6/17/2011 3:20 PM ET|
Big funds see red over China stocks
Shares of many of Chinese companies have tumbled as regulators and investors have raised questions about companies' finances and operations.
Hedge-fund titan John Paulson is hardly alone in his wager on a Chinese company whose stock lately has swooned. Several other prominent money managers, including mutual-fund giants that invest individuals' money, made similar bets on stocks that are now struggling.
A Wall Street Journal review shows that some big-name investors, from Fidelity Investments to Carlyle Group, in recent years snapped up shares in Chinese companies that trade on Western exchanges.
Shares of some of the companies shot up after the financial crisis as investors looked for ways to share in China's rapid economic growth. But in recent months, shares of many of these Chinese companies have tumbled amid questions from regulators and investors about the truthfulness of the companies' finances and operations.
The Securities and Exchange Commission has said it is investigating accounting and disclosure issues at some Chinese companies that list on U.S. exchanges. Trading has been halted on more than a dozen U.S.-listed stocks of Chinese companies.
An SEC official said the commission was planning to issue an investor bulletin detailing some of the risks surrounding companies that have listed in the United States through "reverse mergers" -- a mechanism that helps companies avoid detailed disclosures required in initial public offerings. The bulletin is expected to mention accounting problems at some Chinese companies that have recently been hit with SEC trading suspensions.
Trading was halted on Longtop Financial Technologies (LFT, news) in May, when the Beijing company's chief financial officer and an external auditor resigned amid an SEC inquiry over Longtop's accounting practices. The company, listed on the New York Stock Exchange, announced the inquiry and investigations in a news release, saying it "intends to cooperate fully" with the SEC.
Longtop shares were trading around $12 before the financial crisis, but shot up $40 in the past year, only to fall to $18.93 -- where they have perched since May 16.
Among Longtop's biggest investors has been Fidelity. The Boston mutual-fund giant held 14.5% of common shares outstanding as of March 31, according to Capital IQ, which tracks investments based on regulatory filings. Other major investors have included hedge funds Maverick Capital, with a 9.8% stake as of that date, and Tiger Global Management, with a 4.6% stake.
Other holders, according to Capital IQ, have been mutual-fund houses Putnam Investments and Janus Capital Management.
Fidelity, a shareholder since Longtop was listed in 2007, invested in the company mostly through its two funds Fidelity Advisor Global Capital Appreciation (FGEAX)and Fidelity Advisor Mid Cap II (FIIAX), according to people familiar with the matter.
The Longtop holdings were small for Fidelity, making up a sliver of the large funds, according to data from Morningstar. Based on the March 31 holdings data -- and provided that its stake had remained constant -- Fidelity would have recorded a drop of about $100 million in the value of its investment since March 31.
"We perform rigorous analysis on all potential investments for our funds," a spokesman said, adding that Fidelity has "decades of experience investing in the Asia region, and our funds that invest there have been successful."
Representatives for Maverick, Tiger Global and Putnam declined to comment on their holdings. A representative for Janus didn't respond to a request for comment.
A spokeswoman for Longtop said earlier this month that the company's audit committee has hired a U.S. law firm to coordinate with the SEC in launching an independent investigation.
Critics of investors who have dabbled in Chinese companies say the pain they suffer may be deserved.
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