Mutual Funds Investing in China?

Dear Lazyweb,

Also, what are the high-growth industries in China? What companies? I think I remember reading about some web portal (which could presumably be traded via ADR) ...

first of all, the acronym is ETF not EFT

secondly, invest in what you know or stick to a broad index. if all you know is "china's hot", well that train left the station a decade ago, and the mechanics of the emerging markets club are watching commodity/energy costs, trade issues, and currency moves very closely. all three of these by the way are playing against china right now (in the short term). so there's much much more to the asia money right now than a simple issue of capturing manufacturing (once again, a done deal years ago).

i made and lost a mint in the russian markets in 1996-8, and then again russia became the darling of the emerging markets crowd as oil soared.

i would say stick to VFINX, TIP and short-term CDs unless you are watching the ball constantly.

Too many damned acronyms. Fixed, thanks.

I watch the ball frequently, but not constantly. That's why I'm struggling with where I want to go.

Chinese web portals: sina (symbol SINA), netease, sohu (article: http://journalism.nyu.edu/pubzone/ReadMe/article.php?id=40)

Google's hot! Just jumped about 12% the other day on earnings.

Thanks for the tip, Mike. My Google stock is doing pretty well. :-)

BTW, another company that looks great is Salesforce (CRM). Ever increasing earnings and revenues, and the stock just took off a few days ago. I think it could have a long way to go if they keep on track - IPO was less than about two years ago. Looks like a growth stock just getting started.

ETFs usually track a broad market index at a lower cost than actively managed mutual funds. These days I do almost all my investment via ETFs. Personally I prefer to invest in ETFs such as Barclay's iShares which are high quality and relatively low cost.

I agree with about poster that it might be a bit late to be going heavily into Asia right now. I've been holding Asian ex-Japan funds for the past few years, and they've way out performed the US market, but it would be difficult to imagine that trend continuing much longer.

I'm sorry but I cannot morally invest in companies that are in a country that is so badly run.

It's a Communist country run by people who kill anyone who opposes them or so much as reads something that is anti-regime.

Until the government cleans itself up...I really don't think that anyone should be spending one red cent in China or their businesses.

The real Silicon Valley story is not Google (though it is a story), but SanDisk (SNDK). SanDisk announced earnings the same day as Google, but was up 20% the following day.

Company != Government. Not that that would factor into my investing decisions. Just like a company's political contributions don't.

ETFs also offer the advantage of being "stock-like" in that they trade on a constant basis, like stocks. If I see that a mutual fund is tanking, I can't sell a mutual fund until the end of the trading day (by which time it might have fallen even further), whereas an ETF can be sold "intraday", anytime during the trading day.

ETFs also offer the advantage of being "stock-like" in that they trade on a constant basis, like stocks. If I see that the market is tanking, I can't sell a mutual fund until the end of the trading day (by which time it might have fallen even further), whereas an ETF can be sold "intraday", anytime during the trading day.

Hey Jeremy-

I beleive it makes sense to invest a portion of your portfolio in emerging markets. As a practical matter, 6-10% is the maximum amount I'd suggest. Until government regulation in emerging markets improves, there's a lot of additional risk, beyond the potential of enhanced returns.

ETFs are an okay way to gain entry into specific markets or market segments; there are several that focus specifically on China. The problem with ETFs, however, is that the hit you'll take, if you're investing on a regular basis, is that brokerage fees will eat away a lot of the potential return.

Why can't you find a "good" mutual fund that invests solely in China? It's not very prudent, from a fund company perspective, for them to to put all your eggs in one basket.

If China's market crashes and burns, Eliot Spitzer (and a long line of angry fund investors) will be knocking on their door, wanting answers [and restitution] because "investors didn't understand the risk".

Have you taken a look at T. Rowe Price's New Asia fund (PRASX)? It invests in: South Korea, India, Hong Kong, Singapore, Taiwan, China, Malaysia, Thailand, Indonesia, and Sri Lanka.

A diversified portfolio is the better play; it will lower your risk factor, and still afford you the benefits of investing in emerging markets.

Robert Shiller wrote a super book called "The New Financial Order", which I recommend: http://www.econ.yale.edu/~shiller/books.htm

I wish you well; I don't want to sound like a broken record, but, please make sure to put aside a nice chunk (10-20%, minimum) of your earnings. The tide has a nasty way of turning without warning. Put enough aside and park it in a diversified fashion - you'll do well.

Cheers.

Foundation Guy:

I didn't expect to find many (any?) funds that focused exclusively on China. However, I was hoping to find some that put an emphasis on it.

