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Second Quarter 2014

Strengths

  • Hong Kong and China registered mediocre performance in the region during the second quarter, so the fund’s allocation to South Korea and Taiwan both made positive contributions to fund performance.
  • Industry allocation to conglomerates and utilities helped the fund, as both proved resilient amid a global investment style shift, moving from growth to value during the quarter.   
  • Hutchison Whampoa Ltd, a Hong Kong-domiciled, multinational conglomerate controlled by Asia’s richest man, Li Ka-shing, was the top-dollar contributor to the fund with a 12.42 percent gain.

Weaknesses

  • The China Region Fund rose 1.50 percent in the second quarter, underperforming its benchmark Hang Seng Composite Index which advanced 5.32 percent. See complete fund performance here.
  • A higher-than-usual cash position was maintained for most of the quarter in response to increased market volatility, which turned out disadvantageous against a rising benchmark index.
  • Companies domiciled in Hong Kong and China fared the worst, and investments in industries such as Internet and casino gaming were among the negative contributors to fund performance. Both industries fell prey to short-term, market-style rotation out of secular growers.
  • Galaxy Entertainment Group Ltd, a casino operator in Macau, was the worst dollar contributor to the fund with a 7.08 percent decline for the month.  

Opportunities

  • The launch of the new iPhones and the debut of Alibaba Group, potentially both during the month of September, should help sustain ongoing rallies in electronic-component suppliers from Taiwan and mobile Internet leaders from China. New product cycles and pre-initial public offering (IPO) optimism is brightening the outlook for technology.
  • Well managed multinational conglomerates from Hong Kong and China should continue to outperform as more value-accretive acquisitions or sales are made throughout the world. The diversified nature of their operations offers an element of resilience when markets experience corrections.
  • As Beijing sits on the shortlist for the final three cities that could host the 2022 Winter Olympics, investors should be reminded of China’s commitment to tackle the environmental problem. The possibility of hosting would push the country to set a hard deadline for the clean energy reforms. Clean energy industry leaders may continue to benefit from government policy initiatives to improve the safety of air, water and soil.

Threats

  • Deteriorating sentiment toward Chinese residential property oversupply in lower-tier cities, coupled with a peak in the maturity of wealth management products in the second half of this year, adds to the volatility of property-developer stocks in the near term, creating a potential for contagion.
  • 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.
  • Potentially higher 10-year U.S. Treasury yields, driven by a faster-than-warranted exit from the quantitative easing (QE) program of the Federal Reserve, may sour investor sentiment towards Southeast Asia. This could be especially true in Indonesia, in anticipation of further capital flight and slower recovery of economic fundamentals.

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.

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 06/30/2014: Galaxy Entertainment Group Ltd 0.51%, Hutchison Whampoa Ltd 4.67%.

Net Asset Value
as of 07/30/2014

Global Resources Fund PSPFX $10.11 -0.08 Gold and Precious Metals Fund USERX $7.65 -0.06 World Precious Minerals Fund UNWPX $7.23 -0.03 China Region Fund USCOX $8.35 -0.04 Emerging Europe Fund EUROX $8.22 -0.04 All American Equity Fund GBTFX $33.18 0.04 Holmes Macro Trends Fund MEGAX $23.98 0.01 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change