China Redux—Funds from the East

11/27/2007 12:00 am EST

Focus: FUNDS

Thurman Smith

Editor, Equity Fund Outlook

Also looking toward China, Thurman Smith, editor of Equity Fund Outlook, finds two funds suitable for your taxable accounts…

Spectra N’s (SPECX) annualized return of 24.5% is over twice that of the market. Manager Kelly looks for firms with a multi-year growth path, especially those with barriers for other companies to enter that industry or sector.

As with other Alger funds, the investment process is analyst-driven. Alger analysts are encouraged to make field trips to “kick the tires” and really understand how a business works before making a recommendation. There is enough loss carryforward on the books to avoid distributions this year, so Spectra can be considered for taxable accounts anytime.

Persistence is the word at Kinetics Paradigm (WWNPX), which is why it has been in the Taxable Portfolio for four years. But the themes are always changing, according to the five-man team’s view of the next big thing in the world that most other investors haven’t yet considered. Their big new theme is to recognize the commercial ascendancy of China. Thus, mainland and Hong Kong stocks are now 17% of the fund’s assets.

The firms the fund is buying are being sold to private investors by the Chinese government, as it continues to fund its modernization and economic reforms through the sales of minority stakes. These advantaged companies benefit from a self-fulfilling prophecy in that the government has every interest in maximizing the value of its holdings and will thus provide a friendly environment for these businesses.

The managers also see the fund’s China holdings as a form of risk diversification, to offset the possibility that Chinese companies will dominate the rankings of various industries at the expense of securities in the US and developed markets.

The Chinese holdings depend wholly on domestic markets and the growth of the local economy, and consequently have all their revenues and profits represented in Renminbi, the official currency on the mainland. This feature acts as a currency hedge if the Chinese government does allow the Renminbi a higher valuation versus the dollar and Euro. In this scenario, these securities would benefit because of their exposures and holdings in Renminbi.

Another advantage of Paradigm’s Chinese holdings is that world indices have little or no exposure to mainland Chinese securities. As indices are someday reallocated, Chinese companies owned in the fund would benefit if added to an index.

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