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Just Say No to China Mutual Funds

There are more effective ways to profit from China's growth


Mutual funds are the choice investment for many people. Some feel comfortable with the relative simplicity of mutual funds, having a manager (or an index) guide their investments and knowing that they are diversified. Many people are also forced to invest in mutual funds through your company’s retirement plan.

I need to warn you, though, that most of the time mutual funds are not the most effective way to make your money from China’s growth. There are three important reasons why:

Reason #1: China mutual funds tend to invest too much in state-owned enterprises. This isn’t actually limited to just mutual funds. Wall Street in general doesn’t get it. With only a few exceptions, SOEs are wealth destroyers, not wealth builders. Private businesses have taken market share away from inefficient SOEs. Most mutual funds (and Wall Street analysts) haven’t adjusted their strategies accordingly.

Reason #2: China mutual funds do a poor job of managing risk. I’m as bullish as anybody on China over the long term, but it will not be smooth sailing all the way. No investment ever is, but it’s especially true of China — both because it’s still an emerging market and because you can never be sure what the government will do. Successfully profiting from China’s growth requires effective risk management.

In other words, you can’t invest your money and forget about it, assuming it will grow with China’s economy. Unfortunately, that’s what most emerging market mutual funds do. They stay fully invested in their sectors at all times, so they take big hits when the hiccups come, as they invariably will. The truth is that most mutual funds simply do not know how to sell, and the resulting losses can be substantial.

I stay on top of what’s happening in the streets of China, so we know long before most others where the trends are heading. And I’m not afraid to sell a stock when I see risks of any kind — internal, external or valuation. This is not only the downfall of many mutual funds, but of a lot of individual investors as well. I don’t want to see that happen to you.

Reason #3: Most China mutual funds focus too narrowly on Chinese companies. The China Miracle is a worldwide phenomenon, so you’re hurting your returns if you limit yourself to Chinese companies. Take commodities for instance. Chinese demand has driven up prices all over the world, so mining companies everywhere benefit. State-owned companies in China are not as well-managed as most other mining companies, so looking for your profits there is a big mistake.

Article printed from InvestorPlace Media,

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