Investing in China Mutual Funds and China ETFs: Right Time Now?

Sam Subramanian PhD, MBA

China's growth has been nothing short of spectacular in the past decade. China's economy has grown 316% trumping America's 43% growth nearly 7-to-1.

Superlatives abound in describing China’s economy: Largest auto market, biggest steel producer, major consumer of just about every commodity.

The 2008 financial crisis has slowed growth in many nations around the world including the U. S.

But, not China's.

Here is a comparison of real gross domestic product growth in the U. S. and China.

Virtually unscathed by the 2008 global financial crisis, China's economy continues to grow at enviable rates while the U. S. economy is limping. Data: World Bank, Moody's, International Monetary Fund

All this is well and good.

But, if you took all of the above to infer that you would have done well by investing in China in recent years, you would be off the mark.

How Investors in China Mutual Funds and ETFs have Fared

Since the global stock market top in October 2007, investments in China have actually fared worse than those in the U. S.

The MSCI China index is down a whopping 45.3% compared to the 11.6% decline in the S&P 500.

In fact, Chinese stocks have fared worse than those in crisis-stricken Europe where the region's MSCI's index is down 40.0%

China mutual funds and ETFs have in general performed in line with the MSCI benchmark.

Why have China Mutual Funds and ETFs Underperformed?

There are many reasons for the underperformance of Chinese stocks since October 2007.

From a stock market perspective, they include starting price and valuation. Chinese stocks were just too expensive in 2007 when stock prices rose nearly 150% during the one-year period ending in October 2007.

From a corporate perspective, Chinese companies many of which are state-controlled, focus more on market share than on profits. Their profit growth has not lived up to the lofty levels expected in 2007. Overtly lax corporate governance, opaque accounting, and widespread use of reverse mergers are to blame as well.

From a macroeconomic perspective, high inflation and tightening of monetary policy have come in the way.

Simply put, making snap shot investment decisions based on growth rates or positive headlines can lead to disappointment ... and China’s example proves this quite forcefully.

Price and valuation matter when you buy any investment. If you overpay, your returns will not be good.

Right Strategy for Investing in China Mutual Funds and ETFs

So, should you avoid China mutual funds and ETFs? Hardly so.

China has great growth ahead of it.

Despite all the growth achieved in the past, China's per capita GDP ranks 95th lowest in the world according to 2010 World Bank data.

China's economy is forecasted to grow at close to double-digit rates for a number of years with its GDP exceeding that of the U. S. in about 15 years.

However to make money from China's growth, you must own the best China mutual funds or best China ETFs only at the right time ... as in 2009 when Matthews China Fund (MCHFX) soared 78% compared to 27% for the S&P 500.

This is precisely what AlphaProfit tries to do in its no load growth model portfolio ... own the best China mutual funds when the timing is right.

So, does the AlphaProfit no load growth model portfolio own China mutual funds now?

No, it does not.

China's stock market is likely to do well when the Chinese economy fires on at least one of two fronts: Exports and domestic consumption.

Currently, the financial crisis in Europe, China's largest export market, is a headwind.

Domestic consumption is limited by China's efforts to balance inflation and growth. Monetary policy has been tightened by restricting bank loans and raising reserve requirements. Stimulus measures are limited to infrastructure programs like the massive railroad construction project.

The outlook for China's stocks would improve if either Chinese inflation cools or the outlook for European exports improves.

Where to Invest Now in Asia

While you wait for China to turn timely, you can look to Japan, Korea, or Regional Asian plays.

You can play Japan and Korea through mutual funds like Matthews Japan (MJFOX) and Matthews Korea (MAKOX), respectively or ETFs like iShares MSCI Japan (EWJ) and iShares MSCI South Korea (EWY), respectively.

Diversified regional plays with an income bent such as Matthews Asia Dividend (MAPIX) or WisdomTree Asia Pacific Ex-Japan (AXJL) can also work.

AlphaProfit No Load Growth Model Portfolio: Strategy and Results

Combining country and region rotation in foreign markets with investment style rotation in the U. S. market, the AlphaProfit no load growth model portfolio helps investors invest in the best domestic, foreign, and specialty mutual funds at the right time.

Performance of AlphaProfit no load growth mutual fund model portfolio as of March 20, 2013. Sign up for Free and Premium mutual fund newsletters

Exemplifying the resiliency of AlphaProfit's disciplined mutual fund selection process, the AlphaProfit no load growth model portfolio is up 93% since the start of 2009, compared to the 62% gain for its benchmark.

Since May 18, 2011, the AlphaProfit no load growth model portfolio has included Hennessy SPARX Japan Fund (SPXJX). This fund has outperformed the iShares MSCI EAFE ETF (EFA) and iShares MSCI Emerging Markets ETF (EEM) ... ETFs that track widely followed foreign stock market benchmarks ... by 910 and 820 basis points, respectively.

Popular How-To Guides Sector ETFs: Select the Best Sector ETF Consistently Secrets to Boosting Your No Load Mutual Fund Returns Rollover IRA: A Booster Rocket for 401k Retirement Plans Fidelity Select Funds: Choose the Best Fidelity Sector Fund Best ETFs to Build Your ETF Portfolio Sector Mutual Funds: Picking Winners and Avoiding Losers Constructing a Top Mutual Fund Portfolio Diversified Portfolios with a Knock-Out Punch Select Sector SPDRs: Maximize Return and Minimize Risk A Guide to Analyzing Mutual Fund Returns Looking at Mutual Fund Fees the Right Way Custom Search

Recent MoneyMatters Articles Top Rated No Load Mutual Funds for 2013 The Best Mutual Funds for 2013 & Top ETFs for 2013 Top Rated Mutual Funds for 2013 Fidelity Select Funds: Best, Worst, & 2013 Forecast Best No Load Mutual Funds for 2013 New Low Risk Investments with High Returns Best Funds for Presidential Election Year Stock Market Right Strategy and Investments for This Turbulent Market Best Performing Fidelity Mutual Funds & Top Rated ETFs Mutual Fund Picks for 2012 & The Best ETFs for 2012 NTF Mutual Funds: Fidelity FundsNetwork Eases Rule Protect Yourself in a Haven of Guaranteed Growth Fidelity Select Chemicals and Chemical ETFs More from Investing Blog Sign Up for Free e-letter

About AlphaProfit MoneyMatters and AlphaProfit
AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds. AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.

AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios with Fidelity funds and exchange-traded funds. It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won the coveted #1 rank from Hulbert Financial several times.

Copyright Policy and Fair Use Guide
You are welcome to quote a short excerpt of the article not exceeding 100 words with attribution in the form of a hyperlink to the article's full URL or http://www.alphaprofit.com. If you wish to republish the article in full on your website, blog, or other media, you must obtain permission.

AlphaProfit MoneyMatters™ is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual advice on investing. Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind. AlphaProfit Investments, LLC is not responsible for any errors or omissions. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from any of the investment companies, brokers or entities connected with the securities mentioned herein. Please review our Terms and Conditions of Use and Subscriber Agreement which is available on our website at www.alphaprofit.com; they govern your relationship with AlphaProfit Investments, LLC, including, but not by way of limitation, use of the AlphaProfit MoneyMatters.

This page is best viewed in 1024 by 768 pixels screen resolution or higher.
Copyright © 2011 AlphaProfit Investments, LLC. All rights reserved.