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Revisiting Funds with Big China Bets

How has a slowdown in the Chinese market affected these funds?

David Kathman, 04/29/2008

This has not been a good year for the Chinese stock market, which seemed to be on top of the world just a few months ago. Last year that market was on fire, driven by China's rapid industrialization and economic growth. The Shanghai Stock Exchange Composite Index rose 97% in 2007, building on big gains the year before. This year, however, the global economic slowdown has taken a toll, combined with the lofty valuations of Chinese stocks, investors' general aversion to anything perceived as being risky, and a recent perception that the Chinese government will not intervene to help the market. The SSE Composite Index was down 40% for the year to date through April 22, wiping out most of its gains from last year, though it has rebounded the past couple of days. China-oriented U.S. mutual funds have been predictably hammered, with such funds as AIM China AACFX and Oberweis China Opportunities OBCHX down 20% to 30% for the year.

Six months ago, near what turned out to be the peak of the Chinese market, we took a look at the domestic U.S. stock funds with the biggest percentage of their portfolio in Chinese stocks. Many of those funds (but not all) had done very well relative to their category peers, which is not surprising given the big gains posted last year by the Chinese market. But what has happened to those funds this year, when that market has tanked? We thought it would be interesting to revisit those funds and find out.

The table below shows the 10 diversified domestic-stock funds that had the largest China stakes on Oct. 12, 2007. The table shows each fund's category, the size of its asset base, the percentage it had in Chinese stocks back in October, and the same percentage now (or at least as of the most recent portfolio). We also show each fund's percentile rank in its category for the year to date through April 22.

 Domestic Funds with (Formerly) Big China Bets
Fund
Category
Size
($ Mil)
Prev. China
(%)
Current China
(%)

% Rank
YTD*

Apex Mid Cap Growth BMCGX
Small Growth
0.3
21.49
5.45 1
IPO Plus Aftermarket IPOSX
Mid-Growth
13.6
 12.97
10.65 78
Birmiwal Oasis BIRMX
Small Blend
19.1
9.78
12.94 98
Jordan Opportunity JORDX
Large Growth
62.2
8.41
4.20 1
Sparrow Growth SGFFX
Large Blend
13.2
8.35
1.16 1
TCW Growth Equities TGGEX
Mid-Growth
41.9
7.71
6.10 36
TCW Small Cap Growth TGSCX
Small Growth
94.6
 7.53
6.70 13
Azzad Ethical Mid Cap ADJEX
Mid-Growth
3.2
 7.46
0 9
Azzad Ethical Income AEIFX
 Large Growth
6.3
 6.52
0 20
Oberweis Mid-Cap OBMDX
Mid-Growth
9.2
6.44
5.21 99
* As of 4-22-2008.
PAGEBREAK

The group has actually been doing pretty well this year, with seven of the 10 funds beating their categories, and four in their category's top decile. However, a look at the second-to-last column shows that the funds doing well are mostly those that have slashed or eliminated their China exposure. The two funds on the list that still have a double-digit China stake, IPO Plus Aftermarket IPOSX and Birmiwal Oasis BIRMX, are both in their category's bottom quartiles. In contrast, the two Azzad funds got rid of their Chinese stocks and are now in their category's top quartiles, while the three funds with top-decile returns have all greatly reduced their Chinese holdings. Of course, there are plenty of other factors at work here, but it's reasonable to say that holding a lot of Chinese stocks has not been a good thing for funds this year.

To illustrate that point, consider the funds that now have the biggest percentage of their portfolios in Chinese stocks, using the same restrictions as before. This table shows the top 10 such funds, including each fund's China stake (as of the most recent portfolio in our database) and its year-to-date ranking in its category through April 22.

 Domestic Funds with the Biggest Current China Bets
 

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