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Fund Spy

10 Domestic Funds with the Biggest China Bets

This red-hot market has attracted some U.S.-focused funds.

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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.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.