Wednesday, November 28, 2012

We were surprised this morning to read about the Chinese market breaking down to fresh four year lows.  The Wall Street Journal reports that the Shanghai Composite Index lost 1.3% on Tuesday to its lowest level since early 2009.  Quant’s two high scoring China funds, FXI and GXC, track different indices and are still close to their fourth quarter highs, what gives?  A couple factors explain the discrepancy.  The Chinese stock market has two classes of stock, one for citizens and a separate one for foreigners.  ETF Global hasn’t made it through China’s internet firewall yet so if you are reading this you can invest in the latter class, the news reports refer to the former.  The Journal article does mention that the Hong Kong Hang Seng Index, which caters more to foreigners, is up 18.5% this year.  Ranking in 2nd place today, the aforementioned iShares FTSE/Xinhua China 25 Index Fund (FXI) has 24.3% of its assets in Hong Kong domiciled companies and the 5th place SPDR S&P China Fund (GXC) has 20.3% of its assets there.  However, one would expect that different classes of stock representing similar underlying investments would eventually track each other so something else must also be at play.  The answer to that riddle can be found in CYB, CNY and FXCH.  Those are currency funds that track the Chinese Renminbi or Yuan and are trading near their recent highs, offsetting the decline in the local currency share prices.  Quant only ranks equity funds but those currency funds have earned low Red Diamond Risk Ratings although FXCH carries higher risk than the other two.  Delving into the depths of Quant, we do sense a warning on the Chinese market.  Several other China funds make the biggest drop list in Quant’s rankings with the Guggenheim China Real Estate Fund (TAO) the biggest loser dropping from 254th place all the way down to 602nd today, other tickers on that list include CQQQ, YAO, CHIQ, and HAO.  Investing in foreign lands, especially those in controlled economies, can be tricky so pay attention to any fund’s ETF Global rankings and ratings, they have an ability to keep you in the right names as proven by FXI and GXC which are still up nicely in this negative fourth quarter.

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