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February 2014

Strengths

  • The China Region Fund rose 4.79 percent in February, outperforming the benchmark Hang Seng Composite Index by 171 basis points. See complete fund performance here.
  • Country allocation to China served the fund best in terms of performance contribution, consistent with generally favorable seasonality surrounding Chinese New Year.   
  • Regarding industry allocation, being overweight in technology and underweight in financials made the most positive contribution to the fund’s outperformance, as mobile Internet continued to win consumer preference and intermittent omens from Chinese real estate and currency hurt banks.
  • E-Commerce China Dangdang Inc., a business-to-consumer Internet retailer in China, finished the month as the top-dollar contributor to fund performance, advancing 49.10 percent in total return. 

Weaknesses

  • The fund’s cash position proved a detractor from fund performance in a rising market.
  • As for industry allocation, being underweight in energy and industrials was also inferior relative to the benchmark, due to countertrend rallies in both.
  • Lenovo Group Ltd, an IT hardware company in China, registered as the main, negative-dollar contributor to fund performance, retreating 17.69 percent in total return.

Opportunities

  • Despite concerns related to the current account deficit last year, aggregate foreign direct investment into the five largest Southeast Asian countries rose 7 percent in 2013 to $128.4 billion, overtaking the $117.6 billion into China.  Younger demographics, lower labor costs, robust domestic demand, and rising geopolitical competition among superpowers should help sustain favorable investment cycles in Southeast Asia, especially in faster growing countries like the Philippines and Indonesia. 
  • Facebook’s recent $19 billion acquisition of WhatsApp might crystalize a valuation benchmark for Tencent’s QQ and WeChat social messaging applications, which may realize around $2.5 billion in revenue for 2014, or up to 25 times larger than WhatsApp’s monetization potential this year, according to CICC.  Lifestyle-changing mobile Internet plays remain a structural opportunity.
  • China’s decision to spend $1.6 billion this year to reward local governments who make significant progress in controlling air pollution, once again epitomizes government policy priority to address environmental degradation.  Indeed, according to BP Energy Outlook 2035, China is expected to surpass the European Union (EU) in terms of renewable energy volume growth.  The local, clean-energy sector should continue to benefit from this secular transformation. 

Threats

  • China’s first onshore corporate bond default since at least 1997 may potentially raise the specter of more negative credit events, especially from industries ridden with overcapacity and high leverage, as well as any associated ripple effect.
  • Recent weakness in the Chinese renminbi was arguably engineered by the Chinese central bank to discourage cross-border carry trade arbitragers and manage hot money flows. The worsening prospect of the Chinese currency might weigh on sentiment toward the banking and property sectors in the near term.
  • Stellar performance year-to-date in select stocks and industries might invite profit-taking behavior from short-term traders. 

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.

Holdings as a percentage of net assets in the China Region Fund as of 12/31/2013: E-Commerce China Dangdang Inc. 1.52%, Facebook Inc. 0.00%, Lenovo Group Ltd 1.21%, Tencent Holdings Ltd 4.03%.

Net Asset Value
as of 04/15/2014

Global Resources Fund PSPFX $9.47 0.05 Gold and Precious Metals Fund USERX $6.74 -0.21 World Precious Minerals Fund UNWPX $6.40 -0.21 China Region Fund USCOX $7.93 -0.11 Emerging Europe Fund EUROX $7.94 -0.10 All American Equity Fund GBTFX $31.57 0.14 Holmes Macro Trends Fund MEGAX $22.96 0.13 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change