Special report: An exciting ride ahead for China

In the middle years of the current decade, China, having quickly risen to the ranks of a global superpower, became an obvious choice for investors. But as Chinese export revenues began to collapse last year and unemployment rose, rumours started circulating about potential social unrest. Thoughts then turned to the possibility China could be the next casualty of the global economic crisis.

In addition, as investors lost their appetite for risk, China-focused funds suffered as a new cautious approach led them to liquidate their holdings in funds perceived to be high risk. In this way, the assets under management of many funds with a China focus plummeted last year.

The Chinese story has been something of a rollercoaster in recent times. In the three years to the end of October 2007, the MSCI China index rose by 327.2 per cent compared with a 45 per cent rise for the MSCI World index. The good times came dramatically to an end in the autumn of 2007, and the MSCI China index fell by 55.5 per cent in the year to the end of October 2008.

Despite the dreadful performance of the Chinese indices last year, it has not been all bad news recently. The country continued to grow its economy and contributed 9 per cent to the world's output, the greatest contribution of any country. With high levels of personal savings and low levels of government debt, China does not face some of the main problems currently hampering recovery in Europe and North America. Moreover, the International Monetary Fund is forecasting 6.7 per cent growth for this year. Indeed, China is one of the few countries economists are predicting will grow in 2009.

There are a small, but growing, number of UK-based open-ended investment funds that are seeking to benefit from this growth. Of these, the fund with the best performance record is the First State Greater China Growth fund, the top-rated China fund over the last three and five-year periods. The fund has the flexibility to invest in Chinese territories, in addition to mainland China. At present, the fund has 44 per cent of its portfolio allocated to China, with 27 per cent in Hong Kong and 22 per cent in Taiwan. This breadth of scope not usually adopted by other China-focused funds enables the offering from First State to benefit from the economic growth and diversity in the outlying territories.

First State Greater China Growth is managed by Martin Lau, who has an excellent record as a stock picker. Over the last three years, he has an annualised alpha of 3.07, meaning he outperformed the MSCI China index by 3.1 per cent each year. He is the only manager of a China fund to consistently outperform the MSCI China index.

The second fund worth mentioning is Gartmore's China Opportunities. Though its recent performance has been less than impressive, it is by far the oldest China fund and has an excellent performance record over the long term. In the 10 years to the end of May, the fund returned 266.1 per cent, while the MSCI China index returned 106.4 per cent. The fund's recent poor performance is largely due to its overweight position in the volatile financials sector.