Handle with care

NEW YORK – Many mutual funds that invest abroad had sizeable 2006 gains that bore the stamp “made in China,” but recent volatility in that country’s stock markets have cast some doubt onto this year’s returns.

In what some have likened to the feverish nature of the dot-com bubble in the United States, Chinese investors have poured enormous sums into the country’s mainland stock markets in the past year and a half.

“Those companies are just like the companies that came out of Silicon Valley from 1995 to 2000. Some are going to sink, some are going swim,” said Donald H. Straszheim, vice chairman at Roth Capital Partners LLC in Los Angeles, describing many companies listed in China’s mainland stock markets.

While the investment possibilities in China might seem as broad as the country itself, mutual fund investors should be careful to avoid simply chasing the outsize stock market returns. Opportunities remain, though they might be accompanied by unsettling volatility that mutual fund investors would want to avoid if they weren’t prepared to hang on for the long term.

Last year, share prices more than doubled in China, soaring 130 percent. But in recent weeks, after regulators at the Shanghai Stock Exchange warned the markets were becoming overheated, volatility has increased and led at times to back-to-back sessions of pullbacks.

“The volatility is something investors should’ve expected all along, especially after the big run-up that we’ve seen,” said Arijit Dutta, an analyst with investment research provider Morningstar Inc. “Generally, we tend to discourage people from investing in a single-country fund. Many investors may not be able to stomach the ups and downs and end up using the funds badly by buying at the wrong time and selling at the wrong time.”

And volatility is only likely to increase as stocks rise, said Liang Zhou, research manager for China at fund-tracker Lipper Inc. “Even though the market is no longer cheap now, investors still want to invest.”

Zhou, based in Shanghai, expects the Chinese economy will continue to grow at about 10 annually but predicts investors’ returns will fluctuate. The country has been tightening regulations of some of its stock markets, particularly those of the mainland.

“We also find the quality is increasing fast,” Zhou said of the stock markets in China and the companies listed there.

Mainland stock markets such as the Shanghai Stock Exchange have weaker financial controls than those of Hong Kong, whose regulatory controls are akin to those of other developed markets in Europe, the United States and elsewhere in Asia.

Most U.S. mutual funds that invest in China do so through Hong Kong, thereby skirting some of the concerns about volatility seen in the mainland markets. Often volatility in mainland markets doesn’t necessarily produce ripples in Hong Kong.

“The retail investors in China are not sophisticated investors,” Straszheim said. “They are much more speculators. The markets run on rumor and the regulatory regime is still not fully developed.”