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Will Big China and India Stakes Help These Funds?

A recent rally has given some offerings a boost--but it might not last.

David Kathman, 04/14/2009

World stock markets have rallied significantly from their lows over the past month, and some of the biggest beneficiaries have been groups of stocks that were hit hardest in last year's market collapse. Financial stocks are the most prominent; bank stocks have risen sharply since early March, thanks to renewed optimism about the stability of the banking system and Treasury Secretary Timothy Geithner's plan to get toxic assets off bank balance sheets. As we noted recently, mutual funds with a big percentage of their portfolios in bank stocks have done well relative to their peers over the past month, even though their one-year records are still ugly.

Another group that has fared very well in this rally is emerging-markets stocks, especially those from China and India. After several years of huge gains, both markets got pummeled in 2008 as the world economy soured. However, they've bounced back in 2009, with the March rally giving them an extra boost. As of April 8, China's Shanghai Stock Exchange Composite Index was up almost 30% in 2009, including a 13% gain since early March. India's BSE Sensitive 30 Index (Sensex) is up 11% since the beginning of the year and 32% from the low it hit on March 9.

Back in late 2007, when those markets were still going great guns, we looked at U.S. domestic equity funds with the largest percentage of their assets in Chinese and Indian stocks. Not surprisingly, we found that these funds had done quite well relative to their peers, though we warned that this could change when and if the Chinese and Indian markets came back down to earth. When we revisited both lists about six months later, we found that most of the domestic funds with big China and India exposure had trailed their peers in the first half of 2008.

Now that Chinese and Indian stocks are again showing signs of life, we decided to check in again to see which funds have a lot of exposure to these markets, and how they've been doing lately. First, China. The biggest exposure belongs to specifically China-oriented funds, and these have done pretty well, even relative to the Pacific/Asia ex-Japan Stock category. AIM China AACFX, for example, ranked in that category's top 20% for the year to date as of April 8, and Oberweis China Opportunities OBCHX ranked in the top decile.PAGEBREAK

When we look at U.S. domestic-equity funds with the biggest China exposure, it's a similar story, though not as dramatic.

This time, we restricted the list to funds that have at least $100 million in assets, and eliminated clone funds. The following table shows the 10 funds with the largest percentage of their latest portfolio in Chinese stocks. We also show each fund's category, the size of its asset base, its percentile ranking in its category for the year to date as of April 8, and its ranking in its category for the past year.

 Domestic Funds with Big China Stakes
 

Category

Size
($Mil)
China
%
% Rank
Cat YTD
% Rank
Cat 1 Yr
Van Kampen Mid Cap Growth VGRAX
Mid-Cap Growth
1,172.0 10.16 16 77
Van Kampen Equity Growth VEGAX
Large Growth
196.1

10.07

1 55
Kinetics Paradigm WWNPX
Large Growth
1,002.9 7.82 73 98
Munder Internet MNNAX
Technology
228.3 6.30 21 37
Morgan Stanley Cap Opp CPOBX
Large Growth
207.4 6.03 1 82
Morgan Stanley Inst Small Co Gr MSSGX
Small Growth
936.6 5.17 13 61
AdvisorOne Amerigo CLSAX
Large Blend
470.7 5.08 10 69
Allianz RCM Technology DRGTX
Technology
701.0 4.89 89 75
Fidelity Select Technology FSPTX
Technology
896.0 4.41 30 71
Firsthand Technology Value TVFQX
Technology
160.6 4.14 81 82
* As of 04-08-2009.

Topping the list are two Van Kampen funds, and two others from Morgan Stanley are in the top six. Both Morgan Stanley and Van Kampen are under the umbrella of Morgan Stanley Investment Management, and three of these four funds--Van Kampen Mid Cap Growth VGRAX, Morgan Stanley Capital Opportunities CPOBX, and Morgan Stanley Institutional Small Company Growth MSSGX--are run by teams headed by Dennis Lynch. All four funds hold Chinese Internet service provider Tencent Holdings, as well as other Chinese stocks such as travel Web site Ctrip.com CTRP, which has soared more than 40% in the past month. All four funds trail their categories over the past year (as of April 8) but rank in the top quartile for the year to date period, with two of them among their categories' best performers so far in 2009. While their Chinese holdings can't account for all of this improvement, they undoubtedly haven't hurt.PAGEBREAK

