First Quarter 2018

The China Region Fund rose 0.35 percent in the first quarter of 2018, outperforming its benchmark, the Hang Seng Composite Index (“HSCI”), which declined 0.02 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 majority of its outperformance for the first quarter of 2018. 
  • The fund’s allocation to information technology remained heavily overweight versus the benchmark’s for the period in question. The fund’s stock selection within tech afforded the China Region Fund relative sector outperformance against the index. Energy and properties & construction also provided notable relative outperformance.
  • The dominant single stock contributor for the China Region Fund during the first quarter of 2018 was (in line with the aforementioned sector outperformance) Sunny Optical Technology Group, which climbed 45.05 percent for the quarter.  In second and third place for contributions to the fund’s outperformance in the quarter were, respectively, real estate names Jiayuan International and Country Garden Holdings, which rose, again respectively, 56.20 and 8.46 percent.

Weaknesses

  • In a relatively flattish first quarter, the poorest-performing country allocations for the fund came from minor allocations to Thailand and the Philippines. The Philippine Stock Exchange PSEi Index dropped 6.28 percent for the quarter. Thailand’s SET Index performed much better but had relatively poorer selection.
  • Consumer discretion constituted the largest detraction with respect to sector allocation in the China Region Fund for the volatile first quarter of 2018.
  • The largest absolute detractor from the fund in the first quarter was Geely Automobile, which declined 16.61 percent during that time. Nexteer Automotive and furniture exporter Man Wah Holdings rounded out the second and third largest stock detractions from the fund respectively, declining 36.52 and 16.02 percent.

Opportunities

  • Macau—perhaps something of a bellwether for the overall Chinese economy—remains relatively strong. The stocks largely shrugged off unsavory issues surrounding disgraced real estate businessman Steve Wynn, even as Galaxy Entertainment Group took a significant stake in Wynn Resorts, the parent company of Wynn Macau. 
  • Chinese gross domestic product (GDP) growth data remain relatively robust at this point, with the first quarter GDP reading 6.8 percent, in line with analysts’ estimates and above the 6.5 percent level given by officials as the overall 2018 target, and steadily in line with the prior two quarters.
  • One moderately controversial development is the recent elimination of term limits upon Chinese President Xi Jinping, who is now positioned as president for life.  This move had already been hinted at, as Xi’s essay on political theory Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era was elevated—enshrined, perhaps—in the Communist Part of China’s (CCP) central doctrine alongside the thought of Mao Zedong and Deng Xiaoping. Thus is Xi Jinping’s concentration of power complete. China returns to charismatic one-man rule. One expects, of course, all the potential downsides of one-man rule—especially over the long haul—but the flipside is that in the near- to medium-term, political stability might be assured. China’s trajectory and “road map” as laid out by Xi Jinping will likely be maintained; any investor concerns over stability, lack of heirs apparent, or questions over changing priorities can reasonably be set aside.  From an investment standpoint (not a political one), the formal elimination of term limits may be a reasonably good thing. In short, get used to Xi Jinping, and get used to his priorities.

Threats

  • Without doubt one of the most troubling developments of the quarter is the escalation of tariffs and trade war rhetoric between China and the United States. That being said, however, it seems relatively unlikely that circumstances will escalate much further amid a lose-lose scenario. As things currently stand, China has already offered some basic concessions and, indeed, because China does not actually import enough from the United States to match its tariffs dollar for dollar as it is, it remains reasonable to assume that we may have already hit peak tariff tit-for-tat. It also remains notable that Xi Jinping took the opportunity during a recent Hainan speech to fail—very conspicuously—to raise rhetoric levels or make any specific threats in addition to what is already out there; so too it is notable that markets appeared to take note of the conciliatory tone of Xi’s speech. Again, that being said, there is no denying that tensions are higher and that the risk of escalation is real. But time—and perhaps trade numbers—will tell, and in the big picture, one would do well to recall that China-U.S. trade accounts for only a minimal portion of China’s GDP in the first place.
  • The Philippines Stock Exchange Index is the world’s worst performer in 2018 in local currency terms, according to Bloomberg News, and the peso—Asia’s biggest loser this year—has weakened as concerns mount that rate hikes are running well behind inflation, which the central bank recently stated is expected to exceed the 4 percent upper limit of its target range for at least part of the year.
  • North Korea remains in the wildcard category of threats, though perhaps it is shifting rapidly toward a potential opportunity. The historic North Korea-South Korea summit approaches, with the equally historic North Korea-United States summit to follow next month or sometime in June. U.S. President Donald Trump has already threatened to walk away from any talks deemed unproductive, and the entire affair will indisputably remain subject to headline risk, but at the same time, with the stakes as high as they are and the leaders of both the U.S. and North Korea accustomed to publicity and efforts to keep ratings up, it seems probable that U.S.-North Korea talks will drag on for a while. Said talks will also inevitably receive a lot of (relatively positive) press and “historic” photo-ops, and they should keep missile testing contained throughout their duration. These are not bad things, but the fact remains that it is North Korea, and the stakes are somewhat high, and no one is really certain in what direction all this will go. Stay tuned.

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 Philippine Stock Exchange PSEi Index is a capitalization-weighted index composed of stocks representative of the Industrial, Properties, Services, Holding Firms, Financial and Mining & Oil Sectors of the PSE. The SET Index is a Thai composite stock market index which is calculated from the prices of all common stocks (including unit trusts of property funds) on the main board of the Stock Exchange of Thailand (SET), except for stocks that have been suspended for more than one year.

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 3/31/2018: Sunny Optical Technology Group 10.62%, Jiayuan International Group Ltd. 2.24%, Country Garden Holdings Co. Ltd. 6.87%, Geely Automobile Holdings Ltd. 9.84%, Man Wah Holdings Ltd. 3.40%, Nexteer Automotive Group Ltd. 2.50%, Galaxy Entertainment Group Ltd. 2.67%, Wynn Resorts Ltd. 0.00%, Wynn Macau Ltd. 2.05%.

Standard Disclosure

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

 

Net Asset Value
as of 10/19/2018

Global Resources Fund PSPFX $5.03 0.01 Gold and Precious Metals Fund USERX $6.95 0.07 World Precious Minerals Fund UNWPX $3.51 0.01 China Region Fund USCOX $8.08 0.12 Emerging Europe Fund EUROX $6.32 -0.01 All American Equity Fund GBTFX $25.37 -0.09 Holmes Macro Trends Fund MEGAX $18.05 -0.07 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change