Fund name: Buffalo Jayhawk China (BUFCX)

Objective: The investment objective for the Buffalo Jayhawk China Fund is long-term growth of capital. To pursue its investment objective, the Fund invests in securities of "China Companies," defined as companies that are organized under the laws of, or with a principal office in, the People's Republic of China, including Hong Kong; or whose principal trading market is in China; or that have significant operations or production in China, Hong Kong or Taiwan; or that derive at least 50% of their revenues or profits from goods sold or produced, investments made, or services performed in China, or have at least 50% of their assets in China. (Hmmm... I wonder if WalMart qualifies?) The Fund may invest up to 20% of its net assets in securities of companies that do not qualify as China Companies, but which the portfolio managers expect to benefit from developments in the Chinese economy. (Oh yeah, that’d be WalMart.) Also, when consistent with the Fund’s investment objective, strategies and policies, the Fund may invest up to 20% of its net assets in debt securities of China Companies.

The fund uses a bottom-up investment approach, focusing on a company's fundamental valuation with a value-orientation and long-term horizon. The Fund will seek to invest in companies with strong profits and/or cash flow generation; strong growth potential; undervalued assets; and/or strong management teams.

Adviser: Kornitzer Capital Management Inc. (KCM) is the creator and manager of the Buffalo Funds. KCM, founded in 1989 by John Kornitzer, is a full service investment management firm located in a suburb of Kansas City. KCM manages investments for high net worth individuals, corporations, pensions, colleges, foundations, mutual funds and trust commingled and common funds.

The Buffalo Funds have hired Jayhawk Capital Management, a sub-advisor, to manage the Buffalo Jayhawk China Fund. Founded in 1995, Jayhawk Capital Management (JCM) has offices in the US and China. JCM has been investing in China since 1997, and the managers were investing in China and Asia for many years before that. JCM manages money for institutional, private and hedge funds.

Manager: The Buffalo Jayhawk China Fund is managed by Kent McCarthy and Mark Fleischhauer.

Kent McCarthy founded JCM in 1995. Since then he has been its president and is a portfolio manager of its private funds. Before that, he spent 10 years as an investment professional for Goldman Sachs. Mr. McCarthy holds a B.S. in Accounting and Business Administration and an M.S. in Taxation from the University of Kansas, and earned his Masters in Business Administration from Stanford University. He also teaches portfolio management at the University of Kansas’s Business School and received the Henry Bubb Award for outstanding teaching for his efforts. In 1996, Kent started the Jayhawk China fund that specializes in Asian equities.

Mr. Fleischhauer is the Vice President of CJM, and is also a portfolio manager of its private funds. Before that he was a Senior Research Analyst at HFR Asset Management. He’s got a B.S. in Economics from the Wharton School of the University of Pennsylvania, and an MBA from the Kellogg School of Management at Northwestern University.

Inception: December 18, 2006.

Minimum investment: $2,500 for regular accounts, $250 for IRAs and $100 for accounts with an automatic investment plan.

Expense ratio: 1.84% on assets of $23 million.

Comments: It is not clear to me whether, especially in the short term, investing in China is an activity for sane persons. The actual amount of stock available to Westerners (the "float") is surprisingly small, the country is run by the world’s largest bureaucracy, the actions of the bureaucrats cause enormous short-term drops (we’ve seen single day drops of 7 and 10% just this year) which investors promptly shrug off (as of mid-May, the Dow CBN 600 index was up 92%, YTD).

Does that sound healthy to you?

If your answer is "yes," I’ve got this really interesting bridge in Brooklyn that you might like to buy. It’s a bargain, too.

That said, folks are going to invest in China and they’re going to do so at a risky time. It seems to me that those investors need to be especially careful in selecting an investment manager. Two criteria seem sensible: a fairly sober take on investing and a lot of experience in dealing with the China market. It seems to me that Buffalo Jayhawk China offers all that, as well as reasonable expenses (for a China fund) and low investment minimums.

Buffalo’s management describes themselves as paying careful attention to valuations, which gives the fund a defensive edge. In their first quarter commentary (3/31/07), they note:

They describe a long-term strategy which minimizes turnover and transaction costs:

For the sake of comparison, I’ve reported the results of the Jayhawk China hedge fund with the results of Matthews China (the largest open-end China fund) and Fidelity’s China fund. It’s important to remember that the mutual fund is not the hedge fund (different rules, different fees) though it is run by the same guys, with the same investment philosophy. An analyst for the fund notes that "Jayhawk China and Buffalo China have many of the same names in their portfolios and [t]he Fund's sector strategy is largely the same e.g. negative on Chinese banks, bullish on private entrepreneurial enterprises."  As a result, it might be useful to see how the hedge fund has performed.

Given that the managers are domiciled in China, have an experienced research staff and more than a decade of managing funds there, they seem like folks one might reasonably trust.

Bottom line: It would be understandable for investors to be drawn by the allure of flashier funds which are profiting from the market’s current exuberance. Chief among them is Oberweis China, another young fund which earned 81% last year and 22% YTD, as of 5/30/07. The Oberweis fund shares an investing discipline, coined "The Oberweis Octagon", with its domestic siblings. The Octagon stresses high growth and it has come at a cost in Oberweis’s domestic funds. By Morningstar’s standards, all of the domestic Oberweis funds show consistently "high" risk but have not logged commensurately high returns. Amidst flashes of brilliance, the Oberweis folks have subjected their investors to years of pain. Micro-cap, for instance, offered these returns:

There are investors for whom such volatility is an acceptable price for the prospect of outsized returns. More cautious investors might do well to check in with the folks at Buffalo.