What’s Driving the Asian Giants?
http://www.kiplinger.com/personalfinance/magazine/archives/2005/12/asian.html
KIPLINGER’S PERSONAL FINANCE
What’s Driving the Asian Giants?
For China, it’s manufacturing. For India, it’s services. For you, it means profits.
By Andrew Tanzer
Surely the economic rise of China and India -- with 2.4 billion souls, or 37% of mankind -- must rank high among the megatrends that investors need to watch closely. China is fast becoming factory to the world, swallowing up manufacturing industries that used to flourish in the U.S., Japan and other developed nations. India, to the southwest, is home to many of the voices you hear when you call to complain about a charge on your credit card or to get help for your PC. In recent years, the economic expansion in both nations has been staggering. That growth has helped push up prices of most commodities, from edible oils to petroleum. The booms have lifted hundreds of millions of people out of poverty and created tens of millions of new middle-class consumers.
You can profit by investing in the high-growth economies of these emerging Asian giants. We’ll explain how later, but first come along for a quick tour of the Chinese dragon and the Indian elephant.
Commerce capitals
The best way to get a sense of these nations’ economic dynamism is to tour Shanghai and Bombay, the financial and commercial capitals of each. The two shipping towns share a common heritage: British imperialism. In the 18th century, the British smuggled Indian-grown opium into Shanghai, then pried the city open for foreign trade and settlement in 1843 after winning the infamous Opium War. After colonizing India, the British developed Bombay as a trading center on the Arabian Sea.
But the contrast between Shanghai and Bombay today could not be more stark. After landing at Shanghai’s new Pudong International Airport, you enter an immaculate, state-of-the-art terminal. To travel into town, you zip along an eight-lane freeway in a shiny black Volkswagen taxi or hop aboard the world’s fastest train, which spirits you 19 miles at 269 miles per hour.
Shanghai -- which has been transformed from communist backwater to economic powerhouse in 15 years and is now home to 17 million people -- epitomizes China’s emergence as a strong, proud, ambitious nation. The recently developed Pudong financial district is a forest of futuristic skyscrapers, smart new apartment blocks and orderly, tree-lined avenues.
The first stop across the Huangpu River in the city’s Puxi area is the Bund, Shanghai’s magnificent waterfront. It gleams with European-style architectural gems, mostly neoclassical buildings erected in the early 20th century. The local government has lavishly restored these pre-Revolution office buildings to their former splendor.
Now picture Bombay. You ride into town from the decrepit airport in a flimsy sedan. The streets are crowded with crudely built brick houses covered with corrugated metal roofs. Deep potholes mar the roads. Throughout the city, buildings left over from the British colonial era are crumbling.
In Nariman Point, the city’s old financial district, Indian women wearing flowing, brightly colored saris mingle in streets teeming with turbaned Sikhs, Muslim men in white skullcaps and Indian men dressed in sober Western business suits. One minute you smell the sweet scent of incense, the next, the stench of raw sewage from the city’s antiquated, open sewers.
Bombay is more earthy and chaotic than Shanghai. The city of 17 million leaves you with the impression of a complex tapestry woven with diverse ethnic, religious and social strands -- and of a nation sitting atop a rotting infrastructure that has undergone few improvements since colonial days.
Market results
Yet for all of China’s apparent strengths, India’s stock market has performed far better. Lifted by a tsunami of foreign money, the Bombay index has surged 170% over the past 30 months. The Shanghai Stock Exchange hit an eight-year low in July and is off 51% from its June 2001 high -- a curious result amid a booming economy.
Since the still-nominally Communist nation opened for business in 1978, China’s gross domestic product has expanded by a staggering 9% a year, and international trade has grown at an annual rate of 15%. But foreign companies, not Chinese-listed enterprises, dominate exports.
