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Fund Times

Fund Times: China Markets Meet Skeptics

Plus, news on a PIMCO manager change, Oppenheimer fund closure, and more.

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It seems that nearly every day, a news article is touting the breakneck growth in China's economy, and the wide-ranging global economic transformations that are the result of it. However, before jumping into the latest China-focused fund, we'd suggest giving the skeptics' case a listen. Morningstar's reigning International Fund Manager of the Year, David Herro of  Oakmark International (OAKIX), recently outlined some of his concerns.

He said there are four main risks in Chinese markets: fundamental valuation, state control, severe environmental problems, and a "bubble-like" financial market. On valuation, Herro wrote: "We seek to invest in companies that are of high quality but also sell at low prices. Today the stocks of Chinese companies represent neither: they are richly priced and are of low quality." For example, he said "bank stocks trade at three times book value and 15-20 times earnings [whereas] most of the banks we own are at 10-12 times earnings and trade at one to two times book value." Herro is concerned about the large amount of bad loans these banks have carried in the past, and whether the lending standards have genuinely changed after a government-sponsored cleanup of the loans took place.

Lawrence Jones has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.

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