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The Time To Hedge Is Now! January 2015 Update

Summary Brief overview and links to earlier articles in the series. Why Buy-and-hold investors should consider hedging. Sell your January 2014 puts in Terex (TEX) before expiration this Friday and lock in profits. Improved buy prices on select candidates. Discussion of the risks inherent to this strategy versus not being hedged. Back to December Update – Part II Strategy Overview If you are new to this series you will likely find it useful to refer back to the original articles, all of which listed with links in this instablog . In the Part I of this series I provided an overview of a strategy to protect an equity portfolio from heavy losses in a market crash. In Part II, I provided more explanation of how the strategy works and gave the first two candidate companies to choose from as part of a diversified basket using put option contracts. I also provided an explanation of the candidate selection process and an example of how it can help grow both capital and income over the long term. Part III provided a basic tutorial on options. Part IV explained my process for selecting options and Part V explained why I do not use ETFs for hedging. Parts VI through IX primarily provide additional candidates for use in the strategy. Part X explains my rules that guide my exit strategy. All of the above articles include varying views that I consider to be worthy of contemplation regarding possible triggers that could lead to another sizeable market correction. Part II of the December Update (linked at the top of this article) explains how I intend to roll my positions. I want to make it very clear that I am not predicting a market crash. Bear markets are a part of investing in equities, plain and simple. I like to take some of the pain out of the downside to make it easier to stick to my investing plan: select superior companies that have sustainable advantages, consistently rising dividends and excellent long-term growth prospects. Then I like to hold onto to those investments unless the fundamental reasons for which I bought them in the first place changes. Investing long term works! I just want to reduce the occasional pain inflicted by bear markets. Why Hedge? With the current bull market turning 70 months now, it is now more than double the average duration (30.7 months) of all bull markets since 1929. The current bull is now longer in duration than all but three bull markets during that time period (out of a total of 15). So, I am preparing for the inevitable next bear market. I do not know when the strategy will pay off, and I will be the first to admit that I am probably earlier than I suggested at the beginning of this series. However, I do feel confident that the probability of experiencing another major bear market will rise in the coming year(s). It may be 2015, 2016 or even 2017, before we take another hit like we did in 2000-2002 or 2008-09. But I am not willing to risk losing 50 percent (or more) of my portfolio to save the less than two percent per year cost of a rolling insurance hedge. I am convinced that the longer the duration of the bull market lasts the worse the resulting bear market will be. Sell TEX January 2015 puts now! I don’t like to hold short positions, especially on dividend paying stocks. Even though the dividend is tiny on TEX, I recommend selling the puts now. I sold two of my TEX put positions yesterday ($26 and $27 strikes) and am happy with my returns (680% and 809%, respectively). I also sold the last batch today ($23 strike) for a small profit. The bull market churned ever higher while we remained hedged and one of our candidates fell enough to help offset part of the cost of the hedge. I hope you held TEX puts in your hedge! Overall the hedge position (all 18 positions) lost money. All in all, because of the one good outcome my portfolio was hedged for most of last year for less than one percent. I estimate that this next year may cost over 1.5 percent of our total portfolio (I pay for mine by giving up a portion of my dividend income) if we buy all the puts today. However, there are some events coming up soon that could spur U.S. equities higher in the short term, depending on the outcomes. Pending Economic Events The biggest two events that are on the schedule, in my view are the European Central Bank [ECB] decision to increase quantitative easing coming on January 22 and the Greek election set for January 25, just three days later. I want to thank Mercy Jimenez for reminding me of these two important dates coming in the third week of this month. The ECB decision could provide a boost, if QE is initiated and is large enough to matter, to U.S. equities via the carry trade. Those with access to very low cost money in the Euro Zone will borrow cheaply there and reinvest where they expect high and safer returns; that would be the U.S as investors continue their flight to perceived safety). Both U.S. bonds and equities stand to benefit if the vote is positive. Currently, the plan does not seem settled as to the total amount of QE that the ECB will provide. Most recently I have read articles stating that 500 billion euros (just under $600 billion U.S.) is likely. However, a few days ago I read that the ECB was planning a one trillion euro (almost $1.2 trillion U.S.). I suspect the lower amount is more likely. On the other hand, if the measure does not pass, there could be a negative reaction as those who had positioned investments to take advantage of an expected run up would probably unwind those positions. The Greek election outcome