AS investors grow more confident that the Chinese economy is less than prone to boom and bust, there is a growing interest in China-play funds. Jardine Fleming Investment Management is about to launch a new JF Greater China Trust. Fund manager Steve Luk explains the strategy behind the three-pronged approach. Q: How much appetite is there for China funds right now? A: It is getting hot again. It may be too early for some investors but with other China funds under my management we had a lot of interest in the second half of 1996. New investors are looking at the medium to long term and are willing to stay in China for three to five years. Q: What concrete evidence is there that earnings will turn around in Chinese companies in China? A: Last year was a very bad year with state-owned enterprise earnings continuing to decline for the third consecutive year. It is hard to convince investors that earnings will pick up, but we are sure that in the second half of this year, this will happen. China is now in the right economic cycle with low inflation. Q: How do you see the growth prospects for the Chinese economy this year? A: After the austerity programme we saw some credit relaxation in 1996, which began to filter through to the market. The good thing now is that it comes in a gradual way, in a prudent manner. That's the difference between now and what happened initially when China opened the door to market forces 18 years ago. Q: Why a Greater China trust? A: It's a fund for longer-term investors who would like to get exposure in extreme markets, but leave the asset allocation to the fund manager. There are three markets, Hong Kong, China and Taiwan. Each one may be offering appreciation potential but you may not know the one to choose. We hope that we will be able to select the right weighting. Q: What stocks are you picking in this fund? A: Some China concept stocks in Taiwan, but as you know these stocks in Taiwan are still at a very conceptual stage. Taiwan makes up 30 per cent of the asset allocation. The difference is split: 30 per cent to Hong Kong, excluding H shares and red chips; 20 per cent on B, H and N shares; and 20 per cent on Hong Kong red chips. We will try and identify the stocks with the greatest appreciation potential and take overweight positions in them at that particular time. We don't want to limit ourselves to only China concept stocks in Taiwan so we intend to invest in any stocks in Taiwan. The objective in Taiwan is to beat the Taiwan Weighted Index. In Hong Kong it is to beat the Hang Seng Index, and with the red chips it will probably be the Peregrine Greater China Index. Q: Which red chips do you believe offer long-term value? A: The allocation has not started yet, but we believe that China Resources and China Overseas Land will be two. Corporate earnings of these companies are hard to forecast because many of these companies are changing their nature. For example, a red chip in the travel business has recently acquired some infrastructure projects. Many of them want to become conglomerates like Citic Pacific but it will take them time to achieve this. At the moment a lot of these red chips are trading at 40 times 1997 expected earnings and the earnings growth will probably be in the range of 15 per cent every year. But also it depends on asset injections into the companies and spin-offs. Q: How much nerve do you need with the Greater China Trust? A: Well, I wouldn't say that it is volatile but it is risky. Because we invest in China there is risk. Also because we are investing in Hong Kong and Taiwan, these markets will be affected by economic and political forces from China. But because we are investing in three markets, we should be able to diversify a lot of this risk away. Obviously if you are bullish in one market - say China - then this is not the sort of fund you should invest in. The type of investor we are appealing to is the sort who is looking at a longer-term view of the Greater China region; they also would like to leave the asset allocation to the fund manager. Q: How will you manage this fund? A: I will be managing China, including the red chips, while two colleagues will manage Hong Kong and Taiwan. It is open to retail and institutional investors. Q: What strategy will JF adopt with the Greater China Trust? A: For China we are looking at growth companies with good management that will respond to changes in market conditions. You will probably only find this with red chips at the moment. The B and H shares probably cannot offer you this quality right now. In Hong Kong we are looking at blue chips, market leaders, mainly banks and property companies. In Taiwan, we have to adopt a sector approach; we like the market, but there are stocks in the market we don't like. We are going for construction and electronics counters but we don't like banks.