Taiwan stocks offer route to benefit from China’s growth: US fund manager

HONG KONG— While investors around the globe hunt for stocks that will help them cash in on China’s red-hot economic growth,a United States-based fund manager says neighbouring Taiwan offers investors a good route to capture this growth

“Certain Taiwanese companies that are active in China offer excellent potential returns,” Mr Steven Champion, president of the Taiwan Greater China Fund, said in an interview with Dow Jones Newswires.

Mr Champion’s picks for the closedend,New York Stock Exchange-traded US$115 million ($186 million) fund include Taiwanese companies that export goods to China or have substantial investments in China.Taiwanese companies are some of the largest investors in China: Two-thirds of China’s information technology exports are made by Taiwanese companies with factories in China.

Mr Champion’s fund, established in 1989, includes Taiwanese large capitalisation companies such as Hon Hai Precision Industry Co, which manufactures electronics for several global brands; and AU Optronics Corp, Taiwan’s largest liquidcrystal-display maker by revenue.

Mr Champion said the fund had 70 per cent of its holdings in Taiwanese technology companies that have strong business ties with China, mainly through production facilities in the mainland.

Technology companies account for around 60 per cent of the market capitalisation of the companies in the Taiwan Stock Exchange Index.

Technology companies offer the best link to China because they manufacture and export a large portion of their goods from China, Mr Champion said.

But Taiwanese banking stocks are not on his list.

“We don’t have financial stocks because they are not allowed to invest capital into China,” said Mr Champion.

The fund is also looking to find smallcap stocks to invest in. Mr Champion said small-cap companies offered good value and growth prospects and would allow the fund to diversify its portfolio.

So far, the fund has been able to beat the benchmarks. Last year, the Taiwan Greater China Fund returned 8.16 per cent,compared with the 6.8-per-cent gain in the Taiwan Stock Exchange Index in US dollar terms and 6.4 per cent in the MSCI Taiwan Index, according to Mr Champion.

That beat the drop of 8.3 per cent in China’s Shanghai Composite Index, though the fund fell short of the 12-per-cent rise in the Hong Kong H-share Index. The H-share Index is made up of Chinese companies listed in Hong Kong.

Mr Champion said Taiwan’s market,when compared with China’s exchanges, offered investors interested in the Chinese growth story a more transparent vehicle to tap into.

“Taiwan has much higher levels of corporate governance than China,” said Mr Champion.

“China is an economic miracle, but it is not so easy to play this.” China’s domestic stock market lacks risk controls and good corporate governance standards, and Mr Champion is not the only one who says Taiwan operates to a higher standard.

The 2005 CG Watch, published by CLSA and the Asian Corporate Governance Association, ranks Taiwan fifth out of ten Asian economies in corporate governance standards.

China ranks ninth on the list topped by Singapore and Hong Kong.

Several Taiwanese companies, which are included in the fund’s top 10 holdings,are among CG Watch’s top-ranked companies for corporate governance. There are no Chinese companies on the list.

“We wanted to invest in a more developed market but get good exposure to China,” said Mr Champion.

Yet, while Taiwan offers investors a more transparent market than China, it still has plenty of risk. This includes poor treatment of minority shareholders and lax accounting standards. — DOW JONES BLOOMBERG