Thanks for the tips. I do, of course, have most of my investments in a reasonably diverse collection of things--it's in the 20% ballpark, as you suggest.

Some links to look at:

http://seekingalpha.com
http://chinastockblog.com
http://china-netinvestor.blogspot.com
http://etfinvestor.com
http://www.morganstanley.com/institutional/techresearch

I definitely think putting some of your funds into a Chinese market fund would be a wise idea (but then I would say that as I'm sitting in a hotel room in Shanghai airport!).

"grumpY" is right when he talks about people investing here for some time - they have, and the amazing rate of growth and expansion here has only been able to happen because people have done.

The reason I'm interested in investing here now, rather than before: the consumer is finally catching up with the economy (and there's 1.3bn consumers here!).

5 years ago the average wage in China was $500 a year, now it's $2000. Sure, that's still small but in percentage terms that's amazing. Stuff also costs less here yet you can see there's profitability here because the overheads are less than in the US/Europe (for a start a lot of stuff is made here, obviously!).

I read this in the IHT a couple of day ago which sums a lot of this up: http://www.iht.com/articles/2005/10/21/business/spend.php

A final tip - gambling. China current outlaws Casinos and most other forms of gambling, yet there appears to be a massive interest "underground". New tourism oppotunities for Chinese tourists are also tempting them towards Asian gambling hubs such as Singapore rather than cultureal destinations.

Anyway, China may relax their laws on gambling, and I reckon that will be a massive short to medium term oppotunity there.

And don't forget - don't put all your money in one basket (which is a much smaller basket if you're working for the BBC than if you're working for Yahoo, I'm sure!)

one final note...one word i have not yet heard uttered

MACRO

there is more happening to your favorite stock than its own earnings. macro factors force weak hands all the time.

Chinese economy - I'd say that qualifies as "macro."

If the money you are investing is in a tax-deferred account, then you might want to look at mutual funds. Otherwise, ETFs are the way to go. You need to look carefully at the major holdings and what the management fees are. I also like to look at the daily volume just to see what the market looks like (is it liquid). China is going to be a hard one to find a good ETF for. The one I did find (can't remember the symbol right now) was only investing in government owned companies and there were ~20 companies in the fund. Not exactly a diversified portfilio nor full of growth oriented techy companies.
Mutual funds in general are really not worth the costs (Vangard funds are an exception). I dumped my mutual funds years ago.

> If the money you are investing is in a tax-deferred account, then you might want to look at mutual funds.

Can you elaborate? (I've never heard of any tax benefit with mutual funds, but I haven't paid much attention to them for years.)

Joe-

No offense, but mutual funds are not only for tax-deferred accounts. ETFs may be tax efficient, by some measures, but well run fund shops don't suffer from lesser performance.

A lot of "tax managed" mutual funds suffer seriously because they're too conservative.

The worst possible investment for someone of Jeremy's age is annuities. Mutual funds (tax managed or not) offer the greatest potential for return, lower costs (even post-taxes), and represent the cheapest way to acquire a diversified portfolio.

The T. Rowe fund I recommended has relatively low costs (considering the low liquidity that emerging markets afford); turn-over can reflect the sale of losers in exchange for winners, and isn't all bad. I agree that on-going costs are a huge issue. ETFs are okay if you are going to invest just one time. Immagine paying your broker $7-15 per purchase (weekly or bi-weekly or monthly). The lost return is obnoxious.

Your universal categorization of mutual funds is off base. There are very few companies that meet my standards (I control the investment of over $500M - yes, really). My short list of trust-worthy mutual fund companies includes: PIMCO, Vanguard, Fidelity, T. Rowe Price, DFA, and Bridgeway. My simple rule; if the fund you need isn't offered by one of those companies, you don't need it, period.

Established fund companies stay clear of "boutique" investments and markets. Jack Bogle, founder of Vanguard, is famous for his belief that investing abroad is not a good idea. I idolize and respect Jack more than anyone else in the industry, however, even the greats can be wrong.

I am not going to write a book on investing - there are enough good ones out there. If you want to get literate, check out the definitive books by Bill Bernstein (4 Pillars), Larry Swedroe, Rick Ferri, and Jack Bogle. Treat all you read with a grain of salt, and decide for yourself what is best for you.

We've averaged a return of 13%/year for the past 15 years, and frankly, though others may have had better years, on average, we're doing well, simply by using very basic methods rebalancing, (and staying the course).

