Is it too late to join the boom in China?

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What are the chances that one of your funds will return 100% this year? Extremely slim. Few funds rise 50%, let alone double in a 12-month period. But during the year ending in September 2007, 11 funds investing in China surpassed the magic 100% figure.


Winners included Aim China (return of 143.7%) and Dreyfus Premier Greater China (141.1%). Seeing those figures, some investors may recall the last time a large number of funds achieved such eye-popping returns was 1999. Soon afterwards, nearly all the winners collapsed.  


Should you avoid funds with big Chinese stakes? Not necessarily. Even though many Chinese stocks are expensive, with price-earnings ratios of 30 or over, corporate earnings continue to soar. Analysts expect the economy to expand 10% annually for the next several years. Thus, some companies justify their high prices.


Still, investors should proceed with caution. Mark Headley, portfolio manager of Matthews China, says that Chinese markets have long been volatile, sometimes recording relatively sudden downturns of more than 30%. “If you're excited about China's long-term prospects, try investing a bit,” he says. “Then when there is a pullback of 20% or so, pick up some more shares.”


Investors could start with a diversified international fund, such as Thornburg International Value, which has 3.3% of its assets in China. Portfolio manager William Fries stays diversified, maintaining a broad mix, including companies with rapidly growing earnings and unloved cyclicals that could be considered value choices.  A favorite holding is China Telecom, which provides landline and cellular service. “They are gaining millions of subscribers a month,” says Fries.


For a riskier but potentially more rewarding taste of Asia, buy a diversified emerging markets fund that includes Chinese stocks in its portfolio. Pioneer Emerging Markets has 46% of its assets in Asia, including a stake in China. Portfolio manager Christopher Smart avoids highflyers, seeking undervalued stocks.


To hold down risk, he rarely puts more than 2% of assets in any one stock. He is bullish on the outlook for companies serving the domestic market, such as Industrial & Commercial Bank of China. Earnings for the bank have been increasing at an annual rate of more than 60%.

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