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More Funds Placing Their Bets on China

By all accounts, the equity markets in Taiwan, the People's Republic of China and Hong Kong are red-hot these days, and mutual fund managers are paying a lot closer attention to these markets.

Two new funds that will invest all of their assets predominantly in China are slated to come to market before year-end, following the launch last year of four new China-focused funds, one each from ING Investment Management, John Hancock Investments, Oberweis Asset Management and Old Mutual Asset Management.

OppenheimerFunds has just registered to offer the new Oppenheimer Baring China Fund, under which Baring Asset Management will be the sub-advisor. This past July, Morgan Stanley Investment Management registered to offer a closed-end fund called the Morgan Stanley China A-share fund, which will invest the core of its assets in the A-shares of companies listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, each of which is a mere 15 years old.

Still, according to Morningstar, the total number of funds that currently invest 50% or more of their assets in China is a tiny 14, but growing. That includes the Gartmore China Opportunities Fund, the sole all-China fund to debut in 2004.

New funds are following in the footsteps of early Chinese equity market investment pioneers, including the $196 million Eaton Vance Greater China Growth Fund, which debuted in 1992, the $653 million Templeton China World Fund, launched in 1993, and the U.S. Global Investors China Regional Opportunity and the Guinness Atkinson China and Hong Kong funds, which launched in 1994. Fidelity Investments kicked off its Fidelity China Region Fund in 1995, and today, with more than $669 million in assets under management, it is the largest in the sector.

"China is just emerging from a one- or two-century slumber," said Martin Jansen, senior portfolio specialist, international equities, with ING of New York. Over the past decade, China's emergence has been typified by one word: growth. China is experiencing industrialization as well as urbanization as folks flock from rural areas to cities. In addition, the nation's savings rate is now a massive 45%, and consumer spending has the potential to significantly increase, Jansen said.

With a population of 1.2 billion, China is the world's largest country, and it has an economy that has been growing at a 9% clip each year, said Jim Atkinson, president of the Guinness Atkinson Funds of Woodland Hills, Calif. "The people there are energetic, literate, entrepreneurial and work hard," he said. Moreover, China has proven to naysayers that despite its communist government, its economy can move to a capitalist model. "In the fairly near future, China will be the world's largest economy," he predicted.

China's GDP growth, triple that of the U.S., coupled with an evolving middle class and growing consumer consumption, has been strongly driving interest in that area, said Jim Oberweis, president of Oberweis Asset Management of Lisle, Ill. Oberweis launched its China fund, the firm's only international fund, just over one year ago.

China is currently experiencing many of the same factors that brought the U.S. to prosperity, he added. Over the long-term, the region's industrial growth is sustainable, even if investment valuations of companies fluctuate. "Right now, China is a hot spot to be investing in," he said. "Investment management firms chase opportunities, such as biotech and Internet stocks, and now they're in China."

"There are lots of good entrepreneurial companies in China, along with the privatization of big banks and some blockbuster-sized IPOs," said Gregory Stanek, principal and portfolio manager at Clay Finlay in New York. The Old Mutual Clay Finlay China Fund debuted last December, although Clay Finlay has been managing Chinese equities within separate accounts for seven years. As this market becomes more competitive, proper stock selection will be the key to generating the best returns, Stanek added.

The more fund advisors that enter the Chinese market, the better it can be for all investment firms, even those with a long-standing presence there, fund executives said. "The hope is that it will legitimize China as a fund option for investors in the U.S.," said David Harding, managing director of Matthews International Capital Management of San Francisco, advisor to the $549 million Matthews China Fund. "We've been pounding the table about Asia for years," he added. "If you can offer investment access to the markets at a reasonable cost, they'll come to you."

Competition among the fund managers in China will come down to who does the best job. "It's a matter of who will deliver the best risk/reward profile in time," said Jansen of ING. Right now, the pie is big enough for everyone. But the Chinese market isn't likely to have a ride that is straight up, he added. Temporary setbacks and volatility will likely weed out weaker players.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.