India embarked on its economic reform in 1991, 13 years after China. China’s reform has been more consistent and better managed; in India, it’s two steps forward, one step back. The Indian government seems particularly hapless when it comes to providing infrastructure -- vital for moving manufactured goods to market in today’s just-in-time world. India suffers from severe deficiencies in power supply, roads, railways, ports, airports and sewage facilities. Morgan Stanley estimates that China spends eight times more on infrastructure than does India.
Granted, it’s easier building infrastructure in a one-party state like China than in India with its pluralistic, cumbersome democracy. If Shanghai authorities want your land to construct an overpass, they’ll take it -- and pronto.
It’s a different story, to put it mildly, in India. Plans to build a new road can stir up a cyclone of lawsuits brought by dispossessed landowners. India cries out for more power generation, yet politicians still lavish free power on farmers. "Any politician who wants rural votes promises free power to farmers," says S. Natraj, head of research at Equitymaster, a securities research house in Bombay.
But India excels in services, an area in which brainpower and fluency in English are more important than heavy capital spending. The strict labor laws, high taxes and bureaucratic red tape that strangle manufacturing barely touch India’s new service industries.
India’s software and back-office outsourcing businesses are booming, driven almost entirely by the needs of overseas customers, such as General Electric and Citigroup. Indians work from remote locations on everything from processing insurance claims and tax returns to updating Web sites and conducting financial analyses.
The burgeoning service sector is fueling robust job growth and the rapid expansion of the Indian middle class. "Ten years ago, when youngsters graduated from college, it was hard to get a job," recalls Keki Mistry, managing director of Bombay’s HDFC, the country’s largest mortgage lender. "Now they get two or three job offers."
Still, growth is growth, and it’s not intuitively obvious why the Indian and Chinese stock markets should be behaving so differently.
A closer look at the dynamics of China’s growth and its stock markets explains much of the divergence. Direct investment from foreign sources played a crucial role in creating the Chinese export monster. Encouraged by tax incentives and government efforts to build modern infrastructure, foreigners have invested about $500 billion in China over the past decade; factories built with foreign investments account for more than half of China’s exports.
China’s Woes
But the two most dynamic sectors of the Chinese economy -- foreign-invested manufacturing and private enterprises, which are generally new and small -- are scarcely represented on the Shanghai and Shenzhen stock exchanges. Instead, lumbering state-owned enterprises -- relics from the country’s shrinking old economy, not its surging new one -- dominate the exchanges. Many of those companies are headed by bosses who have little idea of how to run investor-owned enterprises. A steady stream of news about accounting fraud, embezzlement and rampant inside trading -- even fabrication of shareholder meetings -- contributed to the collapse of both the Shanghai and Shenzhen exchanges starting in 2001.
Investors have done much better by placing their chips on shares of Hong Kong and Taiwanese companies that benefit from Chinese economic growth. So-called H shares, which are better-quality Chinese-government corporations that trade on the more mature Hong Kong Stock Exchange, have also produced better returns. Compared with China’s young stock markets, the Bombay Stock Exchange is a grizzled veteran. Founded in 1875 under a banyan tree, it is Asia’s oldest exchange. In recent years, the world-class National Stock Exchange has upstaged the BSE. Established in Bombay in 1994, the privately owned NSE employs computerized trading and paperless settlement systems. "The NSE is a fantastic exchange," says Ajit Dayal, chief executive officer of Quantum Advisors, a Bombay-based investing firm.
Since April 2003, both exchanges have shot up in nearly straight lines. Why? Foreign investors, attracted by India’s 7% annual economic growth and strong gains in corporate profits (30% in 2004 among the 100 biggest Indian companies), have poured money into Indian stocks. "Corporate performance has been phenomenal," says Atul Kumar, of Practical Financial Services, a local brokerage.
With a longer tradition of private enterprise, Indian entrepreneurs tend to focus more on profitability than their Chinese counterparts do. "Indians have a much greater respect for capital," says Samir Mehta, chief investment officer of Hong Kong’s Lloyd George Management. Mehta calculates that over a typical business cycle, return on equity (a measure of profitability) for Indian companies averages 18%, compared with just 8% for Chinese companies.
