JF FUNDS CALLED A media conference in the wake of China's acceptance into the World Trade Organisation last month to trumpet the new opportunities for investors. 'The significance of this historic event is not the immediate direct impact on trade or the economy,' Chung Man-wing, who heads JF's Greater China team, was quoted as saying in a press statement. 'The real significance of the WTO is that it reinforces the confidence of foreign investors that there will be a continuation of economic and market reforms in the years to come from which there is no turning back. Arguably this makes China today the most attractive investment opportunity.' That might grab headlines, but when he gets down to talking, Mr Chung also likes to give you the fine print. Investors should not kid themselves it will be a one-way ride upwards, he says. 'It is not blue sky, opportunities and challenges come together,' says Mr Chung. 'China is a high-risk, high-return area.' Right now, fund managers in China have to make the most of what he calls a 'mixed bag'. There are red chips, Hong Kong-listed companies with Chinese state company assets injected. Some are unwieldy conglomerates, others are notables such as the mobile operators China Mobile and China Unicom. Red chips tend to share the characteristic of rich valuations, Mr Chung believes. 'If you look at the traditional Chinese enterprises, H shares, their valuation is probably low in terms of PE [price-earnings ratio]. But if you look at the track record, if you look at the transparency, if you look at the return on equity performance record, they deserve to be cheap.' A third category has been making an increasing presence felt on the China investing scene in the last few months - companies known as private chips. These are the first listed Chinese firms which are run by entrepreneurs, who have traditionally been frowned upon by Beijing until recently. Some of these firms have been producing spectacular results and offer great promise. Two of them are in the top 10 of the JF Hong Kong Fund which Mr Chung manages. They are Global Bio-chem Technology, which processes value-added food products from corn, and Euro-Asia Agriculture, which is bringing mass production methods to flower cultivation. The new crop of companies may look exciting, but it is too early to get carried away, according to Mr Chung. 'We like the story, [but] we are not 100 per cent sure that every one will continue to be as successful as they are now. Some will continue to do well, some will do less well, and I'm sure some of them will go down. 'On average, we are not sure about the management yet because most of these companies only have a short history. We are mystified by some of their success stories - how they managed to achieve the sort of profitability that they are enjoying. We are doing more homework on that one. 'To be honest we are not 100 per cent convinced about the sustainability of such high profit margins.' Investors have more data to go on with Mr Chung himself. He has been around in the Hong Kong investing scene for some time and was the first fund manager featured in this column. He spent seven years with HSBC Asset Management as head of their Greater China team and manager of the flagship HSBC GIF Hong Kong Equity Fund. That fund won the five-year performance prize in its category at the 1999 South China Morning Post fund management awards and took second place in the three-year award. Back then Mr Chung, who when winning his five-year award emphasised the importance of being defensive at times, could not keep up the pace as a raging bull market developed, led by the mania for Internet stocks. In the two years to the end of August last year, he came 12th out of 17 funds with a gain of 122.52 per cent, according to fund-tracking firm Lipper Asia. The Hang Seng Index outperformed with a gain of 133.51 per cent. Then in September last year, Mr Chung was tempted to leave HSBC and join JF. 'The opportunity from JF was there and it was very interesting and attractive,' he said. 'It wasn't through a head hunter. It is a small community anyway. Everyone knows everyone else in our industry.' Although Mr Chung sees himself as a long-term investor and JF has a reputation for making aggressive moves in bull markets, he sees it as a marriage made in heaven. 'JF style is very bottom-up driven and, in my view, is very performance oriented. We have a team of well-experienced investors looking at the whole of Asia-Pacific and have very strong research coverage by brokers,' he says. 'That makes the job as a fund manager much easier. We are very pro-active. We strongly believe in active fund management. We almost detest benchmark hugging. So whenever we have the conviction, we are not at all shy in putting money behind it.' This year, however, has been all about limiting losses in a bear market and, with the JF Hong Kong Fund, Mr Chung has shown once again he can do it better than anybody else in the SAR. The FF Hong Kong Fund was recently merged into the JF Hong Kong Fund so figures can only be taken from May 18 to November 30, according to Lipper Asia. In that period, the JF fund was first out of 20 peers with a loss of 7.48 per cent while the Hang Seng Index fell 16.18 per cent. The HSBC fund at Mr Chung's former stamping ground was 12th with a loss of 15.9 per cent over the period. As for Hong Kong's outlook, Mr Chung says it is still too close to call between a self-sustaining bull market taking hold or the recent rally proving to be another false dawn. 'I think the market is caught between very supportive liquidity on one hand and still a pretty sluggish economy and still very murky earnings outlook,' he says. 'Nonetheless, there is a hopeful belief for a V-shaped recovery. With interest rates being cut aggressively across the globe and with liquidity being almost chased out of the banking system into financial assets, that explains the strong performance of the market. We expect that can continue for a bit longer. 'At the end of the day, we have to look at the economic and corporate fundamentals. 'To be honest, I don't think we will see any clear signs pointing one way or the other until probably the middle of next year.' The answer to the riddle will lie in the hands of US corporates and consumers, Mr Chung believes. Should investors then be putting their money into a fund centred on China, which has a strong domestic economy, instead of a Hong Kong vehicle, thereby insulating themselves against the risk that the US does not pan out? 'Yes and no,' says Mr Chung. 'China thematically top down is more interesting, but if you do the micro-analysis the risk involved is higher. Potentially, hope fully, the rewards would be higher too. 'Especially if we compare China with Hong Kong or the US, the economic structure is less developed. Let's say corporate governance is inferior to the US and Hong Kong. Policy risk is still much higher in China than in the US and Hong Kong, although over time, policy risk and uncertainty will diminish because of the WTO.' Chung Man-wing 1986: Graduated with an MBA from Hong Kong University. 1987: Economic researcher at the Federal Re serve Bank of New York. 1990: Economic research officer for Thornton Management (Asia) in Hong Kong. 1993: Hong Kong equity fund manager with HSBC Asset Management. 1997: Promoted to director. 2000: Moved to JF Funds as head of Greater China team.