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How Western Investors Can Buy China at a Discount

By Stansberry Research Interview Series
Wednesday, December 5, 2007

China's stock market has been one of the truly phenomenal investments of the last two years. In 2007 alone, the Shanghai Composite Index is up an incredible 81%.
 
As the index reached new high after new high, the list of famous people proclaiming it a bubble grew. On May 17, 2007, Asia's richest man, Li Ka-shing, said China "must be a bubble." One week later, on May 24, former Federal Reserve Chairman Alan Greenspan argued that China's market should undergo a "dramatic contraction."
 
The market promptly rallied another 50% into mid-October. According to China Securities Depository and Clearing Corp, Chinese investors opened nearly 33 million accounts for trading stocks and mutual funds in the first eight months of 2007. That's more than six times the number opened in all of 2006.
 
However, in the last two months, China's markets have started showing signs of breaking down. The Shanghai Composite Index broke through its initial support line – 50-day moving average – with little difficulty.
 
Between this dip and Greenspan and Li's comments, Western investors have undergone a huge reversal in sentiment toward China. Articles about a bubble popping are much more common than those calling for a bigger rally. And nearly all U.S.-traded closed-end funds that focus on China are trading at discounts to their net asset values.
 
Closed-end funds are essentially mutual funds that have a fixed number of shares. The shares are issued on the market in an initial public offering or IPO. From then on, they trade just like stocks. Put another way, their price is determined by market sentiment.
 
Because of this, these funds can actually trade at a discount to their net asset value. It sounds incredible, but you can actually buy one of these funds for less than its current holdings are worth. Here are four such closed-end China funds:
 
Fund
Symbol
Discount
Morgan Stanley China A Share
CAF
-26%
Greater China Fund
GCH
-14%
China Fund
CHN
-13%
Templeton Dragon Fund
TDF
-13%
 
To me, the Templeton Dragon Fund (TDF) is the most attractive. Unlike the misleadingly named China Fund – only 2% of its assets are in China – TDF has 61% of its holdings in China stocks. It's got another 23% in Hong Kong and 13% in Taiwan.
 
The fund is managed by Mark Mobius, one of the greatest global investors of all time. Mobius was voted Closed End Fund Manager of the Year by Morningstar in 1993, Emerging Markets Equity Manager of the Year by International Money Marketing in 2001, and one of the Top Ten Money Managers of the 20th Century by the Carson Group.
 
Since inception in 1994, Mark has doubled his investors' money. However, if you'd bought following the Asian Financial crisis in late 1998, you would have made six times your money in nine years. That's an incredible return for a single stock, let alone a diversified fund.
 
While I think it's a little early in China's correction to load up on shares, several of these funds are worth keeping an eye on, especially TDF. If you're looking for a publicly traded means of investing in China with a top-notch manager and small fees, you can hardly do better than this.
 
Good trading,
 
Graham




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Market Watch
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52-Wk
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52-Wk
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China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

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52-Wk
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Big Pharma 64.14 +0.0% -3.2%
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Semis 16.22 +1.2% +29.4%
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