Could China Be Right for You?

Emerging markets still remain a volatile investment, but China-focused funds present attractive opportunities.

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Not sure where to invest your money right now? If you have time on your side—20-plus years or so—and you don't mind adding a riskier holding to your already diversified portfolio, you might want to consider one of the growing number of mutual funds that focus on China-based companies.

There was much said about President Obama's stimulus package here at home. Should there be one? If so, how much should the government spend? Where will the money come from? In China, there was little debate when its economy also hit a bump in the road, and, as James Oberweis, president of Oberweis Funds, recently told U.S. News, "Dictatorship certainly has its disadvantages, but the upside is you can get things done very quickly."

Last week, the U.S. Commerce Department reported that the gross domestic product in the United States fell at a rate of 1 percent during the second quarter of this year. This was not too surprising for many analysts—the number was actually better than expected. On the other side of the world, it's a different story. GDP numbers in China are already beginning to creep up to the level they were before this whole global recession started. Estimates are hovering around a rate of 8 percent GDP growth for 2009 for the world's third-largest economy. Is it time to reconsider your investment strategy? Says Oberweis: "I do think we're in the relatively early stages of a global shift of capital out of Europe and North America into Asia—and China in particular—very much akin to the industrial revolution in the U.S."

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So what has Oberweis done? His company runs a China-heavy stock fund, fittingly called the Oberweis China Opportunities fund (symbol OBCHX), in which almost all assets are invested in China-related stocks. Oberweis says he believes the future of investing in China is bright. "For someone who has 20 years to invest, I'm highly confident there's an exciting opportunity." The China Opportunities fund started in 2005 and has returned an annualized 12 percent since its inception.

A word of caution for those ready to jump on the China bandwagon: Make sure you're broadly invested in other places. As long as you're firmly invested in some safer U.S. holdings, a China-focused fund could give you a much-needed income boost if, once again, you've got some time to spare.

Oberweis's strategy is to invest in small, fast-growing companies that are "falling below the radar that have the opportunity to add value," he says. Here are three stocks Oberweis thinks could close out 2009 with big returns:

AsiaInfo Holdings (ASIA) specializes in the development of billing software for telecommunications companies in China. With more than 600 million users, the Chinese cellphone market is the largest in the world. After a restructuring in the telecommunications industry, the Chinese market now has three major players, and AsiaInfo works with all three.

Oberweis also favors New Oriental Educational and Technology Group (EDU), which provides educational services for high school students as they prepare for their college entrance examination. "Because of the one-child policy, many families have only one shot, so they're willing to expend significant resources on educating their single child," he says.

Finally, he likes Vision China Media (VISN), which makes flat-panel televisions for buses. Oberweis says the company is "well positioned for the future" because "they're the only game in town for flat-panel TVs on buses."

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Oberweis says the fund invests in three broad types of companies in China: those building brand names with the emerging Chinese middle class in mind, those gaining a huge market share in a country with little antitrust legislation, and those related to infrastructure development, which the Chinese government is furiously trying to jump-start.

China is in the midst of its own industrial revolution. Oberweis is trying to pick the next big names in China, and he—like many experts—is counting on the emergence of a middle class in China that wants to buy these brand-name consumer goods. Investing in China presents tremendous opportunities, but the volatility in emerging markets is much more extreme than in U.S. markets. "China shouldn't be half your portfolio," Oberweis says, "but to have some exposure to China can really help returns over a long period of time."