Second Quarter 2019

The China Region Fund had a total return of negative 0.91 percent in the quarter ended June 30, 2019, outperforming its benchmark, the Hang Seng Composite Index, which declined by 2.26 percent. See complete fund performance here.

The fund’s outperformance was helped in particular by overweight allocations and stock selection within the properties and construction sector as well as the consumer goods sector. Chinese stimulus and a degree of gearing toward a more domestically-focused Chinese economy aided fund performance vis-à-vis its benchmark.

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 China Region Fund were to the benchmark domicile of Hong Kong, where stock selection was particularly strong. Smaller regional allocations to the outperforming locales of Singapore and Taiwan were also useful. The scorching pace of Chinese stocks from the first quarter slowed in the second, so strong selection in Hong Kong and some regional aid from better-performing locales helped balance the fund and lead to outperformance.
  • The fund’s overweight in properties and construction and consumer goods proved to be a solid decision, as evidenced by outperformance in those allocations, as was an overweight allocation to industrials, which also performed well. Again, a domestically-focused turn in the Chinese economy 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 Asia Cement were the top contributors to fund performance. The combination of a cooling pace of economic growth and inherent trade war uncertainties led Chinese authorities to continue to act with stimulative measures. This helped the properties and construction sector in addition to focusing demand domestically, which benefited our large holding of domestically-focused condiment and hot pot producer Yihai International.

Weaknesses

  • The fund’s smaller country allocations to Indonesia, South Korea and the Philippines were the largest regional drags on the fund’s performance. A steady, stable U.S. dollar and weakening global trade outlook with a then-still-unclear Federal Reserve stance weighed in some degree on emerging markets in the second quarter, and on Korea’s growth outlook.
  • The fund’s underweight of the index heavyweight allocation to financials had the largest negative contribution to the fund’s performance. Materials and energy overweights also underperformed. Commodity prices in materials and energy were unsupportive for the majority of the quarter.
  • Investments in PetroChina, Zijin Mining and Vitasoy International were the greatest absolute single stock detractors from the Fund’s performance. Energy names, like crude, did not perform particularly well in the course of the second quarter, while earnings reports for Zijin and Vitasoy were less than stellar. The gold price rally—which came later in the quarter—was not quite enough to salvage lumps taken on Zijin Mining before we rotated out of the name.

Outlook

The current outlook for China and the surrounding region is relatively positive. With a supportive Federal Reserve, emerging markets should enjoy a bit of a reprieve, while the U.S.-dollar-pegged and developed benchmark domicile of Hong Kong may well be set to enjoy a positive second half, even as China continues to remain supportive of its economy. A global easing cycle may now be underway, and in just the recent weeks, both Indonesia and Korea have cut rates while the Philippines continues to talk accommodation as well. Inflation also remains low in these locales, providing cover for accommodative monetary policies.

To be sure, threats remain. In particular, the U.S.-China trade spat could weigh on sentiment at any given time. But it is important to remember that at the end of the day, direct U.S.-China trade represents only minor portions of gross domestic product (GDP) for the two massive economies. Moreover, tariff escalation currently remains on pause as trade talks continue, which, even if trade talks eventually stall and/or go sideways, provides corporations on both sides more time to realign supply chains or restructure operations as necessary in a more orderly, less chaotic timeframe.

One must also highlight the rising Southeast Asian nation of Vietnam, which, in addition to playing host to the Trump-Kim summit not long ago and receiving a steady inflow of China-related business and increasing manufacturing power, has now also finally consummated its seven-years-in-the-making free trade agreement with the European Union.

In sum, there are indeed bright spots in the region, and on the whole, China’s recent 6.2 percent GDP growth—granted, it is the slowest in recorded Chinese GDP data to date—nonetheless remains within the expected governmental projections of 6.0 percent to 6.5 percent.

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 6/30/2019: Yihai International Holding Ltd. 7.24%, Li Ning Co Ltd. 2.65%, Asia Cement Corp. 2.37%, PetroChina Company Ltd. 0.00%, Zijin Mining Group Company Ltd. 0.00%, Vitasoy International Holdings Ltd. 2.40%.

Net Asset Value
as of 08/21/2019

Global Resources Fund PSPFX $4.29 0.01 Gold and Precious Metals Fund USERX $9.14 -0.03 World Precious Minerals Fund UNWPX $3.14 -0.01 China Region Fund USCOX $8.36 0.12 Emerging Europe Fund EUROX $6.75 0.05 All American Equity Fund GBTFX $24.35 0.23 Holmes Macro Trends Fund MEGAX $17.00 0.12 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change