The Chinese Civil War ended Oct. 1, 1949. The (winning) communists controlled Mainland China and the (losing) Chinese Nationalist Party was relegated to Taiwan.

The relations between the two governments since have generally been hostile. Each side hated the other and claimed they were the legitimate Chinese government. Now, after 60 stand-offish years, Taiwan’s leaders are trying a new — more conciliatory — approach.

In April, Taiwan began to allow Chinese investors to buy some Taiwanese stocks for the first time since the end of the civil war. In June, Taiwan expanded the areas where Chinese investors could put their money.

Taiwan’s market has soared +33% since April. The Shanghai index has managed about half that in the same period.

Now, many observers are saying that Taiwan still has plenty of room to run. Bloomberg reported that Lu Zheng-Ying, manager of the SinoPac Small & Medium Capital Fund, said that the rally would continue for the next two years. Lu predicted the rally will push the index to a record: Above 12,682, or about +70% higher than it is today.

I decided to ask Mike Turner, editor of Street Authority’s Trade of the Week, what he thought about Taiwan. Turner said his proprietary software was giving a Taiwan-focused ETF a “Strong Buy.” He thinks the iShares MSCI Taiwan Index Fund (NYSE: EWT) could gain another +33%.

Another Play
Another fund in a great position to continue to benefit from Taiwan’s growth is the China Fund (NYSE: CHN). This fund focuses on small and medium-sized companies in China, Taiwan and Hong Kong. These lesser-followed stocks have an average market cap of about $1.5 billion.

As of the end of July, the fund’s top holdings included investment firm Citic Securities, supermarket retailer Wumart Stores and the health-care company Shandong Weigao Group. Management visits more than 1,000 companies each year. The fund also can invest up to 25% of its assets in unlisted, over-the-counter companies, securities that tend to be overlooked by other managers.

So far this year, CHN is up more than +42%. Although it has lagged the Shanghai Index, the fund hasn’t experienced the pullback Shanghai has, either. Management says the fund is taking a conservative approach by investing in steadier consumer growth companies and staying clear of commodity and property stocks. As the Taiwan, China and Hong Kong gain value, CHN has an attractive strategy.

CHN has achieved tremendous long-term returns, averaging +20% a year during the past 10 years. Morningstar ranks the fund in the top 1% of funds in the Pacific/Asia ex-Japan category for the 10-year period. Despite stellar long-term returns, CHN sells at a -6% discount to its holdings’ net asset value.

Even better, CHN pays out one distribution each year in January. The last distribution was $5.82. That’s about a 25% yield.