Although the contrasts between China and India are sharp now, they will likely blur over time. China’s future lies in private enterprise, and its regime may someday realize that capitalism is not compatible with an absence of freedom. India’s government is courting foreign investors and finally privatizing the companies that operate and maintain the nation’s infrastructure. The dragon and the elephant are forces that will have to be reckoned with for decades to come.
Three ways to saddle the Chinese dragon
After four years of steady share-price declines, Chinese stocks appear to be reasonably valued. An index of A shares that trade on the Shanghai exchange sells for about 18 times the past 12 months’ profits and 1.8 times book value, or assets minus liabilities (the comparable figures for Standard & Poor’s 500-stock index are 19 and 2.9).
Still, Chinese stocks are risky, and even if you invest in mutual funds, be prepared for substantial volatility. We describe one ordinary, open-end fund and two closed-end funds.
Look before you buy. Mark Headley, co-manager of Matthews China fund, thinks it’s vital to visit Chinese companies and study them carefully before investing. Headley, 46, who runs the open-end fund with Richard Gao and Paul Matthews, cites the example of a Shanghai textiles company that went public a few years ago. The prospectus for its initial public offering showed a beautifully lit new factory. But when Headley checked out the factory, he found only dark, empty warehouses. "They had doctored the pictures," he says. "It was disturbing."
Matthews invests primarily in companies that do business in China. Unlike exporters, which are constantly cutting prices, domestic firms benefit from the enormous increase in the purchasing power of Chinese consumers. Headley notes, for example, that ten years ago most visitors to Beijing’s Forbidden City were foreigners. "Now, it’s 90% domestic tour groups visiting sites of their own cultural heritage," he says. One of the fund’s top holdings is Shangri-La Asia, a hotel company that derives most of its revenues from Chinese properties.
Over the past five years to November 1, Matthews China (symbol MCHFX; 800-789-2742) returned an annualized 14%, compared with 7% for the average of all open-end China funds. Annual expenses, at 1.43%, are far below the category average of 2.14%.
Spectacular results. State-owned enterprises leave Chris Ruffle cold. "They act in the interests of their largest shareholder: the state," says Ruffle, manager of closed-end China Fund. Ruffle, a Shanghai-based, Chinese-speaking Oxford graduate, likes companies whose managers are major shareholders, and he prefers domestic players to exporters. "China, not the U.S., is the high-growth economy," says Ruffle, 46. Closed-end funds generally issue a fixed number of shares and then trade on exchanges just like stocks. The shares usually trade at discounts or at premiums to the value of the fund’s underlying assets.
China Fund has been a stellar performer. Over the past five years, it returned an annualized 18% on assets, according to Morningstar. In mid November, the fund (CHN, $25) traded at a 4% premium to net asset value (NAV). Annual expenses are 1.41%.
Two of Ruffle’s favorite themes are the drive to improve China’s rural economy and the need for more infrastructure spending. "For the Communist Party to stay in power, the number-one priority of the leadership must be to reduce the income gap between residents of the countryside and city dwellers," he says.
Taiwan play The long-term record of the closed-end Taiwan Greater China fund is dismal -- it lost an annualized 5% on assets over the past five years. But the fund’s returns have perked up since Steve Champion took the reins in 2004. Champion changed the fund’s strategy to focus entirely on China plays -- Taiwan-listed companies that derive a large share of their revenues from the mainland. Over the past year, the fund’s NAV climbed 6%, compared with a 14% slump in the MSCI China Index. At $4.85 per share, the fund (TFC) sells at an 8% discount to NAV. At 2.79%, the fund’s expense ratio is well above average.