appears to favor the Syriza party which is anti-bailout and wants to renegotiate the austerity terms required for more loans. If the Syriza party prevails and negotiations stall, it could bring the sovereign debt question in Europe back to the forefront. That could either hurt or help U.S. equities, depending upon how the outcome and its consequences are interpreted. If both votes go sour, then we want to be hedged because all bad news from Europe could cause enough fear in the global investors to go to cash. U.S. bonds would probably find support, but a risk off environment would likely result in a correction to equities. Being partially hedged at this point is a good bet. If the vote on QE by the ECB passes, we could get a good opportunity to buy more puts at lower premiums in the near future. Patience is the key. Current Premiums on select Candidates In this section I will provide current quotes and other data points on selected candidates that pose an improved entry point from the last update. All quotes and information are based upon the close on Wednesday, January 14, 2015. I am calculating the possible gain percentage, total estimated dollar amount of hedge protection (Tot Est. $ Hedge) and the percent cost of portfolio using the “Last Premium” amount shown. This was the last premium paid on the last transaction of the day and provides a more accurate example of the cost and potential for each trade. Please remember that all calculations of the percent cost of portfolio are based upon a $100,000 equity portfolio. If you have an equity portfolio of $400,000 you will need to increase the number of contracts by a factor of four. Also, the hedge amount provided is predicated upon a 30 percent drop in equities during an economic recession and owning eight hedge positions that provide protection that approximates $30,000 for each $100,000 of equities. So, you should pick eight candidates from the list and make sure that the hedge amounts total to about $30,000. Since each option represents 100 shares of the underlying stock, we cannot be extremely precise, but we can get very close. Another precaution: do not try to use this hedge strategy for the fixed income portion of your portfolio. If the total value of your portfolio is $400,000, but $100,000 of that is in bonds or preferred stocks, use this strategy to hedge against the remaining $300,000 of stocks held in the portfolio (assuming that is all that is left). This is also not meant to hedge against other assets such as real estate, collectibles or precious metals. Goodyear Tire & Rubber (NASDAQ: GT ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $25.43 $8.00 $15.00 $0.10 $0.65 $0.26 2592 $4,044 0.16% GT stock is actually slightly lower than it was at the time of the last update. But the potential gain is better if you can get in near the latest premium paid. Truck and SUV sales in the U.S. are improving due to lower gas prices, but sales of sedans and economy autos are dropping. Total sales for autos should be relatively flat with profits rising from a higher margin mix. But volume is likely to fall and that spells reduced sales for tire companies like GT. I don’t expect a major drop in share price without a recession, but we could see some gradual downside movement over the coming months. You will still need six January 2016 GT put option contract, but the cost drops significantly to cover one eighth of a $100,000 equity portfolio. Seagate Technology (NASDAQ: STX ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $64.59 $24.00 $45.00 $0.53 $0.57 $0.54 3789 $4,092 0.11% We will need a total of two June 2015 STX put options with a strike of $45 to complete this position at current pricing levels for each $100,000 in portfolio value. The actual last premium was listed as $0.47 which is below the bid premium. That is not likely to happen, so I split the difference between the bid and ask price to get $0.54 and used that for the calculations. The cost per month is considerably lower using June options than using January 2016 options. CarMax (NYSE: KMX ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $63.42 $16.00 $35.00 $0.45 $0.65 $0.60 3067 $3,680 0.12% We will need two January 2016 KMX put options with a strike of $35 to complete this position for each $100,000 in portfolio value. Royal Caribbean Cruises (NYSE: RCL ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $81.94 $22.00 $57.50 $0.85 $0.96 $0.91 3801 $3,459 0.09% We need only one June 2015 RCL put option contract to fill this position and protect against approximately $3,459 in loss on a $100,000 portfolio. United Continental Holdings (NYSE: UAL ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $64.05 $18.00 $35.00 $0.29 $0.64 $0.46 3596 $3,308 0.09% We need two June 2015 UAL put option contracts to fill this position and protect against approximately $3,308 in loss on a $100,000 portfolio. Currently the June contracts are more cost effective than the January 2015 contracts. L Brands (NYSE: LB ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $82.12 $20.00 $50.00 $0.80 $1.00 $0.85 3429 $5,830 0.17% We need two January 2016 LB put options to provide the indicated loss coverage for each $100,000 in portfolio value. Those of you who have been following the series will notice that I have increased the strike price from $40 to $50 here resulting in a significant rise in the amount hedged. Marriott International (NASDAQ: MAR ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $76.57 $30.00 $50.00 $1.00 $1.20 $0.95 1718 $3,780 0.22% We need two January 2016 MAR put option contracts to provide the indicated loss coverage for each $100,000 in portfolio value. Since the last premium was below the bid I chose to split the difference between the bid and ask premium and used $1.10 as the premium for the calculations. Micron Technology (NASDAQ: MU ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $30.05 $10.00 $17.00 $0.53 $0.59 $0.55 1173 $3,870 0.33% We need six January 2016 MU put option contracts to provide the indicated loss coverage for each $100,000 in portfolio value. The cost of these contracts is coming down slowly because the stock price has fallen since the last update. I will probably not add much, if any, of this candidate to my hedge unless I can get a better premium in the future Williams-Sonoma (NYSE: WSM ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $76.99 $20.00 $55.00 $1.40 $1.90 $1.43 2348 $3,357 0.14% We need only one January 2016 WSM put option contract to provide the indicated loss coverage for each $100,000 in portfolio value. In the last update article I used May options. Since then the pricing in the January contracts has become more favorable. Level 3 Communications (NYSE: LVLT ) Current Price Target Price Strike Price Bid Premium Ask Premium Last Premium Poss. % Gain Tot Est. $ Hedge % Cost of Portfolio $47.88 $15.00 $40.00 $1.15 $1.35 $1.20 1983 $4,760 0.24% The position shown above would require two June 2015 LVLT put option contracts to provide the indicated loss coverage for each $100,000 in portfolio value. Remember that these options expire in June 2015 and will require us to replace them at additional cost. Even though the cost has come down by almost a third, I do not intend to add LVLT contracts at this time. I will wait for better pricing or use another candidate for my hedge. Morgan Stanley (NYSE: MS ) and Sotheby’s (NYSE: BID ) option costs are still too high to be considered at this time. I plan to wait for better entry points before adding to my hedge position with these candidates. Summary My top eight choices from the list above includes LB, KMX, GT, WSM, MAR, RCL, STX and UAL. That group (using the put option contracts suggested above) should provide approximately $31,550 in downside protection against a 30 percent market correction at a cost of 1.1 percent of a $100,000 portfolio. Granted, four of the candidates will need to be replaced by May or June which will add to the total cost, but we should still be able to keep the total hedge cost below two percent for the year. Brief Discussion of Risks If an investor decides to employ this hedge strategy, each individual needs to do some additional due diligence to identify which candidates they wish to use and which contracts are best suited for their respective risk tolerance. I do not always choose the option contract with the highest possible gain or the lowest cost. I should also point out that in many cases I will own several different contracts with different strikes on one company. I do so because as the strike rises the hedge kicks in sooner, but I buy a mix to keep the overall cost down. My goal is to commit approximately two percent (but up to three percent, if necessary) of my portfolio value to this hedge per year. If we need to roll positions before expiration there will be additional costs involved, so I try to hold down costs for each round that is necessary. I do not expect to need to roll positions more than once, if that, before we see the benefit of this strategy work. I want to discuss risk for a moment now. Obviously, if the market continues higher beyond January 2016 all of our new option contracts could expire worthless. I have never found insurance offered for free. We could lose all of our initial premiums paid plus commissions. If I expected that to happen I would not be using the strategy myself. But it is one of the potential outcomes and readers should be aware of it. And if that happens, I will initiate another round of put options for expiration beyond January 2016, using from up to three percent of my portfolio to hedge for another year. The longer the bull maintains control of the market the more the insurance will cost me. But I will not be worrying about the next crash. Peace of mind has a cost. I just like to keep it as low as possible. Because of the uncertainty in terms of how much longer this bull market can be sustained and the potential risk versus reward potential of hedging versus not hedging, it is my preference to risk a small percentage of my principal (perhaps as much as three percent per year) to insure against losing a much larger portion of my capital (30 to 50 percent). But this is a decision that each investor needs to make for themselves. I do not commit more than five percent of my portfolio value to an initial hedge strategy position and have never committed more than ten percent to such a strategy in total before a major market downturn has occurred. The ten percent rule may come into play when a bull market continues much longer than expected (like three years instead of 18 months). And when the bull continues for longer than is supported by the fundamentals, the bear that follows is usually deeper than it otherwise would have been. In other words, I expect a much less powerful bear market if one begins early in 2015; but if the bull can sustain itself into late 2015 or beyond, I would expect the next bear market to be more like the last two. If I am right, protecting a portfolio becomes ever more important as the bull market continues. As always, I welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other’s experience and knowledge. Additional disclosure: I hold put option positions in each of the stocks listed in the article.

