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China in your hands

It seems that Jupiter is going from strength to strength and adding talent faster than Chelsea Football Club. Richard Curling has come in from Deutsche to run the smaller companies fund and Simon Somerville came from Cazenove to run the new Japan income fund which, despite a torrid year for Japan, is at least up in the top decile. Ben Whitmore will be arriving in a few weeks from Schroders to run a special situations fund.

Finally, to help bolster the Far Eastern desk, Jupiter has managed to attract the services of Philip Ehrmann, who has been running Far East and China money at Gartmore for over 10 years. Gartmore’s China opportunities fund certainly caught the imagination of many clients in 2004 when it was one of the best performing funds of all. Although 2005 was a much quieter year for China, 2006 has been considerably better. As one of the Bric economies, it can hardly be ignored and this looks to be a shrewd hire from Jupiter.

Perhaps not surprisingly, Jupiter has decided (correctly in my view) to alter its Far Eastern fund by removing the Japanese assets and placing them in the Japan income fund. Ehrmann will manage the revamped Far Eastern fund along with the China fund which is being launched at the moment.

For Ehrmann, the opportunity to join an investment house with some of the very best managers in the industry was probably an opportunity to good to refuse. Jupiter has by and large made its name in the UK and Europe so this is a real chance to build an Asia-Pacific proposition to take on the likes of First State and Aberdeen.

The China story is well documented – real GDP growth at between 8 and 10 per cent a year, the world’s biggest population, a city the size of London being built every year and, with around four cars per 1,000 people compared with 950 per 1,000 people in the US, the potential remains enormous.

However, as many of us know, GDP growth does not always equate to stockmarket growth. After all, European growth rates seem to be anaemic but that has stopped the stockmarkets showing much stronger growth than China for the last three or four years.

Part of the problem has been that many stocks on the market have been big state-owned companies which have been inefficient and not always at the heart of Chinese growth. Ehrmann tends to focus far more on the mid and small-cap area which, although more volatile, offers the greatest potential. He sees the fund divided roughly in thirds between small, mid and big caps. That is not to say he will not have more money in bigger caps when opportunities arise but he feels we are some 18 months away as these companies complete their reform process.

Ehrmann adopts a thematic approach to looking for opportunities. He sees three major themes at present. First, privatisation within state-owned enterprises. Second, consolidation within sectors, especially in key industries such as steel, coal and autos. Basic industries, banking, transportation infrastructure and the retail sectors will all be undergoing transformation and consolidation. Finally, new industries such as travel, telecoms and the environment offer potential growth. The Chinese are beginning to realise that you cannot grow the economy without regard to the environment. As the Chinese become more wealthy, tourism is growing, internally and externally.

Valuation is also a key criterion for Ehrmann when choosing stocks. China is on about 11 times, with earnings of around 25 per cent a year, which he thinks is very supportive. He will initially be overweight in the consumer sector of the market as consumer services and goods are a huge growth area.

Clearly, the fund is high octane and therefore should form part of a bigger portfolio for clients. For most first-time investors, a more general Far Eastern fund might initially be the way to go. However, for those with bigger portfolios and, indeed, those who wish to look genuinely longer term, it should be a fund on their shopping list. Providing Chinese GDP is mirrored by stockmarket growth, this fund should also make an ideal savings plan for those taking a 15-year view.

Mark Dampier is head of research at Hargreaves Lansdown

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