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Third Quarter 2014

Strengths

  • In terms of country allocation, investments made in China via U.S.-listed American depository receipts (ADRs) contributed the most to fund performance against the benchmark. This was driven by improving investor sentiment to China overall, as well as general optimism towards the Internet space heading into Alibaba Group’s initial public offering (IPO).  
  • The fund’s industry allocation, which includes an underweight position to Macau casinos and an overweight position to industrials, served it well during the third quarter. Macau gaming revenue registered four straight months of negative growth, while defensive companies are likely to be among some of the earliest targets for state-owned enterprise reform in China.
  • AviChina Industry & Technology Co. Ltd, a leading producer of helicopters and aviation parts in China, was the top-dollar contributor to the fund with a 26.47 percent gain during the quarter.

Weaknesses

  • The China Region Fund declined 4.19 percent in the third quarter. The fund underperformed its benchmark Hang Seng Composite Index which eked out 0.15 percent, including dividends. See complete fund performance here.
  • Industry-wise, stock selection within the information technology space proved detractive as well as an underweight position in telecommunications. If overbought throughout the quarter on our proprietary model, this remained a disadvantage as telecom was able to sustain its leadership during this time.    
  • Stock picking in a handful of Hong Kong-registered companies also made a negative contribution to the fund’s relative performance.
  • 21Vianet Group, Inc., a leading Internet data center provider in China, was the worst dollar contributor to the fund with a 48.21 percent decline for the quarter.  

Opportunities

  • The most significant relaxation of mortgage policies by China’s central government since 2008 should mitigate the tail risk for the physical property sector and sustain the mean reversion process for property stock valuation. The stabilizing of the physical property market also bodes well for the asset quality of banks.
  • Health care and clean energy-related companies may be able to regain leadership with the upcoming draft of China’s 13th Five Year Plan where environmental protection and pollution control may claim policy priority.  
  • Recent volatility in the Hong Kong market, caused by pro-democracy student protests, may turn out to be a buying opportunity for quality-listed companies with operations outside of Hong Kong. The probability remains low for any conflict escalation or sudden change of status quo.

Threats

  • Recent parliamentary gridlock and political retaliation against Indonesia’s president-elect Joko Widodo, should remind investors of government policy uncertainty in Indonesia.  Global macro investors may seek rotation out of Southeast Asia into China where policy shows a more predictable, easing bias.   
  • Growth prospects of China’s mass consumer sector, such as infant foods and diapers, has significantly diminished due to structural migration to e-commerce and rising competition to name brands.
  • Renewed deterioration of the eurozone economies and the sharp depreciation of the euro in the past three months may negatively affect Asian companies that have significant revenue exposure from Europe. 

Past performance does not guarantee future results.

The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 09/30/2014: Alibaba Group Holding Ltd 0.42%, AviChina Industry & Technology Co. Ltd 1.63%, 21Vianet Group Inc. 0.00%.

Net Asset Value
as of 10/20/2014

Global Resources Fund PSPFX $8.31 0.10 Gold and Precious Metals Fund USERX $6.21 0.12 World Precious Minerals Fund UNWPX $5.65 0.06 China Region Fund USCOX $7.79 0.01 Emerging Europe Fund EUROX $7.26 0.05 All American Equity Fund GBTFX $31.37 0.36 Holmes Macro Trends Fund MEGAX $22.37 0.28 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.01 No Change