Check the small print

We’ve warned here several times against investing in China. Like many others we are concerned about the sustainability of Chinese growth and the possibilities of bubbles developing and bursting across the country. But our main concern is simply that the market is expensive. Buy in and you’re paying a heavy premium for a lot of risk. Forced to invest our own money now, I think most of us here would stick with cheaper developed markets.

But, if you’re a fund investor, it turns out that is easier said than done: there’s a strong chance that by investing in, say, Europe, you are investing in China whether you want to or not. Put your money into Neptune’s European Opportunities Fund, for example, says Andrew Ellson in The Times, and 6% of your money goes to China and Taiwan. And in total, 20% of your money is invested outside Europe (another 9% or so is in America).

Neptune isn’t the only fund manager investing in unexpected places. Fidelity’s European Opportunities Fund has around 27% of its assets invested outside the European equity markets and Investec Europe has 19.5%. Amazed? Perhaps you should be.

I can see why investing outside Europe is attractive to fund managers. It must be maddening to be stuck with a selection of rubbish economies mired in various degrees of recession, while your colleagues are living it up in Shanghai. And given the general view that China can grow forever and its market rise along with it, it must be tempting to try to boost your returns with a little Asian spice. Ellson notes that the Neptune and Fidelity funds have both outperformed their benchmarks recently. And it isn’t against any rules – the Fidelity marketing material has its European fund investing “primarily”, not exclusively, in European stocks, for example.

But none of this makes it right. Investors may not be making a fuss about this right now. But that’ll be because a) they haven’t noticed and b) they’re making money, so there is no reason for them to notice. But this works both ways. If non-European markets tumble, so will the relative performance of the funds invested in them. Then investors might notice.

But regardless of the effect on returns, the important point is that whatever the small print might say, when investors put money into a European fund they expect their money to end up in Europe, not India or South Africa. Everyone wants fund managers to do their utmost to make the best returns possible. But if they aren’t investing exactly in the way their titles suggest, investors need to have this made very clear to them. Transparency is sorely lacking across the financial industry – largely because there are many things it would prefer the retail investor not to know. I’d had a vague hope that, driven by the financial crisis, this would be the decade in which that would change. So far so bad.