Third Quarter 2020

The China Region Fund gained 8.23 percent in the third quarter of 2020, outperforming its benchmark, the Hang Seng Composite Index, which gained 3.75 percent. See complete fund performance here.

The China Region Fund outperformed its index by 448 basis points mostly due to strong stock selection in Hong Kong and by overweighting Taiwan and Thailand. The strategy to underweight major banks and overweight food retailers benefited the fund the most.

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

  • On the country level, the fund’s superior stock selection in Hong Kong had the most positive effect on the fund’s performance relative to the index. In particular, the fund’s allocation in the food industry was the most helpful. The fund overweighted Yihai International Holdings, whose shares gained more than 50 percent in the third quarter. We like this company for its strong balance sheet and business growth potential. In addition, the strategy to underweight major banks contributed to the fund’s outperformance. Shares of China Construction Bank declined by 15 percent and Industrial and Commercial Bank of China lost 14.5 percent of its value in three months. Both lenders are heavier weighted in the Hang Seng Composite.
  • On the sector level, the fund’s overweight position in consumer non-durable and underweight position in financial assets had the most positive effect on the fund’s performance relative to the index. In particular, the overweight position in food producer Yihai International benefited the fund’s performance relative to its benchmark. In finance, the strategies to overweight real estate and underweight banks were the most beneficial.
  • The top three positive contributors were as follows:
    • Yihai International Holdings The Chinese food maker and distributor contributed 384 percent to the fund’s performance. Hot-pot condiment maker Yihai benefited from lockdowns as people consumed more prepared instant meals. Its shares gained 52 percent in the third quarter, supported by new product launches and growing sales.
    • Country Garden Services Holdings The real estate development company contributed 178 basis points to the fund’s performance. Shares gained 39 percent supported by a government push for increased lending. We like this company for its rich cash balance and nationwide exposure.
    • Alibaba Group Holdings The e-commerce platform contributed 126 basis points to the fund’s performance. Shares gained 36 percent as company revenue continued to improve with improving sales. Ant Financial, the financial services subsidiary of Alibaba Group, is planning an initial public offering (IPO). The IPO may raise as much at $30 billion, surpassing the $29.4 billion raise achieved by Saudi Arabia state-owned oil company Saudi Aramco last year.

Weaknesses

  • The fund’s exposure to countries outside China had a small negative effect on the fund’s performance relative to the index. In particular, South Korean and Malaysian equites underperformed. Moreover, the fund’s defensive position had the most negative effect on the fund’s performance relative to the index. In the third quarter, the fund kept a slightly higher cash level and had a position in the Direxion Daily FTSE China Bear 3X Shares ETF due to continued trade tension between the United States and China.
  • The fund’s underweight position in technology services had the greatest negative effect on the fund’s performance relative to the index. In particular, underweighting internet services hurt the fund’s performance relative to the index. Shares of Meituan Dianping gained 40 percent in the third quarter as company sales continued to grow, supported by strong online buying.
  • The top three negative contributors were as follows:
    • Sunny Optical Technology The optical and optical-related product maker contributed a negative 106 percent to the fund’s performance. Sunny Optical suffered losses after the U.S. announced an export ban to Huawei. Shares of Sunny Optical Technology plunged 20 percent in the third quarter percent as it generates a fifth of its sales from lenses and other components to Huawei. We like this company for its quick revenue diversification. The auto industry continues its recovery and could be a major source of revenue. Sunny Optical is also looking to enter the Apple supply chain sometime in 2021 and is likely to begin with mass 5p lens shipments for iPads, as well as specific Mac lenses.
    • Direxion Daily FTSE China Bear 3X Shares ETF The ETF contributed a negative 85 basis points to the fund’s performance. Despite uncertainty around market recovery due to the coronavirus pandemic and China-U.S. trade tensions, Chinese equites moved higher and the China 3X Bear ETF hurt the fund’s performance.
    • PICC Property & Casualty Insurance Company The contributed a negative 76 basis points to the fund’s performance. Its share price dropped 16 percent in the third quarter. Net profit fell 22 percent year-over-year to nearly 13.2 billion Chinese yuan ($1.9 billion) in the first six months of the year.

Outlook

In the third quarter, Chinese stocks continued to move higher, erasing losses from the beginning of the year. China’s benchmark CSI 300 Index, which tracks both the Shanghai and Shenzhen markets, has risen more than 17.2 percent so far this year, compared with an almost 5.6 percent gain for the S&P 500 Index in the Unites States. China became one of the few global economies earlier this year to avoid a technical recession, defined by two successive quarter of economic contraction. Growth rapidly recovered and is expected to improve further following the successful relaxation of lockdown measures and government fiscal and monetary efforts to stimulate the economic recovery.

 

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 CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. It is not possible to invest in an index.

A basis point is one hundredth of one percent, used chiefly in expressing differences of interest rates.

Fund portfolios are actively managed, and holdings may change daily and should not be considered a recommendation to buy or sell any security. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 6/30/2020: Yihai International Holding Ltd. 10.22%, China Construction Bank Corp. 0.00%, Industrial Commercial Bank of China Ltd. 0.00%, Country Garden Holdings Co. Inc. 0.00%, Alibaba Group Holdings Inc. 6.06%, Saudi Arabian Oil Co. 0.00%, Direxion Daily FTSE China Bear 3X Shares 0.00%, Meituan Dianping 2.88%, Sunny Optical Technology Co. Ltd. 4.73%, Apple Inc. 0.00%, PICC Property and Casualty Co. Ltd. 0.00%.

 

Net Asset Value
as of 12/03/2020

Global Resources Fund PSPFX $5.57 0.04 Gold and Precious Metals Fund USERX $13.07 -0.11 World Precious Minerals Fund UNWPX $4.96 -0.02 China Region Fund USCOX $9.46 -0.01 Emerging Europe Fund EUROX $6.13 0.01 All American Equity Fund GBTFX $24.52 -0.11 Global Luxury Goods Fund USLUX $19.74 0.08 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change