My point about tax deferral and mutual funds is that when mutual funds are in a tax deferred account you do not have to worry about the annual year end capital gains reckoning. I ran through this in the 90's with some tech funds. They grew quickly, as did almost everything pre-bubble, and at the end of the year I was always hit with a huge tax bill due to short and long-term capital gains. The problem was how to pay for it come April 15: set aside some otherwise investable cash or sell some shares to cover the bill. If the mutual funds had been in a tax deferred account, like an IRA, those gains and related taxes would not be something to worry about until I was old, gray, and ready to pull the money out. In the years in between, I could afford to invest the money I would have otherwise paid to Uncle Sam. Don't confuse this with a tax-managed fund where the manager tries to lessen the annual tax pain (and some of the potential growth along with it) from the outset. At his age, Jeremy is likely looking for balls-to-the-walls growth and in something that will allow him to manage his taxes. Sector and regional ETFs are probably the way to go, if you can find the right ones to meet your needs.
(and that was the intent of his origial post)

One last parting note (shot?) on mutual funds, I really detest the fact that they tap a percent or two of your money win or lose and also reap profits through various marketing practices. I do not like some of the restrictions on the tradability with some funds (promise to hold the shares for xxx days or to not buy and sell more than n times/year). It is just too limiting to my ability to formulate a strategy and/or react to real world events. The best thing that can be said for mutual funds is that they can offer instant diversification. I still have some mutual funds (in an IRA of course) from T Rowe Price. I think rather highly of the low cost management model offered by Vanguard. I would never personally own a Fidelity fund. Most mutual funds compare their record of performance against some Average or tracking group. Chances are you can find an ETF that represents that performance standard, can get the standard level of performance, and own it for less than the mutual fund, without the restrictions, and with significant estate benefits.

While history would support the notion that investing in the USA will generate the best returns, you can't ignore the future and what Asia, and China in particular, have to offer. Diversification into non-USA markets is often a good way to reduce volatility in a portfolio while not relinquishing too much potential growth. ... but that is a consideration for someone in their 50's not their 30's.

Final remark, everyone is different and has different needs. For some, mutual funds offer a lack of worry that justifies the costs. For others, the control offered by ETFs is of value. If this confuses you, go see an expert, but be wary since they will try to sell you on a solution that will benefit them. They always sell just what you need. Seek the advice of someone with nothing to sell beyond advice in your best interest.

Just wanted to add my two cents.

Alot of the recent gains in emerging & international markets are a result of the dollar devaluation that has been going on over the last few years, so its hard to judge where your returns come from. If you stuck $10,000 in a european checking account, you would have more dollars today because the Euro has significantly appreciated in value vs. the dollar.

I've invested money in the Morgan Stanely Emerging Markets Portfolio as part of my deferred compensation plan for a few years, and have enjoyed handsome returns on that investment. But... IMHO investments in emerging markets are highly speculative ventures, and you need to keep selling shares to ensure that your portfolio doesn't get kicked out from under you.

The relative safety of investing in the US comes from the fact that we have the most resiliant banking system --
Big returns come with big risks. At any moment changes in monetary policy or political alignment could turn your foreign investment into toilet paper. Just invest prudently and have fun.

I play China with Power Shares ("PGJ" to be more exact) its very much like an ETF. They focus on US traded companies that make the majority of their income in China ... yet the companies must meet SEC regulations.

Lately I've taken a keen interest in the Chinese economy - it's going to be the most powerful in the world, no doubt about it in my mind. And I want to be in on it. May take 10-20 years, but the die is cast. And, yes, I realize the risk - this is NOT investing in Dow 30 stocks :). I, like you, have wondered where to invest. I've found the following so far - haven't decided yet. All seem to invest in pretty much the same companies (if you look at their holdings - they are posted on their websites).

iShares China Index Fund (FXI)
Templeton China World A, B and C (TCWAX, TCWBX, TCWCX)
Guiness Atkinson China and Hong Kong Fund (ICHKX)
Matthews China Fund (MCHFX)
US Global Investor's China Fund (USCOX)

Maybe all together we can figure something out here.

Carl

While China is "hot" and in the news constantly, its stock exchange is withering under strict government oversight. Check this chart out of the performance of the Shanghai exchange: http://finance.yahoo.com/q/bc?s=000001.SS&t=my&l=on&z=m&q=l&c=

I think that China requires significant economic and political reform before investment money flows in via its stock market. People don't feel safe with it yet, like they didn't during the much ballyhooed 90's in Russia.

Also, one disadvantage of ETFs is that you do not get a dividend pay-out or yield.

Hi Jeremy, I have someone who runs a chinese mutual fund here in china would like to put an ETF type on the US stock market, Two of their index funds are the leading ones in china. Do you have any idea on how this might work or any US funds might be interesting in working together to make this happpen? thanks.

Sean

Nope.