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This Common Misconception about China May Be Hurting Your Portfolio

February 19, 2014

China is making headlines again, only this time the news attempts to dispel a common myth about the Asian giant.

In Fast Company’s new special report on the “World’s Most Innovative Companies,” the site identifies China as one of 12 rising trends.

Although China’s history is rich with inventions, such as papermaking, the compass and printing, many people continue to think that Chinese companies aren’t innovative.  According to Fast Company, “there’s a stubborn meme that claims China has no culture of innovation. In actuality, it’s shaping global business trends, most notably in social media.”

Among the companies considered the “World’s Top 10 Most Innovative Companies in China” are some of the businesses we own in the China Region Fund, namely, Haier, Tencent and YY Inc. After identifying the strongest performing sectors, industries and countries, the fund looks for faster-growing companies located in China and the surrounding region.

Innovation is one way companies grow and thrive in today’s highly connected and competitive world. Therefore, the Fast Company data, which staff gathered and analyzed over the course of six months, should give investors confidence to add exposure to the most innovative companies of the world—regardless of whether they are located in Silicon Valley.

The top company on the list is smartphone maker Xiaomi. It’s a privately held firm founded by the “Steve Jobs of China,” Lei Jun. A few weeks ago, I wrote about Lei Jun landing on the invitation list of China’s government meeting.

He’s a serial entrepreneur who not only started Xiaomi, but also YY, a mobile social media company, and Kingsoft, an application software maker. Kingsoft is another holding in the China Region Fund.

Tencent is No. 5 on Fast Company’s list of the World’s Top 10 Most Innovative Companies in China, “for pummeling the Chinese social-networking competition and sending chills through Silicon Valley with a 10-terabyte storage offer,” according to Fast Company. This is a ton of data compared to other cloud storage companies.

According to Jefferies, Tencent is the biggest “player” in the web game market, with about a 30 percent market share. Its next competitor is Qihoo 360, with a 9 percent market share.

We believe this focus on Chinese innovation in the China Region Fund (USCOX) helped the fund outperform its benchmark over the 1-month, 3-month and 1-year time frames as of January 31, 2014. Over the past three months, the fund rose 3.4 percent while the Hang Seng Composite fell 4.5 percent. See the fund’s performance here.

Take a look at all the innovative companies on Fast Company’s list to dispel this common misconception before it hurts your portfolio. Then, seek an antidote. The China Region Fund may be one remedy.

Past performance does not guarantee future results.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

The Hang Seng Composite Index is a market-cap weighted index that covers about 95% of the total market capitalization of companies listed on the Main Board of the Hong Kong Stock Exchange. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. Holdings in the China Region Fund as a percentage of net assets as of 12/31/13: BGI 0.0%, Baidu 0.0%, Cootek 0.0%, Geak 0.0%, Google 0.0%, Haier 1.98%, Kingsoft 0.0%, Phantom 0.0%, Qihoo 360 Technology 2.79%, Tencent 4.03%, YY Inc 1.26%, Facebook 0.0%, Wild China 0.0%, Mary Ching 0.0%, Nississ 0.0%

Net Asset Value
as of 07/29/2014

Global Resources Fund PSPFX $10.19 -0.01 Gold and Precious Metals Fund USERX $7.71 -0.08 World Precious Minerals Fund UNWPX $7.26 -0.06 China Region Fund USCOX $8.39 -0.01 Emerging Europe Fund EUROX $8.26 -0.08 All American Equity Fund GBTFX $33.14 -0.12 Holmes Macro Trends Fund MEGAX $23.97 -0.06 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change