Fourth Quarter 2016

The China Region Fund declined 5.87 percent in the third quarter of 2016, underperforming its benchmark, the Hang Seng Composite Index, which fell 4.52 percent during the same period.  See complete fund performance.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

Strengths

  • Outside of the benchmark domicile of Hong Kong, the fund's allocation to Thailand proved to be the most useful individual country allocation for the fourth quarter. Even after reduced performance from baht weakness versus the U.S. dollar, this remains the case. Thailand rapidly bucked initial weakness following the death of its revered, long-reigning monarch King Bhumibol (Rama IX).
  • Selection and allocation to consumer goods provided the fund with its best relative outperformance against the index. The combination of selection and a heavily-underweight exposure to utilities also provided the fund with strong contributions relative to the benchmark. 
  • The top single contributor for the China Region Fund during the fourth quarter period was China High Speed Transmission Equipment Group, which rose 15.43 percent for the quarter and more than that during the intra-quarter period.  

Weaknesses

  • The weakest country allocation for the fund within the fourth quarter lay in its exposure to Indonesia. The strength of the U.S. dollar relative to most currencies in the region diminished returns not only there but also in countries like South Korea and the Philippines, while Hong Kong, pegged to the U.S. dollar, fared better in this regard.
  • The largest detraction with respect to sector allocation in the China Region Fund for the fourth quarter was in financials. Stock selection remained relatively poor, exacerbated by relative strength in benchmark heavyweight HSBC Holdings.
  • The unfortunate title of worst stock in the fund for the quarter goes to the Indonesian real estate developer and operator Pakuwon Jati Tbk, which fell 11.85 percent for the quarter.

Opportunities

  • The official China Manufacturing Purchasing Manager's Index (PMI) rose steadily throughout the year from 49.7 at the close of 2015 to 51.4 for December 2016. Official governmental data were matched by the private Caixin China Manufacturing Purchasing Manager's Index (PMI), which also rose steadily throughout the year--bucking pessimism--and climbing from contractionary levels in the 48 range at this time last year to an expansionary 51.9 in the December period, thus closing 2016 at the highs of the year. 
  • China's growing middle class--like other middle classes in the region--continues its ascent, perpetuating thematic trends in industries like tourism, automobile demand and health care, to name a few examples. Discount airline AirAsia jumped following a broker upgrade and attention to recent statements from Malaysian authorities noting a strong uptick in Chinese tourist arrivals in 2015 after new visa procedures were introduced. Macau also saw some resurgence in the fourth quarter as the gaming and hospitality center continued its apparent recovery from Xi Jinping's crackdown on corruption, perhaps signaling that China's middle class stepped up (at least partly) to fill in some of the gaps from Macau's formerly ostentatious VIP orientation. With Lunar New Year holidays coming up, soon investors interested in consumer stocks will have another gauge of year-over-year data on growing middle classes. 
  • Even though the Tran-Pacific Partnership (TPP)--to which China was noticeably not party--is now ostensibly defunct under the incoming Donald Trump administration, China is already moving (along with regional partners) to take steps to create a replacement trade agreement--to which the U.S. has not yet been party--with talks that began in 2016 and are expected to continue in the coming year. Regardless of U.S. involvement or lack thereof, a new trade agreement could provide some of the same expected benefits that TPP potentially could have.

Threats

  • Near the end of 2016, press reports confirmed that China's Xi Jinping remains "comfortable" with a 2017 gross domestic product growth rate below 6.5 percent as leadership seeks to prioritize stability and risk control above growth for growth's sake.
  • The outsized significance of U.S. monetary policy for the broader region continues to loom as bit of a wildcard, as do oil prices to some degree.
  • Slowdowns or perceived slowdowns in Chinese growth--or other concerning Chinese data, especially more dicey foreign exchange reserve prints--could reignite investor fears about capital flight and the yuan. The declining levels of China's FX reserves continue to hold investors' attention, particularly as the yuan has approached 7 and reserves have fallen to just above $3 trillion. With exports down again in December as well as for full year 2016, and with as-yet unclear U.S.-China trade policies under the incoming Trump administration, investors still have reasonable questions about the outlook for China for coming weeks and months.

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.

The Chinese Manufacturing PMI is a composite indicator designed to provide an overall view of activity in the manufacturing sector and acts as an leading indicator for the whole economy. When the PMI is below 50.0 this indicates that the manufacturing economy is declining and a value above 50.0 indicates an expansion of the manufacturing economy.

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 12/31/2016: China High Speed Transmission Equipment Group Company, Ltd. 0.00%, HSBC Holdings PLC 1.33%, Pakuwon Jati Tbk PT 0.00%, AirAsia Bhd 0.77%

Net Asset Value
as of 02/23/2017

Global Resources Fund PSPFX $5.81 0.08 Gold and Precious Metals Fund USERX $8.78 0.07 World Precious Minerals Fund UNWPX $7.55 0.05 China Region Fund USCOX $8.21 -0.02 Emerging Europe Fund EUROX $6.20 0.02 All American Equity Fund GBTFX $24.59 No Change Holmes Macro Trends Fund MEGAX $19.06 0.06 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change