US Investors Not Feeling the Chinese Stock Market Sizzle

US investors in China stock mutual funds, ETFs and closed-end funds are disappointed with returns so far.

Since the beginning of the year until May 4th 07, the Shanghai index is up 43.57% and the Hong Kong index (Hang Seng Index) is up 4.38% (not including dividends). But US investors who invested in various China stock mutual funds, ETFs and closed-end funds are disappointed with their investments compare to Shanghai index returns.

Many mutual fund companies touted the substantial growth potential of China, so US investors have put money into various investment vehicles, and expect similar returns to Chinese local indexes; however, most of these investors do not know that whether their China funds are invested in Hong Kong, Taiwan listed companies, Chinese H shares, or ADRs. Few mutual funds actually invest directly in the Chinese A share market.

Using Morningstar.com database, among China focused mutual funds the best performing mutual fund year-to-date is Dreyfus premier Greater China Fund A [DPCAX], whichrewarded shareholders with 21.8% return (NAV), not including sales charge. The lowest YTD return mutual fund is ING Greater China A [IFCAX], which rewarded shareholder with only 3.84% [NAV) return, not including sales charge.

For ETF funds investing in Chinese companies, returns have been rather anemic this year compared to the Shanghai index. iShares FTSE/Xinha China 25 Index (FXI) is down -1.12% YTD. iShares MSCI Hong Kong Index (EWH) is up 6.75%. PowerShares Gldn Dragon Halter USX China (PGJ) is up 4.21%. Return figure is through May 2nd 07.

Some closed-end funds invested in Chinese companies are actually showing losses due to fluctuation of its premium/discount levels. Greater China Fund's (GCH) YTD through 4-30-07 market return is -15.29%, NAV return is 11.63%.

China Fund's (CHN) YTD through 4-30-07 market return is -1.11%%, NAV return is 23.58%.
Jardine Fleming China Region Fund's (JFC) YTD through 4-30-07 market return is
–11.4%, NAV return is .44%. This fund actually invests mostly in Hong Kong and Taiwan companies; only 4.5% of the portfolio is listed as Chinese companies.

Morgan Stanley China A Share Fund's (CAF) YTD through 4-30-07 market return is 10.68%, but NAV return is whopping 53.76%. Again the difference is the fluctuation of premium/discount level.

Figures quoted in this article deemed reliable, but no guarantee of accuracy. Return data is based on Morningstar database, either end of April or May 2nd 07 figures.

Comments

[Chamois16:]

Using YTD data for closed end funds can be quite misleading if CEF dynamics are not understood. These CEF paid out large cap gains distribution at yearend, causing the NAV to drop precipitously and putting the market prices ata momentary high premium. These conditions qickly corrected in the new yearand and market prices in January, reflecting the distribution went to more noraml discounts, Since that time, the performance ofmarket prices and NAV have more closely followed the indexes they represent.

More fundamentally, there is a major performance distinction between A&B share mainland markets and HK. CAF, as the example, marches to a different drummer than the other China CEF, even if that drummer may potentially be out of control.

As long as these PRC markets are growing rapidly, I think it is wrong to discount the utility of ETF and CEF as vehicles, CEF, for example, must recognize harvested capital gains through distribution, reducing future market risk associated with ownership.

2007 May 09 12:08 PM

[Daniel Su:]

Thank you for your contribution.

www.etfconnect.com/sel..., The purpose of my article, was that most of investors when they bought the China fund, they expect Chinese market return, but as you rightly point out, there are early CEFs and most of mutual funds perfer invest mostly in HK, or Taiwan companies due to better accounting standards, regulation, and transparancy, instead of mainland Chinese companies, PowerShare ETF they invest exclusively ADRs. Morgan Stanely CAF, it invest mainland Chinese Companies A shares, but due to fluctuation of premiums to discount of -9.75% currently, investor did not gain as much as SH index.

2007 May 09 11:49 PM

[Daniel Su:]

CAF did not make any distribution last year.

12-15-06 The Morgan Stanley China A Share Fund, Inc. Will Not Make a Year-End Distribution for 2006 (BWI)

2007 May 10 12:22 AM

[izomax:]

I own CAF and I found that it actually tracks S&P 500/DJIA.

Whenever U.S. stocks goes down, CAF goes down even more, even when China's A-share is skyrocketing.

The only time when CAF goes up is when S&P 500/DJIA goes up.

Why? Because most investors in the U.S. are clueless about A-shares.

It's really disappointing.

2007 May 12 07:46 PM