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| Feature: Eastern Promise |
Perilous Paths to China
Rebecca Fannin
09/01/2005
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Compare their
performance with the active approach taken by the San
Francisco–based
Matthews
China Fund, an equity mutual fund
founded by veteran Asia
money manager Paul
Matthews. It
managed to post annualized returns of
16.2 percent during the past
three years before falling 1.77 percent as
of late May. Like
most China
investments, the $850 million fund is
extremely
volatile; it plunged 40 percent
in the spring of 2004. But in
a universe where instability is the norm, Lipper,
Reuter’s
analytical
division, ranks it the top-performing China regional fund
for the five
years ending May 31. The fund’s success seems to
stem largely from
seeking dominant companies in growth
industries—and from the fact that
among its
top holdings are
some well-established companies based in
Hong Kong, including
Swire Pacific and Bank of China.
All securities in China are, at bottom, equity
based, and the market risk,
absent any way to diversify
it away, is
nearly impossible to hedge. | Most of
the
excitement over China is
predicated on its growth, but there are
those taking a more contrarian approach.
In the urban real
estate
market, a notorious bazaar where only true insiders
should venture,
Alexander Shang, a partner with the private
equity firm Phoenix
Capital
Partners in New York and Beijing,
is looking not to the boom, but to the
bust. He has begun raising a
fund to invest in distressed real estate;
he plans
to build
out the interiors of buildings left as shells by
bankrupt property
developers. While he has not specialized in real
estate
before, he believes his
extensive China experience gives him a
50-50 chance of turning others’ downsides
into an upside.
Shang says he
has already spotted one likely opportunity: a huge
real estate project
left abandoned in the bustling southern
Chinese
manufacturing center of
Shenzhen.
Those who
have invested successfully in
China share
one trait in common:
access to exceptional local knowledge. With
this
in mind,
private investors looking to profit from the country’s boom would
do
well to do hire only the most experienced, active managers—which
will
usually
lead them to the private equity community. Juan Meyer,
executive vice president
at the Greenwich, Conn., branch of
the
multifamily office Asset Management
Advisors, agrees. “The
only avenue
we have found that makes sense is private
equity,”
he says. His family
office invested 10 years ago in China Management, a
$250 million
private equity fund that has stakes in 27
fast-growing Chinese
consumer
companies. His firm’s capital in
the fund has doubled in the past four
years, primarily from
returns garnered through public listings. Of the
limited
options, private equity offers the highest returns and lowest
risk, he
notes.
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