The other funds on the list have shown less dramatic effects, but there are other factors at work here. Four of these are technology funds, whose returns tend to be very economically sensitive and driven by sector-specific factors. About half of Kinetics Paradigm's WWNPX portfolio consists of financial stocks, which have been very volatile. (Although it trails the large-growth category for the year to date, this fund has one of the category's best returns over the past month.) The one remaining truly diversified fund on the list, AdvisorOne Amerigo CLSAX, has done dramatically better in 2009 than it has over the past year, just like the Morgan Stanley/Van Kampen funds.

Now let's consider the funds with the biggest India exposure. Here the situation is a bit more ambiguous. India-focused mutual funds, such as Matthews India MINDX and Eaton Vance Greater India ETGIX, have been among the worst performers in the Pacific/Asia ex-Japan Stock category for the year to date, though they look much better over the past month, as the Indian stock market has moved sharply upward. The following table shows the 10 domestic-stock funds (excluding clone funds and those under $100 million in assets) with the largest percentage of their portfolio in Indian stocks. As in the first table, we also show each fund's category, size, and percentile rank in its category for the year to date (as of April 8) and for the past year.

 Domestic Funds with Big India Stakes
 

Category

Size
($Mil)
India
%
% Rank
Cat YTD
% Rank
Cat 1 Yr
Janus Contrarian JSVAX
Large Blend
2,687.2 10.43 86 97
Van Kampen Equity Growth VEGAX
Large Growth
196.1

6.55

1 55
T. Rowe Price Media & Telecom PRMTX
Communications
808.7 5.72 39 46
Davis Financial RPFGX
Financial
439.3 5.56 13 30
SIMT Tax-Managed Mgd VolatilityTMMAX
Large Blend
136.8 4.77 70 2
Wasatch Core Growth WGROX
Small Growth
348.6 4.56 31 68
Federated Kaufmann KAUFX
Mid-Cap Growth
5,390.2 3.97 89 48
Columbia Select Large Cap Growth UMLGX
Large Growth
815.5 3.75 6 70
Wasatch Small Cap Growth WAAEX
Small Growth
507.8 3.53 5 9
BlackRock Large Cap Value Return MKLVX
Large Value
108.6 3.49 57 26
* As of 04-08-2009.

The top fund on this list, Janus Contrarian JSVAX, was also at or near the top of our earlier lists of India-heavy domestic funds in late 2007 and June 2008, even though the specific Indian stocks in the portfolio have changed. The fund has a great long-term record under manager David Decker, though it tends to badly underperform in bear markets such as 2008. Despite its poor year-to-date and one-year returns, it ranks in the large-blend category's top quartile over the past month, and its big India weighting is undoubtedly a factor there.

The second fund on this list, Van Kampen Equity Growth VEGAX, is also second on the list of China-heavy funds. A combined 16.6% of this fund's most recent portfolio is in Chinese and Indian stocks, and a similar amount is in other foreign stocks. Its recent results reflect the extreme performance of those two markets: In 2008 it lost 50% and was one of the worst-performing large-growth funds, while so far in 2009 it has been among the category's best.

Beyond that, it's tough to make too many conclusions. It's true that five of the other eight funds have done better for the year to date than they have over the past year, but the overall difference isn't dramatic. SIMT Tax-Managed Managed Volatility TMMAX and Federated Kaufmann KAUFX have done significantly worse for the year to date than over the past year. None of these funds' India stakes are really very high, especially compared with Janus Contrarian, so any effect has probably been overwhelmed by other factors.

Many of these funds have benefited in recent months from their Chinese or Indian holdings, but those benefits could be fleeting, as last year illustrates so well. That's especially true given the fragile nature of the recent market gains. By their very nature, rapidly growing emerging markets such as China and India are volatile, and any fund with a lot of exposure to those markets is likely to have more than its share of ups and downs in the months ahead. Thus, if you own such a fund, it's best not to be too concerned about short-term market movements.

David Kathman is a fund analyst with Morningstar

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