Champion, 59, makes a strong case for investing in China through Taiwanese stocks. For starters, 70,000 Taiwanese firms have invested more than $100 billion in the mainland and employ more than ten million workers. Taiwan shares a common tongue (Mandarin) and culture with China, but Taiwanese companies tend to be better managed and place a greater emphasis on profit margins. Champion’s largest holding, electronics giant Hon Hai Precision Industry, is China’s biggest exporter.
Funds that dial into the Indian service economy
India’s economy is a great long-term story, but be aware that its white-hot stock market may be overdue for a correction. The Bombay index has soared 170% since April 2003, including a 20% jump in the first ten months of 2005. Still, Indian stocks don’t appear hugely overpriced on a price-earnings basis. An index of 50 large Indian companies recently traded at 15 times the past year’s earnings.
Overachiever. Over the past few years, Eaton Vance Greater India fund has performed even better than the sizzling Bombay index. The A shares of this open-end fund (symbol ETGIX; 800-225-6265), run by Lloyd George Management, gained 23% in the first ten months of 2005 and returned a rousing 53% annualized over the past three years. But this is an expensive fund. The A shares levy a front-end sales charge of 5.75% and carry annual expenses of 2.77% (the B shares come with a deferred load and annual fees of 3.27%).
Manager Samir Mehta, a Bombay native based in Hong Kong, scours the Indian landscape for companies with high returns on equity and an ability to address a global market. Software fits the bill nicely. "Indian information-technology companies provide quality services at prices much cheaper than in the U.S.," says Mehta, 38. He holds Infosys and Tata Consultancy Services, two stalwarts of India’s service economy.
An accountant by training, Mehta also finds it hard to resist Indian-listed shares of the local subsidiaries of multinational corporations. In the 1970s, the Indian government forced foreign companies to sell stakes of their Indian units to local investors. "Nowhere else in the world do you get access to multinational subsidiaries of the caliber of those in India," says Mehta. Two of his largest holdings are the local units of Siemens and ABB, leading makers of power equipment.
On a roll. Talk about a Roman candle. Make that an Indian candle: The NAV of the closed-end Morgan Stanley India Investment fund (IIF, $41) soared 49% over the past 12 months to November 1, according to Morningstar, and gained an annualized 22% over the past five years. The fund traded at a rich 13% premium to NAV in mid November. Consider waiting for the premium to shrink to single digits before investing (you can find discount and premium information at www.closed-endfunds.com). Annual expenses, at 1.40%, are reasonable.
Narayan Ramachandran, the Singapore-based managing director of Morgan Stanley’s emerging-markets team, focuses on Indian companies with improving cash flows. Such companies, he reasons, can use the cash to invest in attractive business ventures, or return money to shareholders via dividends or share buybacks.
A favorite theme is the explosive growth of credit. Ramachandran, 43, notes that although consumer lending is growing 30% to 40% per year, lenders still have plenty of opportunities to make inroads with increasingly wealthy Indians. Among his largest holdings is Housing Development Finance, the leading mortgage lender, and Hero Honda, a unit of the Japanese giant; easy credit boosts sales of its motorbikes.
Notable newcomer. During a recent visit, Andrew Foster observed a wave of entrepreneurship sweeping all across India. Even in Calcutta, that heart-rending symbol of poverty, he was impressed with the commitment to progress, including a construction boom in roads and housing developments. "The place had changed dramatically over the 20 months since I’d last visited," he says. Foster is the manager of the new Matthews India fund, the first no-load, open-end fund devoted to that nation’s stocks.
Foster, who’s based in San Francisco, will focus on companies involved in financial services, computers and the Internet, as well as producers of consumer goods that benefit from India’s rapidly rising living standards. "We’re big believers in the breadth and depth of growth in consumption," he says. Foster, 31, plans to invest in companies of all sizes using a growth-at-a-reasonable-price strategy.
Although Matthews India is a blank slate, the firm has compiled a solid record with its other Asia funds. The fund (MINDX; 800-789-2742) estimates annual expenses of 2.0%.
