I enjoy reading articles from Morningstar because I tend to disagree with almost every conclusion they draw and their articles make for useful posts on this blog.
The latest article is about single country funds. You can read the article here. The conclusion of the article is
“We’re concerned about all the interest in single-country funds, though. For starters, it’s always dangerous to chase after hot performers. Moreover, these funds come with all sorts of geographic, sector, and other risks, and they’re difficult to use effectively.”
The author later says this about China funds
“All told, China funds are way too explosive for conservative to moderate investors and those with shorter time horizons. They’re also far too daring and focused for individuals who want only a supplemental international offering with lots of upside potential.”
To be clear, single country funds are more volatile than broad foreign funds. For some folks single country funds are clearly not appropriate. But I disagree with the way in which the author so broadly advised two out three types of investors ( I am making an assumption, when he says conservative and moderate that the only other one is aggressive) to avoid them.
Single country funds are a tool to be used or mis-used by investors. Some investors will be more informed than others and some will have more success than others. As a first step, it does not take much work to figure out that there are some interesting things going on in China, as an example. Perhaps a little more work may lead to an investment in one of the China funds. What the article ignores is how much should go into a China fund. If you have read this blog for any length of time you know I would probably say 2% of the portfolio makes sense, once you have assessed what you may be in for.
Now lets say this fund was bought at the top of the Shanghai market, in spring 2004, with no exit strategy, and was still owned today. The fund might be down 35%, close to what the drop in the Shanghai composite has been in that time. In this scenario the drag on the portfolio would be 0.7% over a year and a half, again this assumes no exit strategy. Are you conservative? If so could have withstood this type of hit to a portfolio? Of course if you are conservative you might have had some sort of exit strategy when you bought the fund.
Whatever might be the reality of the fundamental things going on in China, there are a couple of market related things going on too. The Shanghai market is down 30% from a recent high ( I think of two years as recent), it has a low correlation to the S+P 500 and the S+P 500 might be rolling over.
This post is not meant to serve as a recommendation to buy China. But hopefully it is a catalyst for you to hone your process. There is way to use these types of funds (single country). The article makes no effort to explore how. This post isolates one way, there are others.
Single country funds are very volatile, they way in which they are used can either enhance or mitigate that volatility.