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May 2015

The China Region Fund retreated 1.80 percent in May, outperforming its benchmark, the Hang Seng Composite Index, which declined 2.14 percent. See complete fund performance here.

Strengths

  • Investments in Korea, Singapore and Taiwan worked best in the fund’s favor, as diversification outside of China and Hong Kong helped offset short-term profit taking activity in Hong Kong.
  • Stock selection in technology proved most positive to alpha generation for the fund. Attractively valued bellwether semiconductor manufacturers engaged in accretive acquisitions, and Internet gaming companies riding on new product momentum fared best for the month.
  • Avago Technologies Ltd., a Singaporean designer of analog semiconductors for various industries, was the top contributor to the fund with a 26.69-percent gain during the month, thanks to its buyout offer for Broadcom and better-than-estimated quarterly results.

Weaknesses

  • Chinese property developers and railway constructors took a breather after the surge in April driven by mainland liquidity investing in the way of government policy.
  • Exposure to Hong Kong set the fund back the most, as short-term profit takers chose to realize gains after the Hang Seng Composite Index registered the best month in April since 2009.   
  • Great Wall Motor Company, a Chinese auto manufacturer focusing on SUVs, was the worst contributor with a 13.72 percent decline for the month, due to market concerns of rising competition.  

Opportunities

  • Lingering deflationary pressure and weak domestic demand in China, as reflected in May’s economic data, coupled with potentially accelerating hybrid ownership reform in state-owned banks, should raise investor expectation of further government policy easing and benefit large-cap, state-owned, old-economy sectors at the expense of small-cap, privately-owned, new-economy sectors in China. 
  • Chinese H share equities are still trading at around 50 percent discount on forward earnings multiple, on average, versus their dual-listed A share brethren. A compelling case, therefore, can still be made for investors to overweight Hong Kong-traded Chinese stocks for better margin of safety and in anticipation of the official liberalization of Hong Kong–mainland mutual fund offerings in each other’s territory on July 1.
  • Ongoing global rotation out of India and Southeast Asia into Taiwan and Korea reflects a continued shift in investor style preference in favor of value. In addition, both Taiwan and Korea are historically viewed as “China plays” via links through external trade and investment, and therefore may attract investors who missed the rally in Chinese stocks seeking alternative ways to participate in the Chinese policy reflation cycle.

Threats

  • While Macau’s gross casino gaming revenue declined by a slightly better-than-expected 37 percent year-over-year in May, investors remain worried about negative changes in working capital at the company level and further negative earnings revisions which can prolong valuation de-rating. With little sign of reversal in Chinese authorities’ efforts to crack down on various corruption activities to earn political goodwill from its increasingly vocal middle class, it is difficult to envision that the bear market in Macau casino stocks will be over anytime soon.
  • Deteriorating corporate earnings revisions, historically elevated valuations, renewed weakening of the local currency and the further delay of general elections to September 2016 from February 2016 highlight a potential escalation of downside risks for Thailand. Foreign investors remained net sellers of Thai equities one year after the military coup.
  • Rising infection cases of Middle East Respiratory Syndrome in Korea, the first country to report an outbreak in Asia, could introduce near-term uncertainty of tourist arrivals in the country and weigh on investor sentiment towards retail and hotel sectors in Korea.

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.

Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. Alpha is a measure of performance on a risk-adjusted basis.

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 03/31/2014: Avago Technologies Ltd. 0.24%, Broadcom Corporation 0.00%, Great Wall Motor Co. Ltd. 3.11%.

Net Asset Value
as of 07/02/2015

Global Resources Fund PSPFX $5.46 No Change Gold and Precious Metals Fund USERX $5.45 No Change World Precious Minerals Fund UNWPX $4.54 0.03 China Region Fund USCOX $9.14 -0.13 Emerging Europe Fund EUROX $6.11 0.02 All American Equity Fund GBTFX $27.85 -0.07 Holmes Macro Trends Fund MEGAX $21.29 -0.06 Near-Term Tax Free Fund NEARX $2.24 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change