Jeffrey Schumacher

We embark on the second quarter with the launch of a revised feature: the Morningstar Fund Radar. In this weekly column, succeeding the previous Top 5 analysis, Morningstar’s fund analysts examine the state of affairs within a particular asset class, then delve into one or several mutual funds, with the primary selection criterion being the Morningstar Medalist Rating. As customary, we commence the new quarter with an overview of global equity funds.

Active funds collectively underperform compared to their passive counterparts, primarily due to their struggle to remain competitive over time. However, exceptions exist, such as global dividend funds, which consistently outperform in this challenging environment.

A turbulent first half of the year has had a clear impact on fund flows, with renewed investor interest in bond funds, increased focus on emerging markets, and continued growth of passive strategies defining the landscape for the first six months of 2023. BlackRock’s iShares and Vanguard led the pack in terms of inflows during the first half. 

AI funds are offering investors the opportunity to capitalize on the burgeoning interest and opportunities that Artificial Intelligence presents. Using the Consensus Purity Score, Morningstar was able to rank funds based on their pure exposure to the AI theme. A top 5.

After years of dominance by growth stocks, dividend funds had slowly become the wallflowers of the investment universe. Investors flocked to technology, e-commerce and internet companies, which emerged as the stars in the stock market firmament partly due to the corona crisis and the resulting generous monetary policy of central banks. Barring some brief periods of outperformance, value stocks slid deeper and deeper into the mothball bin. However, a value renaissance began in late 2020, which received a firm tailwind in 2022.

The year 2022 will go down in the books as a pitch-black year for investors. A cocktail of worrying developments, including a spike in inflation, tightening monetary policy, the economic implications of Russia’s invasion of Ukraine, an energy crisis and recession fears, resulted in a historically bad investment year in which both equity and bond investors suffered hefty losses.

The final quarter of a stock market year that many investors were keen to put behind them was marked by a number of notable and abrupt changes.  Only one global equity fund, the Gavekal Global Equities Fund, managed to close the year with a double-digit return for 2022.

Quality companies possess characteristics that investors usually warm to, but this was totally different in 2022. In every quarter, the MSCI World Quality index lagged behind the MSCI World index, and in every quarter a loss was collected.  On balance, it was lower-quality stocks that beat the market in 2022. A top five low-quality equity funds.

Among the top five actively managed mutual funds in the energy sector that are tracked by Morningstar, the BGF World Energy and NN (L) Energy funds stand out as top performers when considering the year-to-date performance of this type of funds.

Fund investors clearly lack faith in UK companies. There has been a net outflow from funds investing in UK equities over the past three years, with the €21 billion of outflows over the first three quarters of 2022 already setting a record. UK dividend stocks are being relatively spared by investors, but small-cap stocks, often more focused on the local economy, are being sold off in particular.