When Fred Alger Management launched the China-U.S. Growth Fund in 2003, China was still a fairly new story, and it wasn't clear yet how the huge population and economic growth of this giant would sway the world's economies.

Since then, however, the country's gross domestic product has nearly doubled. Its middle class, nonexistent a decade ago, has grown to some 300 million people. In the 1990s, China's economy depended on the production of apparel and low-end electronics for export, but now it is increasingly driven by the growing ranks of the country's own domestic consumers.

Last year, the country's GDP expanded at a rate of 8.7%, and the World Bank predicts growth of 9.5% in 2010.

"We saw a huge opportunity in the emergence of China as an economic force to be reckoned with," says Daniel C. Chung, the chief executive officer and chief investment officer of Fred Alger Management, "and believed that the country's influence would make its mark on the next generation of investing."

The Alger China-U.S. Growth Fund invests in both companies based in China itself and also those located elsewhere but doing a significant amount of business there. The fund has benefited from the powerful economic trends helping China as well as the strong earnings growth of its portfolio companies.

For the five years ending in December 2009, it was the top-performing fund in Morningstar's world stock category. From its inception in November 2003 through mid-April 2010, a $10,000 investment in the fund grew to $22,202, while the same investment in the MSCI EAFE Index grew to only $16,447.

Chung sees the opportunity for powerful long-term equity returns in China going forward. "The buying opportunity in China is not dissimilar from the 1980s and early 1990s in the U.S.," he says.

Still, recent developments have left some investors wondering if China's growth spurt is leveling off. Its ability to export goods so cheaply has created trade tensions between it and the U.S. and Europe.

"I don't see any danger of it getting out of hand at this point," says Chung. "Some people are talking loudly about protectionism, but most of it is rhetoric."

In an effort to curtail inflation, the Chinese government added a few speed bumps late last year in the form of higher interest rates and more restrictive lending standards. Concerns about the impact of government control on economic growth put pressure on the country's stock market, which peaked in the fall of 2009 and has fallen behind the U.S. market since then. The Chinese government actions have also had a dampening effect on stock markets in the U.S. and other countries, where companies are looking to China's strong economy to help fill the gap left by slow-growth environments on their own turf.

Chung takes a different view of government intervention than others do. "Government control of the Chinese economy allows the country to act quickly and follow through. I see it as a positive rather than a problem." He believes the government will loosen the reins sometime this summer once inflation appears to be under control.

The World Bank expects consumer prices in China to rise by 3.7% on average this year before they slow down to 2.8% in 2011. "You can't compare acceptable levels of inflation in the U.S. to emerging markets like China, where an inflation rate of 4% or 5% is quite acceptable," says Chung, who believes the government will ease up on its tightening policy before the summer is over.

He believes an easing of monetary policy would provide new wind for China's bull market. "Even though Chinese companies have been seeing strong revenue and earnings growth, the markets have been weighed down by the overhang of government intervention," he says. "Once the government stops further monetary tightening, I believe the Chinese market will come back with a vengeance."

Whether a buoyant Chinese market will have a spillover effect into other stock markets remains to be seen. "I'm leaning toward betting that will happen," he says. "Most of the inflows into mutual funds recently have been into bond and money market funds. There is a lot of liquidity left in the market that can be used to buy U.S. stocks. And based on our analysts' research and analysis, we see corporate earnings delivering solid growth this year. "

That would have a positive impact on the fund, since about one-third of its assets are invested in U.S. stocks. About 25% of the fund's holdings are companies based in China itself; Hong Kong holdings are 21% and Taiwan's are 11%. The fund parameters have led it to make a hefty investment in information technology companies, which represent 29% of assets, followed by financials at 15% and industrials at 21%.

A company doesn't necessary have to generate a specific percentage of revenues from China to qualify for the Fred Alger fund. Apple, for example, is one of its holdings even though the company has minimal sales in China. The reason is that the technology company benefits from China's low labor costs. "Very few larger companies derive a huge percentage of revenue from China, so we need to look at all sides of the equation," Chung says. "Sales are only part of it. Companies can achieve lower costs and improve profit margins through operations there as well."

Other U.S. companies, such as fund holding United Parcel Service, have a more direct China connection. UPS, which now operates in more than 200 cities in China, is unique in the complex delivery business and is aggressively building out its operations in growing markets, including China's.

Mindray Medical International, the largest manufacturer of health-care equipment in China, also appeals to Chung. While about half of its sales are in China, the company also has a strong presence in those emerging markets that are in the early stages of ramping up their health care facilities. "Amidst the focus on trade and technology, investors tend to forget about the underdeveloped infrastructure and health care needs of those markets," he says. "Yet those markets have enormous potential for growth."

Since China's role in providing health care has receded in the free-enterprise era and private insurance is rare, people must often pay for health care from their own pockets. It's a similar situation in developing countries such as Brazil or India. "You have to understand that a hospital operating in a rural clinic without tech support staff can't afford a $2 million piece of equipment from a U.S. manufacturer," Chung says. "Many American companies have to redesign equipment to get it to the right price point. Mindray's equipment provides what they need in a cost-efficient manner."

A company's potential for high unit volume growth, such as Mindray's, is just one of the qualities originally sought by Fred Alger, who founded the firm in 1964. Chung and his co-workers at Alger also look for companies undergoing dynamic changes-garnering stronger profit margins or rising cash flow, for instance, or benefiting from new products that can initiate new growth phases.

The strategy has usually worked best in bull markets. In 2008 when the bear market struck, the growth-oriented Alger Funds, including China-U.S., lagged their peers. The tide turned in the bull market of 2009, however, when a number of the company's funds delivered chart-topping performance. Over the five-year period ending that year, three of them landed in the top 1% of their Morningstar categories and another three
made the top 10%. Alger China-U.S. was the top performing world stock fund in that period.

The successes are welcome at Fred Alger Management, which has experienced tragedy, coupled with wrenching changes, over the last decade. Thirty-five people in the firm's 55-person World Trade Center headquarters staff were lost in the September 11, 2001 disaster. Chung, then 39, might have been one of them had he not been in Midtown Manhattan speaking to the management of Tyco Industries. Chung, who joined the firm in 1994, became its most senior member with the death of CEO and relative David Alger. (Chung married Fred Alger's daughter Alexandra in 1993.) After David Alger died, Chung's role expanded quickly, as he was named CIO in September 2001, president in 2003 and CEO in 2006.

The years after 9/11 were a time of difficult transition. Chung's father-in-law Fred Alger, who had left the firm years earlier, returned after the disaster to set up a management committee to run day-to-day activities. He bowed out again in 2002 and has not returned.

Assets under management, which had grown in the late 1990s, sank with the stock market, and the firm's assets were hurt further by investors' shift in the early 2000s from growth to value stocks. The sting of the 2008 bear market was particularly bad for growth shops.

But Chung believes 2009 was a watershed year and sees better times ahead for the firm, which now has some $13.5 billion in assets under management. "In 2001, people asked me how we were going to rebuild and succeed. I knew then that the key to our success was to remain true to our investment philosophy and process. That's still true today," he says. "I think our recent investment results speak for themselves."