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March 2015

The China Region Fund gained 4.02 percent in the first quarter, underperforming its benchmark, the Hang Seng Composite Index, which rose 5.87 percent. See complete fund performance here.

Strengths

  • With the fund being underweight U.K. domiciled, benchmark heavyweight HSBC Holdings was a right decision.
  • Stock selection in the financial sector was most positive to fund performance. Exposure to select health care and automobile names also generated alpha.  
  • Tencent Holdings, Inc., a leading Internet entertainment and social media provider in China, was the top contributor to the fund with a 30.87-percent gain during the quarter.

Weaknesses

  • Technology, telecommunications and industrials were the largest detractors from fund performance. Interest rate non-sensitive and higher multiple Internet stocks were relative laggards from loosening policy.
  • Stock selection in Hong Kong and allocation to Indonesia and Taiwan made a negative contribution to relative fund performance.
  • Sunac China Holdings Ltd., a leading residential property developer in China, was the worst contributor with a 14.68 percent decline for the quarter.  

Opportunities

  • China’s plan to convert existing local government debt into longer duration, lower interest-rate municipal bonds, aims to lighten banks’ post-crisis nonperforming loan legacy. This move could also free up more lending capacity and reduce the need to raise more capital. Chinese banks are direct beneficiaries of this solution to a longstanding, systemic problem.
  • Further mortgage policy relaxation on second-home down payments in China is consistent with authorities’ recent pragmatism toward managing short-term growth risk while promoting long-term structural reform. Chinese residential property developers should be well supported by government policy tailwinds and undemanding valuation.
  • China’s so-called “One Belt, One Road” strategy, which seeks to invest in overseas  transport infrastructure and boost trades with emerging markets, is an ingenious way to export domestic industrial overcapacity and counter slower growth at home and aboard. This strategy should bode especially well for Chinese railroad construction companies.

   
Threats

  • Tremendous popularity of the online environmental documentary Under the Dome, self-funded by a former investigative journalist in China, might aggravate investor sentiment on heavy polluters in the coal, cement and steel industries and intensify their secular decline.
  • Macau gaming revenue trends and press reports of potentially tighter visa restrictions against mainland Chinese could reduce the probability of any positive catalysts in the near term for the city’s casino operators, thereby weighing on their performance.
  • Both Chinese A shares and H shares are short-term overbought, driven by surging liquidity influx into Hong Kong markets from mainland China after authorities allow mainland mutual funds to invest in H shares via the Shanghai-Hong Kong Stock Connect program.   

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 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.

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 03/31/2015: HSBC Holdings PLC 0.00%, Tencent Holdings Ltd. 7.09%, Sunac China Holdings Ltd. 1.04%.

Net Asset Value
as of 05/21/2015

Global Resources Fund PSPFX $6.14 0.07 Gold and Precious Metals Fund USERX $5.90 -0.01 World Precious Minerals Fund UNWPX $4.89 No Change China Region Fund USCOX $9.87 -0.01 Emerging Europe Fund EUROX $6.87 No Change All American Equity Fund GBTFX $28.72 0.12 Holmes Macro Trends Fund MEGAX $21.21 0.02 Near-Term Tax Free Fund NEARX $2.24 No Change China Region Fund USCOX $9.87 -0.01