Fund Profile: Alger China—U.S. Growth Fund

by Ann C. Logue

With the conclusion of another mega-holiday season, it seems fitting to look at a China fund.  After all, how would Americans celebrate if it weren’t for the Chinese?  Whether it’s dreidels to spin after dinner, lights for the front yard, toys under the tree, or silly noisemakers, we have come to rely on inexpensive bounty made in China.  (Should I mention that Chinese restaurants are usually open on Christmas Day, the better to serve those who don’t celebrate the holiday or who suffer a culinary disaster?)

The Alger China— U.S. Growth Fund doesn’t invest exclusively in Chinese companies, in part because there aren’t that many public companies there.  After all, China is still a Communist country, and the pure capitalism of the stock markets is more or less anathema to Marxism.  (Like all things Chinese, the situation is changing rapidly; it seems like every week, a Chinese company is coming public in the United States.)  Its charter allows investments in Chinese, Hong Kong, and U.S. companies.  As of July 31, 2007, 48.1% of the fund’s assets were in U.S. companies, 39.5% in Hong Kong, and just 1.5% in China.  Other assets are held in Singapore (1.6%) and Taiwan (7.9%).  The remaining 2.4% of the fund’s money is held in cash and U.S. treasuries.

Instead, the China—U.S. Growth Fund’s goal is to find companies that are benefiting from the economic changes in China, whether they are based in China or the United States.  The fund’s largest holding is China Mobile, the Hong-Kong based cellular telephone provider, but it also has investments in Starbucks (Nasdaq: SBUX) and Yum Brands (NYSE: YUM), multinational fast-food operators that are growing faster in China than in the rest of the world. Other American companies in the fund include companies that manufacture products in China, like SanDisk (Nasdaq: SNDK); those providing financial services, like Citigroup (NYSE: C); and those shipping goods between here and there, like Expediters International of Washington (Nasdaq: EXPD).

Although more than one yuppie parent has signed kids up for Mandarin lessons, the economy there isn’t perfect.  China has been growing rapidly, but it can’t keep up its dramatic growth forever.  Pollution remains a problem there, and the quality of Chinese-made goods is an issue here.  (This Christmas probably saw a smaller share of Chinese-made presents than in years past because of concerns about lead in toys made there.)  The Chinese government has been gearing up for intense international attention during the 2008 Beijing Olympics, but much of the modernization could stop when the press leaves.  And China, for all its economic growth, is still a Communist nation.  That’s an interesting bit of cognitive dissonance that has to give, but which side will yield?  The Marxist ideology espousing the violent overthrow of the bourgeoisie, or the capitalist ideology that embraces it?

Unlike most international trade, the falling dollar has not had a huge effect on U.S. trade with China.  That’s because the Chinese have been reluctant to let the yuan appreciate too much, because that would hurt the cost advantage of Chinese companies selling here.  The yuan had been fixed at 8 per dollar until 2005.  On Dec. 24, 2007, the yuan closed at 7.3475.  China has been keeping the dollar from falling further by investing in U.S. treasury bonds.  It’s unlikely that the Chinese government would pursue fiscal or monetary that would disrupt trade with its largest customer, but investors in this fund need to keep an eye out for that.

The China—U.S. Growth Fund is mostly sold through financial advisors.  It has a minimum investment of $1000 with a 5.25% load and a breakpoint at $25,000.  There’s also a 12b-1 fee of 0.25 % per year and an expense ratio of 2.20%.  Unlike the typical toy made in China, this fund isn’t cheap, but it may be a flexible way to play a fast-growing and controversial market.  China can’t keep growing forever, but it’s likely to maintain its current pace until the Olympics are over.

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