KIPLINGER’S PERSONAL FINANCE
What’s Driving the Asian Giants?
For China, it’s manufacturing. For India, it’s services. For you, it means profits.
By Andrew Tanzer
Surely the economic rise of China and India -- with 2.4 billion souls, or 37% of mankind -- must rank high among the megatrends that investors need to watch closely. China is fast becoming factory to the world, swallowing up manufacturing industries that used to flourish in the U.S., Japan and other developed nations. India, to the southwest, is home to many of the voices you hear when you call to complain about a charge on your credit card or to get help for your PC. In recent years, the economic expansion in both nations has been staggering. That growth has helped push up prices of most commodities, from edible oils to petroleum. The booms have lifted hundreds of millions of people out of poverty and created tens of millions of new middle-class consumers.
You can profit by investing in the high-growth economies of these emerging Asian giants. We’ll explain how later, but first come along for a quick tour of the Chinese dragon and the Indian elephant.
Commerce capitals
The best way to get a sense of these nations’ economic dynamism is to tour Shanghai and Bombay, the financial and commercial capitals of each. The two shipping towns share a common heritage: British imperialism. In the 18th century, the British smuggled Indian-grown opium into Shanghai, then pried the city open for foreign trade and settlement in 1843 after winning the infamous Opium War. After colonizing India, the British developed Bombay as a trading center on the Arabian Sea.
But the contrast between Shanghai and Bombay today could not be more stark. After landing at Shanghai’s new Pudong International Airport, you enter an immaculate, state-of-the-art terminal. To travel into town, you zip along an eight-lane freeway in a shiny black Volkswagen taxi or hop aboard the world’s fastest train, which spirits you 19 miles at 269 miles per hour.
Shanghai -- which has been transformed from communist backwater to economic powerhouse in 15 years and is now home to 17 million people -- epitomizes China’s emergence as a strong, proud, ambitious nation. The recently developed Pudong financial district is a forest of futuristic skyscrapers, smart new apartment blocks and orderly, tree-lined avenues.
The first stop across the Huangpu River in the city’s Puxi area is the Bund, Shanghai’s magnificent waterfront. It gleams with European-style architectural gems, mostly neoclassical buildings erected in the early 20th century. The local government has lavishly restored these pre-Revolution office buildings to their former splendor.
Now picture Bombay. You ride into town from the decrepit airport in a flimsy sedan. The streets are crowded with crudely built brick houses covered with corrugated metal roofs. Deep potholes mar the roads. Throughout the city, buildings left over from the British colonial era are crumbling.
In Nariman Point, the city’s old financial district, Indian women wearing flowing, brightly colored saris mingle in streets teeming with turbaned Sikhs, Muslim men in white skullcaps and Indian men dressed in sober Western business suits. One minute you smell the sweet scent of incense, the next, the stench of raw sewage from the city’s antiquated, open sewers.
Bombay is more earthy and chaotic than Shanghai. The city of 17 million leaves you with the impression of a complex tapestry woven with diverse ethnic, religious and social strands -- and of a nation sitting atop a rotting infrastructure that has undergone few improvements since colonial days.
Market results
Yet for all of China’s apparent strengths, India’s stock market has performed far better. Lifted by a tsunami of foreign money, the Bombay index has surged 170% over the past 30 months. The Shanghai Stock Exchange hit an eight-year low in July and is off 51% from its June 2001 high -- a curious result amid a booming economy.
Since the still-nominally Communist nation opened for business in 1978, China’s gross domestic product has expanded by a staggering 9% a year, and international trade has grown at an annual rate of 15%. But foreign companies, not Chinese-listed enterprises, dominate exports.
India embarked on its economic reform in 1991, 13 years after China. China’s reform has been more consistent and better managed; in India, it’s two steps forward, one step back. The Indian government seems particularly hapless when it comes to providing infrastructure -- vital for moving manufactured goods to market in today’s just-in-time world. India suffers from severe deficiencies in power supply, roads, railways, ports, airports and sewage facilities. Morgan Stanley estimates that China spends eight times more on infrastructure than does India.
