10 Domestic Funds with the Biggest China Bets
This red-hot market has attracted some U.S.-focused funds.
This red-hot market has attracted some U.S.-focused funds.
If you pay any attention to the financial news, you've undoubtedly heard about China's red-hot stock market. The Chinese economy is growing by leaps and bounds as the country builds out its infrastructure, and Chinese stocks have been riding this growth to impressive returns. The SSE Composite Index, representing the stocks on the Shanghai Stock Exchange, has more than doubled so far in 2007, on top of a 130% gain last year. Initial public offerings of Chinese stocks are soaring in a way that's sometimes reminiscent of the U.S. tech-stock bubble of 1999-2000. Just this week, coal producer China Shenhua Energy went public in the country's largest-ever IPO, and gained 87% in its first day of trading.
Such eye-popping numbers have had a significant effect on U.S. mutual funds. The Pacific/Asia ex-Japan stock category, which includes many China-heavy funds, has been the best-performing Morningstar category so far this year, with an average return of more than 50%. Lots of funds focusing on Asian and emerging-markets stocks have big China stakes that have helped them to great returns the past several years. Quite a few diversified foreign-stock funds with significant China holdings, such as Fidelity Overseas (FOSFX) and Thornburg International Value (TGVAX), have been among the top performers in their categories this year.
But it's not just Asia-focused funds, or even foreign-stock funds, that have been affected by the rapid growth in China and other emerging markets such as India. We talk to lots of domestic-equity fund managers who are trying to take advantage of that growth, often in indirect ways. For example, they'll buy companies that do significant business in China, or basic-materials stocks that are expected to benefit from increased demand from China and India. Other managers own a smattering of Chinese or Indian stocks, usually in the form of ADRs.
We thought it would be interesting to see which diversified domestic stock funds--that is, those in the nine Morningstar style-box categories--have the biggest percentage of their portfolio in Chinese stocks. The following table lists the top 10, including the size of each fund's asset base and its percentile rank in its category for the year to date through Oct. 9.
Domestic Funds with the Biggest Bets on China | ||||
Category | Size ($Mil) | China (%) | % Rank Cat YTD | |
Apex Mid Cap Growth | Sm Growth | 0.3 | 21.49 | 91 |
IPO Plus Aftermarket | Mid-Growth | 18.1 | 12.97 | 91 |
Birmiwal Oasis | Sm Blend | 22.2 | 9.78 | 6 |
Jordan Opportunity | Lg Growth | 30.3 | 8.41 | 7 |
Sparrow Growth (SGFFX) | Lg Blend | 14.1 | 8.35 | 12 |
TCW Growth Equities | Mid-Growth | 46.6 | 7.71 | 2 |
TCW Small Cap Growth | Sm Growth | 66.4 | 7.53 | 4 |
Azzad Ethical Mid Cap (ADJEX) | Mid-Growth | 3.3 | 7.46 | 71 |
Azzad Ethical Income | Lg Growth | 6.5 | 6.52 | 83 |
Oberweis Mid-Cap | Mid-Growth | 13.1 | 6.44 | 5 |
Data as of 10/09/07 |
One notable thing about this list is that these are all small funds, with under $100 million in assets. However, there are some larger funds not far down the list-- Legg Mason Partners Small Cap Growth (SASMX), with just over $1 billion in assets, has 5.07% of its portfolio in Chinese stocks, and Marsico Focus (MFOCX), with just over $5 billion in assets, has a 4.71% China stake.
It's also worth noting that six of these 10 funds have year-to-date returns in the top 20% of their categories. The soaring Chinese stock market has undoubtedly helped these funds, along with a broader preference for the type of risky stocks favored by the market lately. However, the only two funds on this list with double-digit China stakes, Apex Mid Cap Growth and IPO Plus Aftermarket, are in their categories' bottom deciles this year, and have generally poor long-term records. Both funds own a lot of small, volatile stocks, and have made some bad bets that have hurt their performance.
Those examples just go to show that investing in China is no guarantee of success, even in this hot market. But even the funds on this list that have been doing well this year could get hurt if the Chinese market stumbles from its lofty heights, as many Asian markets did a decade ago. Investing in hot emerging markets is a double-edged sword--the rewards can be great, but so can the risks.
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