Cohen & Steers REIT And Preferred Income Fund: Not Just A Real Estate Offering

Summary RNP is managed by REIT specialist Cohen & Steers. RNP does not, however, have a strict real estate focus. It might be better to look at RNP as a balanced fund of sorts. Cohen & Steers REIT and Preferred Income Fund (NYSE: RNP ) is an interesting animal that tries to combine in one fund two different investment focuses. For investors seeking simplicity, this could be a good option. For those who want more control over their portfolios, you’d be better off buying a real estate investment trust (REIT) fund and a preferred fund separately. Who is Cohen & Steers? I always include a comment about this company’s origin when I write about it because Cohen & Steers isn’t a household name in finance. But it is one if you are remotely connected to the REIT space. That’s because Martin Cohen and Robert Steers were among the first to create a company dedicated to investing in REITs. They basically helped popularize the space for institutional and individual investors. And, more important, the company they created has lots of experience. If you are thinking about outsourcing your REIT investments to anyone, Cohen & Steers should be on your short list. So, from that standpoint, I like anything they do that involves real estate investing. Only half the fund But that’s only half of what Cohen & Steers REIT and Preferred Income Fund does. The other half of the fund invests in preferred shares. While there’s some overlap, since REITs often issue preferred shares, that doesn’t make Cohen & Steers an expert in, say, preferreds issued by insurance companies. That’s not to suggest that they don’t have the ability to do analyze such securities, just that their business has historically been structured around REITs. And this fund, with only about 10% of its preferred portfolio in REIT preferreds, is definitely more than just REITs. But what exactly is in RNP? Roughly 50% of the fund is, indeed, in REITs. The largest holdings are basically top-quality players. It’s fairly diversified across nine major sectors, with offices, apartments, and regional malls accounted for nearly half of its real estate exposure. Nothing exciting here. Preferred stocks and debt make up the rest of the fund. That side is concentrated in four sectors. Banking preferred stocks alone make up nearly 55% of this side of the portfolio. Insurance, real estate, and utility preferreds are the other big areas. This speaks more to the nature of the preferred market than to anything else, since these group of industries tends to make the most use of preferred stock. It’s worth taking note of the real estate sector’s 10% position on this half of the fund, which means that REITs, in some form, make up about 55% of RNP’s overall portfolio. The big takeaway from that is that this is not a pure real estate investment trust fund. It was never intended to be, but you should keep this fact in the back of your mind if you own it and front and center if you are looking for a pure REIT fund. How’s it done? Looking at total return, which includes distributions, RNP’s trailing ten year return through year-end 2014 was roughly 8% based on the share price (a little under 7% based on the CEF’s net asset value) according to Morningstar. That’s not bad for a fund with an income focus and is roughly in line with the S&P 500 Index over that span. That, of course, assumes the reinvestment of dividends. The price of RNP is down roughly 30% over that span if you used the dividends. Note, however, that dividends over the last six years have totaled roughly seven dollars or so. That pretty much makes up for the entire share price decline right there. While it’s true that the shares are worth less, you have been paid reasonably well along the way… With the other four years of dividends providing the bulk of your take-home return over the span. So, overall, this is a fine fund if you want a decently performing REIT and preferred combo offering. But you’ll need to keep another factor in mind. The big problem RNP makes use of leverage. Toward the end of last year, the fund’s leverage was at around 27%. Leverage is a double-edge sword, aiding performance in good markets and exacerbating losses in bad ones. For example, in 2007 the fund’s return was -27%, according to Morningstar. In 2008 it returned -60%. Those are hard losses to watch unfold and include dividend payments. That said, in 2009 RNP was up 90%, including dividends, and in 2010 it advanced another 50%. So while the fund owns what some would consider “safer” investments, this fund is anything but conservative. This is a fact that shouldn’t be taken lightly. Note, too, that the fund’s