Granted, it’s easier building infrastructure in a one-party state like China than in India with its pluralistic, cumbersome democracy. If Shanghai authorities want your land to construct an overpass, they’ll take it -- and pronto.
It’s a different story, to put it mildly, in India. Plans to build a new road can stir up a cyclone of lawsuits brought by dispossessed landowners. India cries out for more power generation, yet politicians still lavish free power on farmers. "Any politician who wants rural votes promises free power to farmers," says S. Natraj, head of research at Equitymaster, a securities research house in Bombay.
But India excels in services, an area in which brainpower and fluency in English are more important than heavy capital spending. The strict labor laws, high taxes and bureaucratic red tape that strangle manufacturing barely touch India’s new service industries.
India’s software and back-office outsourcing businesses are booming, driven almost entirely by the needs of overseas customers, such as General Electric and Citigroup. Indians work from remote locations on everything from processing insurance claims and tax returns to updating Web sites and conducting financial analyses.
The burgeoning service sector is fueling robust job growth and the rapid expansion of the Indian middle class. "Ten years ago, when youngsters graduated from college, it was hard to get a job," recalls Keki Mistry, managing director of Bombay’s HDFC, the country’s largest mortgage lender. "Now they get two or three job offers."
Still, growth is growth, and it’s not intuitively obvious why the Indian and Chinese stock markets should be behaving so differently.
A closer look at the dynamics of China’s growth and its stock markets explains much of the divergence. Direct investment from foreign sources played a crucial role in creating the Chinese export monster. Encouraged by tax incentives and government efforts to build modern infrastructure, foreigners have invested about $500 billion in China over the past decade; factories built with foreign investments account for more than half of China’s exports.
China’s Woes
But the two most dynamic sectors of the Chinese economy -- foreign-invested manufacturing and private enterprises, which are generally new and small -- are scarcely represented on the Shanghai and Shenzhen stock exchanges. Instead, lumbering state-owned enterprises -- relics from the country’s shrinking old economy, not its surging new one -- dominate the exchanges. Many of those companies are headed by bosses who have little idea of how to run investor-owned enterprises. A steady stream of news about accounting fraud, embezzlement and rampant inside trading -- even fabrication of shareholder meetings -- contributed to the collapse of both the Shanghai and Shenzhen exchanges starting in 2001.
Investors have done much better by placing their chips on shares of Hong Kong and Taiwanese companies that benefit from Chinese economic growth. So-called H shares, which are better-quality Chinese-government corporations that trade on the more mature Hong Kong Stock Exchange, have also produced better returns. Compared with China’s young stock markets, the Bombay Stock Exchange is a grizzled veteran. Founded in 1875 under a banyan tree, it is Asia’s oldest exchange. In recent years, the world-class National Stock Exchange has upstaged the BSE. Established in Bombay in 1994, the privately owned NSE employs computerized trading and paperless settlement systems. "The NSE is a fantastic exchange," says Ajit Dayal, chief executive officer of Quantum Advisors, a Bombay-based investing firm.
Since April 2003, both exchanges have shot up in nearly straight lines. Why? Foreign investors, attracted by India’s 7% annual economic growth and strong gains in corporate profits (30% in 2004 among the 100 biggest Indian companies), have poured money into Indian stocks. "Corporate performance has been phenomenal," says Atul Kumar, of Practical Financial Services, a local brokerage.
With a longer tradition of private enterprise, Indian entrepreneurs tend to focus more on profitability than their Chinese counterparts do. "Indians have a much greater respect for capital," says Samir Mehta, chief investment officer of Hong Kong’s Lloyd George Management. Mehta calculates that over a typical business cycle, return on equity (a measure of profitability) for Indian companies averages 18%, compared with just 8% for Chinese companies.
