Sunday, April 23, 2006

The China Index Fund (FXI)

The China Index Fund is also known as iShares FTSE/Xinhua China 25 Index Fund. This fund invests in the 25 of the largest and most liquid Chinese companies. This fund fits in the large growth category.

First, we have to look at the large cap growth sector. The work done by Fama and French shows that large cap growth funds typically under perform the large cap value segment as well as the total stock market as a whole. However, China is an atypical market. The economy is flying with 10% growth year over year and this growth is expected to continue through at least 2010 if not further. Compare this to the U.S market which grew at an average rate of 3% all through last century. Not only do we have a huge differential but the Chinese economy has grown at this rate for the past twenty years.

First let us take a look at the fund characteristics and let us then take a look at the stocks in the fund. FXI has a reasonable expense ratio at 0.74%. The funds net asset value was $80.81 but the fund was trading at $81.64 as of 4/21/2006. The fund returns were 46% for the trailing 12 months and 30% since the fund was listed.

The funds investments were distributed as follows on 1/31/2006. The fund had 1.8 billion dollars in assets and the assets were distributed as follows. The banking sector had 13.84% of assets (three banks), chemicals 1.56%( one company), coal 6.07(two companies)%, commerial services 5.71% ( three companies ), Electric 4.61% ( two companies ), Holding Companies 10.92% ( three companies ), Insurance 9.62% ( three companies ), Mining 2.79% ( one company ), Oil and Gas 24.25% ( three companies ) and telecommunications ( 20.57% ) (four companies). Short term investments total 3.55%.

More than fifty percent of the holdings are through Oil and Gas, Telecommunications, Banks, Holding Companies and Coal. In the past segments, we covered some of the Chinese companies listed in NASDAQ and NYSE.

The Oil and Gas segment has three companies - Cnooc Ltd(CEO), Petro China (PTR) and China Petroleum and Chemicals or Sinopec (SNP). Let us look at each of these companies to see how they look compared to the U.S oil and gas majors. Cnooc was in the news last year for their failed bid for Unocal, a U.S oil and gas company. Petro China is an oil major held by legendary investor Warren Buffet. CNOOC has a trailing P/E of 12 and a dividend yield of 2.2%. Petro China has a P/E of 12 and a dividend yield of 3.6%. SNP has a P/E of 11.2 and a dividend yield of 2.0%.

Compare this to Exon Mobil that has a P/E of 11.37 and a dividend yield of 2%. Chevron Texaco has a P/E of 9.4 and a dividend yield of 2.9%. The Chinese companies provide an alternative investment opportunity as they invest in areas where U.S can't operate in middle east and Africa. These companies are partly owned by the Chinese government and the downside in their earnings is limited. While Warren Buffet made the statement that Petro China is no longer undervalued, it is probably also true that it is not over valued. This is probably also true of other oil and gas companies in the FXI index.

The telecommunications segment has China Mobil Ltd (CHL), China Netcom Group Corp(CN), China Telecom Corp Ltd (CHA) and China Unicom Ltd. (CHU) respectively. CHU had a revenue growth of 12.5% year over year and a market cap of 100 billion. The P/E is also fairly reasonable at 18. CHL is also a major at a market cap of 118 billion and a P/E of 17. CN has a market cap of 12.7 billion and a P/E of 8. CHA has a market cap of 28 billion and a P/E of 8.54.

The banking segment has generally been considered as somewhat weak compared to their U.S counterparts. This is primarily because many of the banks are owned by the governement and the government has been using the banks to pump liquidity to the system. The government owned banks are unlikely to have problems as the government is sitting on a pile of foreign currency to the tune of about 800 billion dollars.

The China Index Fund (FXI) provides a way to invest in China and potentially the ability to ride the growth wave of China. The likelihood is for the Yuan to strengthen further as opposed to weaken against the dollar in the coming years. There are also risks as government has a large stake in many of the companies. In some sense, it is like betting that the current system of government is China will continue to thrive as opposed to betting on the company's management. This has its own pros and cons. At the moment though, it looks as though nothing can stop China from becoming the pre-eminent power in the world in the 21st century.


Anonymous said...

I agree, like FXI very much. Before your article here, I read a very interesting comparative study of FXI vs. PGJ, another China ETF, at

They are the China stock specialist covering U.S. listed Chinese ADRs.

If you want, check out the "research" tab on the page to see the entire research coverage of Chinavestor. Very interesting.

Anonymous said...

I also have compared the holding of fxi to some china mutual funds. FXI contains some of the best ADRs available. I really like its concentration in the china stocks I want to own.

Anonymous said...

The trouble with PGJ is that the portfolio companies are not all Chinese and a large percentage of them are NASDAQ listed with unproven records. Some have problems. An example is UTStarcom (UTSI), a California company about to be delisted from the NASDAQ because of continued late SEC filings.

FXI has the better portfolio, imo.

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