Second Quarter 2016

The China Region Fund declined 0.70 percent in the second quarter of 2016, underperforming its benchmark, the Hang Seng Composite Index, which rose 1.11 percent during the same period. See complete fund performance here.

Strengths

  • Within the greater China region, the fund's country allocation to Indonesia provided the largest positive contribution to return. The China Region Fund's allocation and selection amongst U.S.-listed ETFs and ADRs also proved useful throughout the quarter.
  • The properties and construction sector constituted the fund's strongest sector contribution relative to the benchmark, followed by its allocation to telecommunications.
  • The top individual equity contributor for the China Region Fund during the second quarter period was the Indonesian real estate owner and developer Pakuwon Jati Tbk, which rose 27.07 percent during that time.

Weaknesses

  • Taiwanese exposure constituted the weakest country allocation for the fund within the second quarter of 2016.
  • The largest detraction with respect to sector allocation in the China Region Fund for the second quarter was in financials, which constitutes a heavy weighting in the benchmark Hang Seng Composite Index.
  • The unfortunate title of worst stock in the fund for the second quarter goes to electrical power equipment company Boer Power Holdings, which fell 43.40 percent during the period.

Opportunities

  • Despite the Chinese authorities' initial lowering of expectations for 2016 GDP growth rate to a range of 6.5-7.0 percent, and despite second-quarter expectations for a decline to 6.6 percent from 6.7 percent in the first quarter, Chinese GDP beat analysts' expectations, coming in at a 6.7 percent. The Chinese government continues to reiterate its focus upon growth-oriented policies.
  • Stabilization in China's forex reserve level continues to allow investors to breathe more easily. Stability of forex reserves relieves market angst about the possibility of unsustainable or catastrophically rapid devaluation of the renminbi and concomitant capital flight. Chinese leaders continue to stress to global leaders and media that no rapid or surprise devaluation is coming. Obviously, if the U.S. dollar continues to weaken, it makes the yuan look stronger, but ultimately, even if the dollar strengthens against the yuan, the yuan may still hold steady or rise against a broader basket of currencies, allowing a slower (but largely expected) devaluation.
  • Indonesia continues to be a bright star within the region of late, as Prime Minster Joko Widodo continues his course of reform. Widodo recently achieved his objective of a Tax Amnesty Scheme for repatriating offshore and undeclared assets, bringing in tax revenue even as he keeps Indonesia ahead of the 2018 implementation of the Automatic Exchange of Information banking secrecy laws. This encouraging move should help to offset "JokoWi's" promised infrastructure spending and development, bolster property investment, and bring increased transparency and revenue to the island nation.

Threats

  • While the June measurement of the private and export-oriented Caixin China Manufacturing PMI surprised to the upside, rising back into expansionary territory, the official government measure of China's Manufacturing PMI actually missed, declining below 50 into contractionary territory at a print of 49.9. A weaker renminbi may well help exporters and perhaps give Chinese authorities more room to stimulate and/or reform the economy but investors are keeping a close eye on Chinese growth, yuan levels, FX reserve levels and follow-through on promises from leaders.
  • A couple of political developments in the region bear attention as potential threats. First, President Tsai Ing-wen of the Democratic Progressive Party is now in office in Taiwan, and while her rhetoric is carefully crafted, relations with the People's Republic of China may well be frostier than under her recent predecessors. Second, former Davao City mayor and now President Rodrigo Roa Duterte won election to the highest office in the Philippines, and the tough-talking, populist politician has yet to provide the sort of economic clarity some investors would like.
  • The outsized significance of U.S. monetary policy (and to a lesser degree, Japanese and European policies) for the region continues to loom as something of a wildcard, not to mention broader global economic growth prospects and oil prices.

Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. 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. Performance does not include the effect of any direct fees described in the fund's prospectus (e.g., short-term trading fees of 0.05%) which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end here or by calling 1-800-US-FUNDS.

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 6/30/2016: Pakuwon Jati Tbk PT 3.61%, Boer Power Holdings Ltd 0.70%.

Net Asset Value
as of 08/26/2016

Global Resources Fund PSPFX $5.70 0.02 Gold and Precious Metals Fund USERX $9.55 0.06 World Precious Minerals Fund UNWPX $8.77 0.07 China Region Fund USCOX $7.67 0.06 Emerging Europe Fund EUROX $5.52 -0.01 All American Equity Fund GBTFX $23.52 -0.16 Holmes Macro Trends Fund MEGAX $19.00 -0.04 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 -0.01