Although the contrasts between China and India are sharp now, they will likely blur over time. China’s future lies in private enterprise, and its regime may someday realize that capitalism is not compatible with an absence of freedom. India’s government is courting foreign investors and finally privatizing the companies that operate and maintain the nation’s infrastructure. The dragon and the elephant are forces that will have to be reckoned with for decades to come.
Three ways to saddle the Chinese dragon
After four years of steady share-price declines, Chinese stocks appear to be reasonably valued. An index of A shares that trade on the Shanghai exchange sells for about 18 times the past 12 months’ profits and 1.8 times book value, or assets minus liabilities (the comparable figures for Standard & Poor’s 500-stock index are 19 and 2.9).
Still, Chinese stocks are risky, and even if you invest in mutual funds, be prepared for substantial volatility. We describe one ordinary, open-end fund and two closed-end funds.
Look before you buy. Mark Headley, co-manager of Matthews China fund, thinks it’s vital to visit Chinese companies and study them carefully before investing. Headley, 46, who runs the open-end fund with Richard Gao and Paul Matthews, cites the example of a Shanghai textiles company that went public a few years ago. The prospectus for its initial public offering showed a beautifully lit new factory. But when Headley checked out the factory, he found only dark, empty warehouses. "They had doctored the pictures," he says. "It was disturbing."
Matthews invests primarily in companies that do business in China. Unlike exporters, which are constantly cutting prices, domestic firms benefit from the enormous increase in the purchasing power of Chinese consumers. Headley notes, for example, that ten years ago most visitors to Beijing’s Forbidden City were foreigners. "Now, it’s 90% domestic tour groups visiting sites of their own cultural heritage," he says. One of the fund’s top holdings is Shangri-La Asia, a hotel company that derives most of its revenues from Chinese properties.
Over the past five years to November 1, Matthews China (symbol MCHFX; 800-789-2742) returned an annualized 14%, compared with 7% for the average of all open-end China funds. Annual expenses, at 1.43%, are far below the category average of 2.14%.
Spectacular results. State-owned enterprises leave Chris Ruffle cold. "They act in the interests of their largest shareholder: the state," says Ruffle, manager of closed-end China Fund. Ruffle, a Shanghai-based, Chinese-speaking Oxford graduate, likes companies whose managers are major shareholders, and he prefers domestic players to exporters. "China, not the U.S., is the high-growth economy," says Ruffle, 46. Closed-end funds generally issue a fixed number of shares and then trade on exchanges just like stocks. The shares usually trade at discounts or at premiums to the value of the fund’s underlying assets.
China Fund has been a stellar performer. Over the past five years, it returned an annualized 18% on assets, according to Morningstar. In mid November, the fund (CHN, $25) traded at a 4% premium to net asset value (NAV). Annual expenses are 1.41%.
Two of Ruffle’s favorite themes are the drive to improve China’s rural economy and the need for more infrastructure spending. "For the Communist Party to stay in power, the number-one priority of the leadership must be to reduce the income gap between residents of the countryside and city dwellers," he says.
Taiwan play The long-term record of the closed-end Taiwan Greater China fund is dismal -- it lost an annualized 5% on assets over the past five years. But the fund’s returns have perked up since Steve Champion took the reins in 2004. Champion changed the fund’s strategy to focus entirely on China plays -- Taiwan-listed companies that derive a large share of their revenues from the mainland. Over the past year, the fund’s NAV climbed 6%, compared with a 14% slump in the MSCI China Index. At $4.85 per share, the fund (TFC) sells at an 8% discount to NAV. At 2.79%, the fund’s expense ratio is well above average.
Champion, 59, makes a strong case for investing in China through Taiwanese stocks. For starters, 70,000 Taiwanese firms have invested more than $100 billion in the mainland and employ more than ten million workers. Taiwan shares a common tongue (Mandarin) and culture with China, but Taiwanese companies tend to be better managed and place a greater emphasis on profit margins. Champion’s largest holding, electronics giant Hon Hai Precision Industry, is China’s biggest exporter.
