Third Quarter 2017

The China Region Fund gained 18.03 percent in the third quarter of 2017, outperforming its benchmark, the Hang Seng Composite Index (HSCI), which gained only 9.90 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

  • The fund’s benchmark domicile of Hong Kong provided the China Region Fund with the vast majority of its outperformance for the third quarter of 2017. 
  • The fund’s allocation to industrials remained overweight versus the benchmark’s for the period in question, but note that much of this overweight derives from a position in the hardware manufacturer Sunny Optical Technology Group, which is particularly geared toward information technology.  The fund’s stock selection within industrials thus afforded the China Region Fund its best relative sector outperformance against the index.   
  • The dominant single stock contributor for the China Region Fund during the third quarter period of 2017 was Sunny Optical Technology Group, which climbed 77.43 percent for the quarter. In second and third place were Geely Automobile Holdings and BYD Electronic International, which rose 30.64 and 49.22 percent.

Weaknesses

  • The poorest-performing country allocation for the fund within the third quarter was Indonesia. The fund’s relatively minor allocation to Indonesia underperformed relative to the Hang Seng Composite. The Jakarta Composite Index finished very nearly flat for the quarter.
  • Consumer services constituted the largest detraction with respect to sector allocation in the China Region Fund for the third quarter. Notably, however, as an asset class, cash also constituted a net detractor for the quarter, again due to the reasonably strong market in Hong Kong.
  • While cash constitutes the largest relative detraction from the fund versus its benchmark in the third quarter, the unfortunate title of largest absolute detractor for the fund during that time goes to TravelSky Technology, which declined 11.52 percent for the quarter. This narrowly beat out the relative cost of the fund’s underweight position in tech giant Tencent Holdings. The China Region Fund maintained its significant but nonetheless underweight position. Tencent climbed a strong 19.73 percent in the quarter, which created a relative headwind for the Fund versus the index on that front despite our absolute gains in the name.

Opportunities

  • Auto stocks in China had another great quarter, as evidenced by some of the fund’s top holdings. Despite cautious views on the state of the industry and expectations for demand in China toward the end of last year—as tax incentives were set to expire—2017 has seen continued and relatively robust demand and growth. Indeed, as Chinese economic data have come in better than expected—with two consecutive quarters of 6.9 percent gross domestic product (GDP) growth, well ahead of expectations—so too has consumer demand. Geely Automobile, for example, continued its impressive gains, growth and expansion worldwide, even while announcing its impressive new line of luxury SUVs to be produced domestically. China’s Ministry of Industry and Information Technology also recently announced its New Energy Vehicle (NEV) credits mandate, which should help to support China’s NEV market as existing subsidies phase out.
  • Late in the quarter, China’s central bank announced an upcoming cut in the reserve requirements for banks that extend more loans to small businesses, surely intended to spur competition and bolster employment without sacrificing too much from the lenders’ perspective.
  • China’s first and second quarter GDP data have impressively outperformed expectations year-to-date in 2017, and earnings have kept pace. On a number of other fronts, China appears to be moving steadily forward as well: There are signs of progress in state-owned entity (SOE) reform, the deleveraging campaign continues without significant economic disruption, and the internationalization of the renminbi continues apace.  New stock listings are up in Shenzhen and Shanghai, domestic demand has proved robust and the expansion of China’s middle class continues apace as well.  Indeed, as investors await the upcoming 19th Party Congress, both China and the global economy appear to be faring better than some anticipated. 

Threats

  • North Korea remains an ongoing threat to investor sentiment. It is worth observing, though, that despite the heated rhetoric and tweets between Pyongyang and the White House, and in spite of recent missile tests of truly concerning scope, China and the United States were nonetheless able to overcome some differences and come to an agreement on a joint proposal for the United Nations with respect to increasing sanctions on North Korea. This diplomatic victory clearly neither resolves nor diminishes the underlying threat of a nuclear North Korea, but it does keep China and the U.S. on reasonable terms over a potentially contentious issue while maintaining pressure on North Korea in the meantime.
  • Credit ratings agency S&P Global Ratings cut China’s sovereign credit rating in the third quarter, from AA- to A+, following up the previous quarter’s warning about China’s overall credit situation. Indeed, worries about credit—particularly shadow banking—have fueled President Xi Jinping’s crackdown on leverage. While the market did not seem greatly affected by S&P’s announcement, it remains worthwhile to note two things: First, obviously, a real deterioration in credit would spook the market, but second, investors ought to remember that even with successful deleveraging, a possible tradeoff for longer-term stability could be short-term growth. 
  • There remains a threat that much of the year’s growth in China was front-loaded, as some analysts speculated in late 2016 and early 2017, and thus that growth could drop off a little more sharply than expected, perhaps emboldening bears and/or frightening bulls. At the moment, however—as at the end of last quarter—this threat still seems distant with the HSCI and the Shanghai Composite Index near 52-week highs. But once again, perhaps therein lies the threat.

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 Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange. The Jakarta Stock Price Index is a modified capitalization-weighted index of all stocks listed on the regular board of the Indonesia Stock Exchange.

An S&P Global Ratings issuer credit rating is a forward-looking opinion about an obligor's overall creditworthiness. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due.
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 9/30/2017: Sunny Optical Technology Group Company Ltd. 8.61%, Geely Automobile Holdings Ltd. 8.40%, BYD Electronic Company Ltd. 5.11%, TravelSky Technology Ltd. 0.00%, Tencent Holdings Ltd. 5.38%.

 

Net Asset Value
as of 11/17/2017

Global Resources Fund PSPFX $5.87 No Change Gold and Precious Metals Fund USERX $7.43 0.10 World Precious Minerals Fund UNWPX $5.77 0.08 China Region Fund USCOX $11.86 -0.05 Emerging Europe Fund EUROX $6.97 0.03 All American Equity Fund GBTFX $24.17 -0.03 Holmes Macro Trends Fund MEGAX $21.08 0.04 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change