Investing in Chinese stocks–be careful July 12, 2011
Posted by forwardfinancialplanning1 in Emerging Markets, Investing-General.add a comment
Since China has been the growth story of the new millenium, it’s tempting for investors to desire ” a piece of the action.” Some Chinese companies are making their way on to our stock exchanges, but much like with other frontier business opportunities, buyers should exercise caution.
The U.S. Securities and Exchange Commission recently issued a bulletin about the process some of these companies have used to get listed on the exchanges. Ordinarily, new publicly traded stocks go through an exhaustive Initial Public Offering (IPO) process which requires them to file detailed registration documents with the SEC. The purpose of these documents is to improve the transparency of the new listing information and prevent the fraud that was very common in the markets of the go-go 1920′s.
Several of these Chinese corporations have skirted these investor protection processes by pursuing stock exchange listing via a “reverse merger.” In a reverse merger, a private company gets its stock traded on a public exchange by agreeing to merge with an existing publicly traded “shell company”. The shell company has few or no operations of its own and survives after the merger. Its control, however, is ceded to the shareholders of the private firm with which the shell company just merged. By entering the exchange via this “back door”, the private company goes public without having to file all of the informational documents required during an IPO. So, if you’re tempted by these newly available Chinese stocks, take some time to do your due diligence. Read the SEC bulletin at www.sec.gov/investor/alerts/reversemergers.pdf. There’s no telling what you might find!!
Not all emerging markets funds are the same April 19, 2010
Posted by forwardfinancialplanning1 in Emerging Markets, Equity Mutual Funds.add a comment
There has been a lot of interest in emerging markets mutual funds in the past few years. Their strong relative performance explains much of the “buzz”, but their value as a diversifying element in a broader portfolio cannot be denied. However, one must not equate single country emerging market funds with their more broadly diversified cousins. Investing in a fund holding the stocks of a single country is a far more risky proposition than choosing a fund which invests in multiple developing markets.
This fact is highlighted by a quote from David Herro, fund manager of several Oakmark international funds who was selected by Morningstar as their International Manager of the Decade. When asked which country is the least investor friendly, David replied, “The least investor-friendly country that I’m familiar with has to be Russia, because there is not consistent rule of law. At this point it isn’t a transparent place to invest.” Despite these circumstances, there are numerous mutual funds which invest only in the stocks of Russian companies. It would be prudent to heed Herro’s comments before committing dollars to such single country mutual funds.
