By Walter Frank
MONEYLETTER.com
Walter Frank was a tad shy about placing a pure China fund in his portfolios as he considers the Chinese market to be extremely volatile. And concerned about the arbitrary nature of the regulation of the Chinese stock market by the authorities. Added to the casino nature of the Chinese market. As the authorities have been relaxing regulations, however, he has changed his mind. Frank takes a close look at the five China funds he is adding to his coverage.
Fidelity China Region
Fund Type: Pacific
Manager: Wilson Wong (since 6/07)
2007 YTD Return: +32.3 (9/17). 2006 Return: +29.7%
Best Quarter (since 1/01): +21.7% (4Q 2001)
Worst Quarter (since 1/01: -21.8% (3Q 2001)
What 10K grew to in five years (2002-2006): $20,473
(compares to $13,408 for Vanguard 500 Index Fund)
Minimum Investment: $2,500
Also available: F (with no transaction fee at Fidelity), S (with transaction fee at Schwab).
Fidelity China Region (FHKCX: (800) 544-9797) has undergone a metamorphosis. Until June 1, the fund had significant exposure to Hong Kong and Taiwan. But the installation of a new portfolio manager, Wilson Wong, brought with it a greater focus on Chinese firms. After assuming the role of manager, Wong upped the fund's China exposure from 8% of assets to nearly a third of assets. Note that a number of Chinese firms are listed in Taiwan or Hong Kong, and so the Chinese weighting may be higher than it appears when just looking at the fund's country weightings. Meanwhile, Wong also likes firms that benefit from China's growth, even if not based in that nation. His strategy is best described as growth at a reasonable price; he focuses primarily on large-cap stocks (84% of assets), with a lesser exposure to mid-caps (12%). By sector, the heaviest weighting is in financials (27%), followed by industrials (20%), materials (19%), and consumer discretionary (12%). The fund holds 92 stocks, and turnover is modest.
iShares FTSE/Xinhua China 25 Index
Fund Type: Pacific
Manager: n/a
2007 YTD Return: +38.8 (9/17). 200 Return: +83.2%
Best Quarter (since inceptions 10/04): +38.4% (4Q 2006)
Worst Quarter (since 10/04): -6.3% (1Q 2007)
What $10,000 grew to in five years (2002-2006): n/a
Minimum Investment: n/a
Available: New York Stock Exchange
As its name alludes to, this fund holds a scant 25 stocks. Its bogey, the iShares FTSE/Xinhua China 25 Index (NYSE: FXI) contains "25 of the largest and most liquid Chinese companies." All of these securities trade on the Hong Kong Stock Exchange. The index is market weighted, so that the companies with the greatest total market values will have the greatest weightings. By sector, financials have the greatest representation at 40% of asset (four of the top six holdings are insurers or banks), followed by telecommunications at 18% (China Mobile, the largest operator of cell phone service, is the top holding, accounting for more than 10% of assets), oil and gas (16%), basic materials (13%) and industrials (10%). Given the limited number of names in the portfolio, and the heavy weightings of top names, this fund has the potential to be more volatile than its more diversified peers.
Matthews China
Fund Type: Pacific
Managers: Richard H. Gao (since 1/99), Mark W. Headley (2/98)
2007 YTD Return: +55.1 (9/17). 2006 Return: +64.8%
Best Quarter (since 1/01): +28.0% (4Q 2006)
Worst Quarter (since 1/01): -27.1% (3Q 2001)
What $10k grew to in five years (2002-2006): $27,937
(Vanguard 500 Index Fund = $13,408)
Minimum Investment: $2,500
Also available: FSA
Matthews China (MCHFX: (800) 789-2742) boasts an experienced and respected management team. Managers Richard Gao and Mark Headley use an all-cap investment approach - currently about 76% of assets are in large-cap issues, 18% in mid-caps, and the remainder in small-cap shares. The pair invests for growth, looking for strong long-term earnings outlooks, but also preferring moderate valuations. The portfolio comprises 60 stocks, with 23% in the financials sector, 18% in consumer discretionary, 15% in industrials, and 11% in energy. Compared to the MSCI China Index, the fund in underweight in large caps and overweight in the other ranges, and by sector, overweight in consumer discretionary and information technology, and underweight in financials, energy, and telecom services. Recently, Headley said he has been trimming some high flyers and purchasing contrarian plays.
Oberweis China Opportunities
Fund Type: Pacific
Managers: James W. Oberweis (since 10/05), Vanessa Shiu (10/05)
2007 YTD Return: +45.3 (9/17). 2006 Return: +81.2%
Best Quarter (since inception 10/05): +38.7% (1Q 2006)
Worst Quarter (since 10/05): -0.5% (2Q 2006)
What $10k grew to in five years (2002-2006): n/a
Minimum Investment: $1,000
Also available: FSA
Oberweis China Opportunities (OBCHX: (800) 245-7311) claims that it "was among the first to focus on smaller growth Chinese companies." They look for less-well known small- and mid-cap companies, stating that "rapidly growing small companies in the early stages of their growth cycles" equals superior long-term investment performance. The investment approach: "AGARP - aggressive growth at a reasonable price." Their investment parameters fit into the "Oberweis Octagon," an eight-pronged assessment of growth and valuation. In addition to relative strength (above), these factors include rapid revenue and earnings growth, high earnings quality, low relative price/earnings and price/sales ratios, and strong stock price momentum. The managers favor entrepreneurial over state-owned companies, as they are more nimble, having increasing market opportunities, and reasonable barriers to entry for competitors. Consumer discretionary stocks figure most heavily in the portfolio (33% of assets), followed by industrials (17%), materials (12%), consumer staples (11%), and information technology (10%). China and Hong Kong comprise 75% of assets, with 12% in Singapore.
U.S. Global Investors China Region Opportunity
Fund Type: Pacific
Managers: Frank E. Holmes (since 2/94), Romeo Dator (2/02)
2007 YTD Return: +39.7 (9/17). 2006 Return: +38.0%
Best Quarter (since 1/01): +30.4% (4Q 2003)
Worst Quarter (since 1/01): -25.0% (3Q 2001)
What $10k grew to in five years (2002-2006): $27,063
(Vanguard 500 Index Fund = $13,408
Minimum Investment: $5,000
Also available: FSA
U.S. Global Investors China Region Opportunity (USCOX: (800) 873-8637) fund targets firms whose principal business activities are in the greater China region, including China, Hong Kong, Singapore, Korea, and Taiwan. Recently, China accounted for 36% of assets, Hong Kong 24%, and Korea 8%. The management team basically employs a "GARP" strategy - growth at a reasonable price, looking for strong earnings and growth potential, leading market positions, solid cash flow, and a dynamic and entrepreneurial management. Trading is more rapid (208%) at this fund than the others herein, none of which surpassed 100% annually. The fund's heaviest weighting is in industrial materials (29%), followed closely by financial services (21%), and business services (16%). Consumer sectors are underweighted. Meanwhile, large-cap stocks account for about three quarters of the portfolio.
Editor's Note: Walter Frank is editor of MONEYLETTER.com, 479 Washington St., P.O Box 6020, Holliston, MA 01746, 1 year, 24 issues, $180.
