INVESTORS in mainland stocks seeking diversification but wary of the restraints of mutual funds could consider the Cathay Investment Fund, a closed-end fund listed on the Hong Kong stock exchange. Closed-end funds are popular in other markets, particularly Britain, but are still finding their niche with investors in Asia. The fund is presently trading at a 20 per cent discount to its net asset value of about US$110 million. This means that investors are receiving $1 worth of stocks for every 80 cents they spend. The three-year-old fund, which is trading at about $9 a share, has ranged from a 20 per cent discount to a premium of 30 per cent. The share price has ranged from about $7.80 to more than $11. According to Paul Wolansky, the investment manager, the fund has a diversified portfolio of mainland investments and seeks long-term capital growth. It covers five companies - chosen because they are the leaders in their respective industries - with the assets evenly split between each. The Stock Exchange Executive Council of Beijing is the fund's investment adviser. The fund also has a representative on the board of directors of each of the companies in which it invests. Mr Wolansky said investors in an open-ended fund, such as a mutual fund, were investing in two things: the success or failure of the underlying assets; and rises or falls in the stock market. 'Since the beginning of 1993, the Hang Seng China Enterprises Index has dropped by about 60 per cent, or from 2,100 points to 800 points,' he said. The Cathay Investment Fund, meanwhile, had seen its net asset value rise from $60 million to $110 million. 'Even if the stock market goes down, we are still able to make a nice gain,' he said. 'The fund is investing in the long-term growth potential of the market and not the vagaries of the stock market.' Those considering this type of investment should be prepared to place their money in the fund for at least five years. They should also limit exposure to a small percentage of their overall portfolio and be prepared for volatile periods. The imminent listing of Beijing Hua Yuan Property - the overseas holding company for one of Beijing's largest property development companies and the holder of one of Beijing's largest land banks - will probably boost the fund's underlying value. Other holdings are: China Yuchai International, a holding company for China's largest diesel engine manufacturer; 999 Pharmaceutical Company, a herbal-based and Western medicines producer; Luoyang Chundu Industry, the biggest producer of sausage and ready-to-eat preserved meats; Wuxi Little Swan Company, a washing machine maker which has a joint venture with Bosch-Siemens. Mr Wolansky said: 'Cathay generally invests in mature, profitable, enterprises - no early-stage or 'greenfield' projects, as tempting as many of these projects may be. 'This self-imposed discipline provides three benefits. First, management of established, successful businesses is generally more experienced. Second, the risk of success of the overall business plan can be better assessed when the company has some form of meaningful track record. 'Third, the farther along the path of development that we are able to invest, the closer we are to a potential exit - usually an initial public offering or sale to a strategic buyer seeking to establish a beachhead in the China market.'