Fund of the week: The biggest risk in Asia is China

China's growth story continues but it pays to be wary, warns Matthew Dobbs, manager of Schroders Asian Alpha Plus Fund. The £196.8m fund focuses on capital growth through investment in Asia, ex-Japan. Although 2011 was challenging, the fund lies second out of 66 funds in the regional sector, and produced a cumulative three-year return of 147.9% against the regional index of 86.8%.

The 55-stock fund played aggressively on IT last year "a counter-intuitive position but [which] proved absolutely right and made us quite a lot of money in the second half", Dobbs told Investment Week.

He likes the emerging Association of South-East Asian Nations countries, with his main exposure to Thailand, where the risk/rewards look "most attractive".

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Dobbs also sees interesting valuations in Singapore and Hong Kong, while he is underweight on Korea, Taiwan and China. "The biggest single domestic risk in Asia is China its debt has built up a lot in the last three years... China needs to shift economic activity towards domestic growth, and broader growth drivers, and it is a hell of a challenge."

Despite a dynamic economy, strong fiscal position, and falling inflation, the fund will not "go hell for leather on China risk". Dobbs seeks "good-quality business models in China, and a lot of the... market does not offer that".

However, Asia looks cheap, and the fund favours select banks, property sectors, IT and famous Hong Kong industrial names. The average investment is on a p/e of around ten, has plenty of cash, and a yield of 5%-6%. "If commodity prices stay under control, we may have a year in which we can make some progress."

Contact: 0800-718777.

Schroders Asian Alpha PlusFund top ten holdings