To limit risks, portfolio manager Jasmine Huang looks for companies with little debt and high returns on equity. She wants market leaders that benefit from government policy and can grow consistently for several years.
A favorite holding is ENN Energy Holdings (XNGSF.PK), a producer of natural gas. The government is encouraging increased reliance on gas because it is a relatively clean fuel. As a result, the gas company's sales increased 42% in the last quarter.
"The gas penetration in China is still very low, and there is a lot of room for growth," says Huang.
She also likes Belle International (BELLY.PK), a dominant seller of shoes in China. Besides producing its own brands, the company operates 10,000 retail outlets. With the government encouraging consumers to shop, Belle has been growing at an annual rate of more than 20%.Another solid fund is Invesco Asia Pacific Growth, which has 18% of its assets in China. During the past five years, the fund has returned 9.1% annually, outdoing 80% of its peers. While portfolio manager Steve Cao seeks growth, he steers away from expensive shares. Many of his holdings have price/earnings ratios of less than 10. A favorite holding is the Industrial and Commercial Bank of China, which has a P/E multiple of 6. Chinese bank shares have been slumping as investors worry that hot property markets could turn cold. But Cao says that Industrial and Commercial Bank has little exposure to real estate. A dominant commercial bank, it has high returns on equity and a strong balance sheet. "The bank has enough capital to cope with a downturn," Cao says. Another holding is ANTA Sports (ANPDF.PK), which operates 2,400 sporting goods stores. The company focuses on second-tier cities, where it faces limited competition from Western brands. In the last quarter, sales increased 28%. Readers Also Like: >> Best-Performing Stocks Under $5 in 2011 >> 4 Spectacular Fund-Manager Blowups of 2011