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China-Focused Mutual Funds: Risk-Adjusted Returns as of June 10

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Risk-adjusted returns

All investment vehicles come with a certain amount of risk. Just expressing returns generated over a period of time is an incomplete picture without discussing associated risks. For assessing risk, we’ll use standard deviation.

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Standard deviation

Standard deviation is widely used for assessing risks associated with an investment. Simply put, it measures the deviation of a series of returns from its average. The wider the deviation, the higher the risk, and vice versa.

In annualized terms, over the three-month period ended June 10, 2015, the John Hancock Greater China Opportunities Fund Class A (JCOAX) had the lowest standard deviation of 18.5. The Clough China Fund Class I (CHNIX) had the highest standard deviation of 22.1.

Year-to-date, JCOAX has the lowest standard deviation of 16.1, while CHNIX has the highest standard deviation of 19.3.

Standard deviation goes into calculating a popular measure of assessing risk-adjusted performance, called the Sharpe ratio.

Sharpe ratio

For realized returns, the Sharpe ratio assesses the average return over a risk-free asset or security, like U.S. Treasuries of a certain maturity, over total risk as represented by standard deviation.

The Fidelity China Region Fund Class C (FHKCX) turned out to be the best performer on this front with a Sharpe ratio of 6.1 over the three-month period ended June 10, 2015. The fund gives you exposure to large companies like Melco Crown Entertainment (MPEL), China Life Insurance Company (LFC), and Taiwan Semiconductor Manufacturing Company (TSM).

Meanwhile, the John Hancock Greater China Opportunities Fund Class A (JCOAX) fared the worst with a reading of 3.7. The Matthews China Investor Class (MCHFX) had a Sharpe ratio of 4.7, while the Clough China Fund Class I (CHNIX) stood at 4.4.

Year-to-date, FHKCX continues to dominate its peers, with a Sharpe ratio of 3.3. CHNIX has fared the worst with a reading of 2.4. MCHFX stands at the number-two spot with a Sharpe ratio of 2.8, while JCOAX came in third with a reading of 2.7.

So FHKCX stands out as the clear winner as far as risk-adjusted performance is concerned.

Now let’s turn to the portfolio composition of these funds.

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