Oberweis China Opportunities Fund (OBCHX)

By Ian Wyatt, MutualsAdvisor.com | OBCHX | Aug 08, 2007 | comment

By Ian Wyatt, Editor-in-Chief

 Amy Buttell Crane, Research Analyst

Fund Type: China

Expense Ratio: 1.91%

Min. Investment: $1,000

Web: http://www.oberweisfunds.com

Top 3 Holdings:

Century Sunshine E 4%

Focus Media Holding, Ltd. ADR 3.62%

Lee & Man Paper Mfg 3.25%

When Jim Oberweis launched a fund to take advantage of China’s rapidly growing economy, he chose a road less traveled by purchasing shares of small companies positioned to profit from the country’s exploding middle class and its appetite for goods and services.

Oberweis, chairman of Oberweis Asset Management, seeks to leverage his firm’s expertise overseas in the China Fund and its recently launched sibling, Oberweis International Opportunities Fund. While most U.S.- based funds that invest in China concentrate on the large companies listed on major indexes such as the FTSE Xinhua indexes and S&P/IFCI China Index, Oberweis bets that smaller companies will deliver superior long-term growth.

To supplement the company’s small-cap investment expertise, Oberweis has hired a co-manager, Vanessa Shiu, based in Hong Kong, where she works with two other analysts; a third analyst is based in the United States. Capitalizing on that Hong Kong expertise, the fund concentrates its assets on companies that do business in China but that are actually listed on the Hong Kong Stock Exchange.

Those companies make up 55% of the portfolio, followed by companies listed on the Singapore Exchange and in American Depository Receipts – foreign companies listed on U.S. exchanges. This strategy enables the fund to avoid the potential problems of investing in companies listed on mainland Chinese stock exchanges, where corporate transparency and financial reporting are questionable.

Specifically, the investment philosophy and strategy of Oberweis China Opportunities revolve around the “Oberweis Octagon,” eight factors the firm uses to evaluate potential companies for inclusion in its portfolio: rapid revenue growth; rapid earnings growth; low relative price-to-earnings ratio; future growth potential; earnings acceleration; low relative price to sales ratio; quality of earnings, and top quartile relative strength.

While not every company in the fund portfolio will meet all eight criteria, this underlying philosophy ensures that the fund managers and analysts remain focused on the qualities that distinguish this fund from its peers: AGARP (aggressive growth at a reasonable price). Fund management recognizes the potential perils of investing in China and cautions that the fund is suitable only for long-term investors with an appetite for risk.

China’s markets and securities are volatile – markets were roiled in the first quarter of 2007 by the central government’s attempt to slow the torrid pace of growth by raising interest rates, improving tax collection and tightening bank reserve requirements. Such measures had little impact as China continues to see increases in its gross domestic product at around 11%.

Consumer retail spending – on which the fund is pinning its success – also continues at a strong clip, rising 15% year over year. The fund’s sector make-up reflects this focus with 29.2% of the assets invested in the consumer discretionary sector, 11.3% in the consumer staples sector and 15.6% in the industrials sector. Compared with the S&P CitiGroup EMI China Index, the fund’s benchmark, it is overweight in the consumer sectors.

As a fund with not even two years of history, its asset growth is impressive. However, with $801.32 million in assets as of May 31, 2007, the fund is still small enough so the managers can easily build positions in the small companies it focuses on, and get in and out of the markets where they trade. Portfolio turnover is 94%, higher than its peer group, but is consistent for an investing approach that favors fast-growing companies with price momentum.

The fund held stakes in 88 companies at the end of May. Major holdings included Century Sunshine Ecological Technologies, a manufacturer of organic fertilizers, Focus Media, a company that owns flat-panel video displays used for advertising, and Nine Dragons Holdings, a manufacturer of container boards.

The fund launched at a favorable time in terms of market conditions for China-related companies, and returned 81.2% in 2006. As of late June 2007, year to date returns were nearly 30%. Oberweis funds have a history of not only turning in good short-term numbers, but also strong long-term numbers, so if this fund’s siblings are any indication, this fund should hold its ground well during the long-term. Oberweis Emerging Growth, for example, has a five-year average annual return of 13.15%; the Oberweis Micro-cap Fund, 19.67%; and Oberweis Mid-Cap Fund, 13.73%.

The fund celebrates its second birthday on Oct. 1, 2007. The fund does not hedge for currency fluctuations. “We believe the effect of the exposure to the Yuan will be positive over the next 10 years,” says Oberweis.

In terms of expenses, the fund’s current expense ratio is 1.91%, which compares favorably to its China stock fund peers, which have an average expense ratio of 2.33%, according to Standard & Poor’s.

Although Oberweis China Opportunities is a young fund, it’s a potentially good opportunity for aggressive investors looking to invest in China and get in on the ground floor with a fund with a small asset base backed by experienced management.

This article is from the report, "MutualAdvisors.com, Top 10 Mutual Funds from 2008." Click here for the latest report!

Comments on this article

There are no comments for this entry yet.

Add your comments