Closed end funds focusing on China
Comment of the Day

December 14 2012

Commentary by Eoin Treacy

Closed end funds focusing on China

Eoin Treacy's view Investors are warming to Xi Jinping's proactive attitude to governance. The new administration's actions to date suggest a warmer reception for those interested in the stock market. Last week, the Chinese authorities changed the rules on how insurance companies invest in banks from a highly restrictive policy to a much more liberal approach. This has unleashed a new source of demand for financial shares. There is now speculation that foreign investors will be allowed to increase their weighting in shares which would also represent another fresh source of demand.

On the supply side of the equation the release of previously non-tradable shares was completed earlier this year. The banks had been diluting their shares through rights issues but that process has also ended. In addition to P/E ratios and dividend yields at historically attractive levels, these represent two structural headwinds that have dissipated of late.

Following a 94% upside day on the Shanghai A-Share Index and follow through on last week's upside key reversal I thought it might be instructive to expand on my review of potential China investment vehicles posted in Comment of the Day on the 12th. Today I will focus on closed end funds and investment trusts, offering exposure to China, not least because a number are still trading at discounts to NAV.

In the USA the Morgan Stanley China A-Share Fund traded at an average discount of over 8.4% for most of the year but moved to a small premium this week as investors reawakened to upside potential for Chinese related vehicles.

The Greater China Fund (GCH) is currently trading at a discount to NAV of 3.4% and yields 0.4%. It broke out of a yearlong range three weeks ago and a sustained move below $12 would be required to question medium-term scope for additional upside.

The China Fund Inc (CHN) is trading at a discount to NAV of 6.41% and yields 1.55%. It has held a progression of incrementally higher reaction lows since December 2011 and broke emphatically back above the 200-day MA last week. A sustained move below $21.50 would be required to begin to question medium-term scope for additional upside.

The Templeton Dragon Fund (TDF) has been ranging above $25 for much of the year and has now firmed from that region. Its largest holding is Dairy Farm International (17%) which is listed in Singapore and the UK. I reviewed the share in Comment of the Day on December 10th. The fund trades at a discount to NAV of 13.4% and yields 2.12%.

The JF China Region Fund (JFC) trades at a discount to NAV of 12.38% and has been ranging with an upward bias for a year. A sustained move below $12.50 would be required to question medium-term scope for additional upside.

In the UK, Fidelity's China Special Situations IT (FCSS) has recently begun to trade at a premium to NAV. The trust found support in the region of 70p from last year and has held mostly above the 200-day MA since October. A sustained move below 77.5p would be required to question current scope for additional upside.

During my research I found mention of Pacific Investment China Land which is listed on AIM and headquartered in Hong Kong. The trust trades at discount to NAV of 26.9% and has posted an enviable performance. However since it invests directly in property, one would be advised to do one's due diligence. Here is a link to their website.

In Hong Kong, the HSBC Dragon Fund trades at a discount to NAV of 14% and has been ranging mostly above HK$6 for much of the year. A clear downward dynamic would be required to check current scope for additional upside.

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