inherent exposure to financial preferred stocks on the preferred side of the portfolio were a huge drag during the financial-led 2007 to 2009 recession, when the CEF was hard hit in the market. This type of volatility doesn’t make RNP a bad fund, it just means it’s probably not appropriate for conservative investors. Expenses, meanwhile, at around 1.8%, are elevated by the costs of that leverage. Right now the shares trade at about a 12% discount to NAV. That’s roughly in-line with the fund’s five- and 10-year average discounts of roughly 10%, according to the Closed-End Fund Association. So RNP is hardly on sale right now. But you will be picking up a yield of around 6.75%. At the end of the day The question you have to ask is if that amount of income, most of which has recently been dividend income, is worth the share price volatility that Cohen & Steers REIT and Preferred Income Fund can experience. And the fund is really only appropriate if you want a mix of REIT and preferred exposure in one fund. At the end of the day, I’d say this is a specialty fund most appropriate for those with strong stomachs. It would be a good way, for example, to outsource “boring” sectors and asset classes while still staying true to an aggressive overall investment approach.

Bad News Is Good News: A Contrarian View Of China Investing

A Healthy Balance Between Monetary and Fiscal Support. Government to Remain Accomodative. Oil Sinks, Airlines Take Flight. When China celebrates its new year next month, we will transition into the Year of the Ram, also known as the Year of the Goat or Sheep. If you believe in luck, this could be a good sign. The ram comes eighth in the 12-zodiac cycle, and in Mandarin, “eight” sounds very similar to the words meaning “prosper,” “wealth” or, in some dialects, “fortune.” As you might imagine, the Chinese consider the number to be very lucky. But of course successful investing involves so much more than luck. In a time when not only China but much of the rest of the world is trying to get its groove back, it’s important to be cognizant of the factors that shape the markets, including changing government policy. We often say that government policy is a precursor to change, so it’s important to follow the money. With that in mind, I asked portfolio manager Xian Liang to outline a few of the most compelling cases to remain bullish on the Asian giant. Below are some highlights from our discussion. A Healthy Balance Between Monetary and Fiscal Support Back in October, I pointed out that one of the main contributors to the European Union’s sluggish growth is its inability to balance its monetary and fiscal policies. It has been eager to tax everything and everyone who moves. Waiting for European Central Bank (ECB) President Mario Draghi to act often feels a little like waiting for Godot. Investors’ patience is wearing thin. China, on the other hand, is much more responsive and actively committed to making full use of both policies in its arsenal to spur its cooling economy. On the monetary side, according to Xian, are interest rate cuts and a loosening of reserve requirements for certain deposits. The goal is to ease access to loans for businesses and individuals seeking to purchase big-ticket items such as homes. As a result, Chinese entrepreneurs have increasingly been able to start more businesses. (click to enlarge) Jobs growth has been so robust, in fact, that the government has managed to attain its job creation target outlined in its current Five-Year period ahead of schedule and by a wide margin. The country has grown millions of jobs with great efficiency, even as GDP sags. Although the Chinese housing market has stagnated in recent months, these new monetary measures will help it pick up steam. Already we’re seeing some improvement, with home property stocks moving higher. Regulations are an indirect taxation of the economy, whereas deregulation unleashes entrepreneurial spirit. (click to enlarge) On the fiscal front, the government is reportedly planning to spend $1.6 trillion over the next two years on infrastructure projects in various industries-300 separate infrastructure programs, to be exact, according to BCA Research. As I pointed out last month, many of these projects will largely involve high-speed rail, both domestically and abroad. China has already secured multiple construction deals with countries ranging from Brazil, South Africa, Nigeria, India, Russia, the U.S. and others. Government to Remain Accommodative There are a couple of reasons the Chinese government has accelerated support to capital markets, according to Xian: One, a significant deflationary threat has been driven by slumping energy prices. And two, there