Third Quarter 2019

The U.S. Global Investors China Region Fund had a total return of negative 5.61 percent in the third quarter of 2019, outperforming its benchmark, the Hang Seng Composite Index, which declined by 7.83 percent.  See complete fund performance here.

The fund’s outperformance of the benchmark was helped in particular by an overweight allocation and good stock selection within the consumer goods sector, as well as an underweighting of the financials sector. Continued gearing toward a more domestically-focused Chinese economy aided fund performance vis-à-vis the benchmark even amid the protests and troubles which plagued Hong Kong throughout the third quarter of 2019.

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

  • The best performing country allocations for the fund were first and foremost to the benchmark domicile of Hong Kong, where stock selection was once again particularly strong this quarter, and, to a much lesser degree, in both Taiwan and Indonesia. 
  • The fund’s overweight in consumer goods proved to be a worthwhile decision, as evidenced by continued solid outperformance in that allocation, as was an overweight allocation to consumer services and an underweight in financials.  Again, the domestically-focused turn in the Chinese economy amid the troubles of Hong Kong for the quarter definitely helped our model names, providing a degree of a buffer from some of the trade war tensions.
  • Single stock investments in Yihai International, Li Ning and Country Garden Services Holdings (HK:6098) were the top absolute contributors to fund performance.  The combination of a cooling pace of economic growth and trade war uncertainties led Chinese authorities to continue to act with stimulative measures. Condiment and hot pot producer Yihai Intl. continued to hold up strongly, delivering solid numbers.  Sportswear company Li Ning, where some 98 percent of revenue is derived from China, also performed handily, as did real estate service company Country Garden Services Holdings. Trade war or not, these three China-focused companies were all making new 52-week highs at various points toward the end of the third quarter.

Weaknesses

  • The fund’s smaller country allocations to South Korea, Thailand and Singapore were the largest drags on fund performance. 
  • The fund’s relative overweighting in the industrials sector weighed most on fund performance, which was partly stock-specific to Yangzijiang Shipbuilding. An underweighting of information technology hurt relative to the benchmark, as did the fund’s mild overweight in telecommunications.
  • Investments in Asia Cement (China) Holdings, Country Garden Holdings (HK:2007) and Yangzijiang Shipbuilding were the greatest absolute detractors from the fund’s performance.  Despite a positive profit warning from Asia Cement early in the quarter, declining cement prices—or the expectation of them—seemed to drive the company’s underperformance during the period, as did what appears to be a slower pace of construction and demand in China. Real estate holding company Country Garden pulled in during the course of the quarter, meandering more or less in line with the overall sector with results. The most notable outlier for the fund’s detractors was Singapore-listed Yangzijiang Shipbuilding.  As a model-meeting stock with a relatively steady order backlog and as China’s largest non-SOE shipbuilder, it came as some surprise when the stock’s trading was halted following a report that one of its former patrons was reportedly under investigation by Chinese authorities. The stock was quickly give the boot once trading reopened, as per previous the previous memo. The stock no longer screens out in our models and its price has not yet recovered, either. 

Outlook

The current outlook for the China Region must almost by definition be more cautious than previously, as the protests and troubles in Hong Kong continue to take a very clear and directly-related bite out of readily-quantifiable data like retail sales, visitor arrivals and growth domestic product (GDP).  And of course, the U.S.-China trade war looms as large as ever, with a number of uncertainties remaining.  The question of whether these two major threats have any linkage at this point yet remains to be seen. 

Indeed, it would be irresponsible not to pay respects to the staying power of the current protests in HK, or to their obvious effects to date.  A global financial hub can only sustain so many airport shut-downs, MTR freezes, live-round shootings and regular images of fires burning amid heavily-trafficked pedestrian areas before the disruption causes larger and longer-lasting damage.  Amid all this, China’s growth was already slowing, and the U.S. continues to blacklist Chinese companies.

But while all these things are threats, none of them entirely new or unknown at this point. Beyond these things there remain genuine opportunities, too, with perhaps less obvious downsides. The global easing cycle does now definitely appear to be underway with continued cuts around the region. Rising Southeast Asian nation Vietnam enjoyed a scorching, consensus-beating third quarter GDP print of 7.31 percent. One also notes that Macau is holding up quietly, but steadily, despite the noise of its nearby neighbor Hong Kong.  And if Macau is anything of a bellwether for broader China, perhaps things are not nearly as dim as they may seem. 

Indonesian President Joko Widodo began a new term, continuing to promise infrastructural development and initiating the first steps of a long-discussed plan to abandon Jakarta as Indonesia’s administrative capital. The new and yet-to-be-named city, the Widodo government announced, will be in East Kalimantan province in eastern Borneo, between Samarinda City and Balikpapan.

In sum, there remain pockets of strength in both China and the broader region, and we continue to seek these out via our models and weightings.  But make no mistake about it, either: overall sentiment around the region is clearly affected by trade war and its perceived effects, and Hong Kong itself is not out of the woods yet—though it has bounced back sharply before. Stay tuned. The Trump administration is currently engaged in talks and an interim deal could well provide a swift move higher.

 

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.

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 9/30/2019: Yihai International 9.31%, Li Ning Co Ltd 4.13%, Country Garden Services Holdings 0.00%, Yangzijiang Shipbuilding 0.00%, Asia Cement 2.00%, Country Garden Holdings Co Ltd 4.34%.

Net Asset Value
as of 10/18/2019

Global Resources Fund PSPFX $4.29 -0.02 Gold and Precious Metals Fund USERX $8.63 -0.02 World Precious Minerals Fund UNWPX $3.03 0.01 China Region Fund USCOX $8.82 -0.03 Emerging Europe Fund EUROX $7.05 0.02 All American Equity Fund GBTFX $24.69 -0.05 Holmes Macro Trends Fund MEGAX $16.64 -0.21 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change