A bull in China? Opportunities abound but recent volatility requires investors to tread cautiously.

Author:Anderson, James A.
Position:MUTUAL FUND FOCUS
 
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You just cannot ignore the trail China has been blazing in recent years. We've all had more than ample opportunity to gawk at the impressive numbers put up by stocks in the nation's Shanghai composite index--up 97% in 2007, and 130% the year prior.

A huge nation with 1.3 billion people (20% of the world's population), China has a gross domestic product of $10 trillion but is still considered an emerging market. "There's a general rule of thumb for investing in emerging markets," says C. Kim Goodwin, head of equities for Credit Suisse's asset management business in London. "When you're just trying to get in on a fast-growing economy, you usually buy the biggest bank or a collection of the biggest banks to take a stake on growth opportunities. China has developed and matured to the point where now it's a good time to look for specific company investments."

A few concerns, however, probably make mutual fund investing the best way for most individual investors to approach China. While the numbers are impressive, there's been significant volatility. Consider that according to Morningstar, a Chicago-based mutual fund research firm, mutual funds with at least a 25% stake of their assets invested in China managed a minimum 39.6% gain last year. Over five years, the average annualized return for these funds was 30.6%. As a cautionary note, this year, the same group of funds fell between 11% and 26% by early February.

Another concern is what's going on here at home, i.e., the sputtering U.S. economy: America, after all, accounts for 19% of Chinas exports, and a recession here--and in Europe's...

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