are potentially lower exports to commodity producing nations. Indeed, sluggish global demand has contributed to China’s weak December purchasing manager’s index (PMI), which dropped to an 18-month low of 50.1. China has been quick to respond to lower PMI data with a drop in interest rates. (click to enlarge) But Where There’s Bad News, Good News Is Often Not Far Behind The silver lining to falling commodity prices is that since China is a net-importer of raw materials-crude oil especially-the country has been able to save tremendously on its oil and gas bills. Back in November, I reported that for every dollar the price of a barrel of oil drops, China’s economy saves about $2 billion annually. From its peak in June, crude has slipped close to $50-you do the math. This has served as a major wealth transfer from oil-producing countries into China’s coffers. Oil Sinks, Airlines Take Flight Speaking of crude, declining oil prices-they’re currently below $50 per barrel-have been good for airlines, Chinese companies included. As you can see, there’s been a clear inverse relationship between crude oil returns and airline stocks. (click to enlarge) China is the largest investor in U.S. government bonds. The country has accumulated close to $1.3 trillion, so a strong dollar and falling oil prices benefit its economic flexibility. More middle-class Chinese might be able to afford to travel abroad, specifically here to the U.S., where inevitably they will spend their money. (click to enlarge) According to Carl Weinberg, founder and chief economist of High Frequency Economics: Chinese President Xi Jinping has estimated that there will be more than a half-billion Chinese tourists traveling to the West in the next 10 years. You can work out the impact if all of them came to New York and spent $2,000 or $3,000 each. That would be enough to add a half-percentage point to U.S. GDP every year over the next decade. Reasonable Stock Valuation Chinese stocks are currently valued below their own historical averages as well as those among other global emerging markets, making them both attractive and competitive. “Odds favor mean reversion to continue,” Xian says. “The better the Chinese markets perform, the more global liquidity they might attract.” Chinese stocks, as expressed in the MSCI China Index, are currently a much better value than those in the S&P 500 Index, trading at 10 times earnings whereas the U.S. is trading at 18 times. (click to enlarge) A-Shares Still a Huge Draw Chinese A-Shares surprised the market by breaking out last summer, having delivered 66 percent for the 12-month period. It looks like a breakout from the long-term bear market. (click to enlarge) What’s more, the upside is unlikely to have been exhausted. Although they aren’t as stellar of a bargain as they once were, they’re not yet overvalued, and retail and institutional investors might accumulate on pullbacks. For the A-Shares market, we have recently added exposure to A-Shares in one of our funds to capture more attractive valuation. In today’s environment, we believe the safer bets are investable H-Shares, which are driven by A-Shares and, in 2014, returned 15.5 percent. H-Shares comprise the vast majority of the fund’s exposure to Chinese equities, with further exposure gained through A-Shares exchange-traded funds (ETFs). The Ram Is the New Bull As GARP (growth at a reasonable price) hunters, we’re prudently optimistic about the upcoming year and anticipate great things out of the world’s second-largest economy. China’s government and central bank are committed to jobs and manufacturing growth as well as policy easing. Its stocks are reasonably valued, and low commodity prices should continue to offset slowing global demand. As Xian eloquently put it last month: China’s leadership appears to be delivering on the promises it made in November 2013 at the Third Plenary Session, specifically the liberalization of the financial sector and reform of the role capital markets play in allocating resources. This leadership is determined and committed to putting China on the right path. Past performance does not guarantee future results. 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. The HSBC China Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives at more than 400 private service-sector companies. The MSCI China Free Index is a capitalization weighted index that monitors the performance of stocks from the country of China. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. 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 9/30/2014: Air China Ltd. 0.00%, China Eastern Airlines 0.00%, China Southern Airlines Co. 0.00%. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.