Funds that dial into the Indian service economy
India’s economy is a great long-term story, but be aware that its white-hot stock market may be overdue for a correction. The Bombay index has soared 170% since April 2003, including a 20% jump in the first ten months of 2005. Still, Indian stocks don’t appear hugely overpriced on a price-earnings basis. An index of 50 large Indian companies recently traded at 15 times the past year’s earnings.
Overachiever. Over the past few years, Eaton Vance Greater India fund has performed even better than the sizzling Bombay index. The A shares of this open-end fund (symbol ETGIX; 800-225-6265), run by Lloyd George Management, gained 23% in the first ten months of 2005 and returned a rousing 53% annualized over the past three years. But this is an expensive fund. The A shares levy a front-end sales charge of 5.75% and carry annual expenses of 2.77% (the B shares come with a deferred load and annual fees of 3.27%).
Manager Samir Mehta, a Bombay native based in Hong Kong, scours the Indian landscape for companies with high returns on equity and an ability to address a global market. Software fits the bill nicely. "Indian information-technology companies provide quality services at prices much cheaper than in the U.S.," says Mehta, 38. He holds Infosys and Tata Consultancy Services, two stalwarts of India’s service economy.
An accountant by training, Mehta also finds it hard to resist Indian-listed shares of the local subsidiaries of multinational corporations. In the 1970s, the Indian government forced foreign companies to sell stakes of their Indian units to local investors. "Nowhere else in the world do you get access to multinational subsidiaries of the caliber of those in India," says Mehta. Two of his largest holdings are the local units of Siemens and ABB, leading makers of power equipment.
On a roll. Talk about a Roman candle. Make that an Indian candle: The NAV of the closed-end Morgan Stanley India Investment fund (IIF, $41) soared 49% over the past 12 months to November 1, according to Morningstar, and gained an annualized 22% over the past five years. The fund traded at a rich 13% premium to NAV in mid November. Consider waiting for the premium to shrink to single digits before investing (you can find discount and premium information at www.closed-endfunds.com). Annual expenses, at 1.40%, are reasonable.
Narayan Ramachandran, the Singapore-based managing director of Morgan Stanley’s emerging-markets team, focuses on Indian companies with improving cash flows. Such companies, he reasons, can use the cash to invest in attractive business ventures, or return money to shareholders via dividends or share buybacks.
A favorite theme is the explosive growth of credit. Ramachandran, 43, notes that although consumer lending is growing 30% to 40% per year, lenders still have plenty of opportunities to make inroads with increasingly wealthy Indians. Among his largest holdings is Housing Development Finance, the leading mortgage lender, and Hero Honda, a unit of the Japanese giant; easy credit boosts sales of its motorbikes.
Notable newcomer. During a recent visit, Andrew Foster observed a wave of entrepreneurship sweeping all across India. Even in Calcutta, that heart-rending symbol of poverty, he was impressed with the commitment to progress, including a construction boom in roads and housing developments. "The place had changed dramatically over the 20 months since I’d last visited," he says. Foster is the manager of the new Matthews India fund, the first no-load, open-end fund devoted to that nation’s stocks.
Foster, who’s based in San Francisco, will focus on companies involved in financial services, computers and the Internet, as well as producers of consumer goods that benefit from India’s rapidly rising living standards. "We’re big believers in the breadth and depth of growth in consumption," he says. Foster, 31, plans to invest in companies of all sizes using a growth-at-a-reasonable-price strategy.
Although Matthews India is a blank slate, the firm has compiled a solid record with its other Asia funds. The fund (MINDX; 800-789-2742) estimates annual expenses of 2.0%.
posted by Mahesh Shetty at 4:39 AM
0 Comments:
Post a Comment
<< Home