According to Matthews Asia portfolio manager Andrew Mattock, those pursuing AI exposure have overlooked a key part of the picture: China.
Speaking on CNBC’s “ETF Edge” this week, Mattock argued that broad emerging market funds and plain vanilla MSCI products simply do not deliver enough AI exposure to matter. The solution, he said, is to look directly at the world’s second-largest economy.
“The big piece that you are missing… is the Chinese piece.”
Mattock’s Case for China
Almost half of the holdings in the iShares MSCI Emerging Markets ETF (EEM) come from companies based in South Korea and Taiwan, according to Mattock’s explanation. The iShares MSCI China ETF (MCHI), by contrast, does not concentrate on AI stocks.
He noted that a standard MSCI offering fails to cover the Chinese AI narrative. Those seeking involvement with the sector must take care in selecting which companies to invest in.
Mattock runs the Matthews China Fund (MCHFX). The fund invests at least 80% of its net assets in the common and preferred stocks of companies located in China, according to the firm’s website.
As of Friday’s close, the fund has fallen short of its mark by 4%. Its biggest holdings sit with Tencent and Alibaba.
Tepper’s Buy Everything Call
The argument for China is not new. Billionaire hedge fund manager David Tepper, founder of Appaloosa Management, made the case in September 2024. He told CNBC that he bought more of “everything” related to China.
Tepper’s call drew attention to China as an investment destination. Mattock’s position extends that thinking by urging investors to target China directly rather than settling for broad emerging market exposure.
Ahern’s Warning on Volatility
Some doubt whether China remains a secure wager. Brendan Ahern, who holds the title of chief investment officer at KraneShares, has advised that investors look into approaches that might shield them from extreme shifts in Chinese markets.
The same interview included remarks from Ahern, who said “I like the idea of utilizing options around some of those ETFs… like with KWEB [KraneShares CSI China Internet ETF],”.
“Why do some of these hedge funds gravitate to these ETFs? Because they’re able to write a call and principally protect themselves,” he added. “Give themselves some downside.”
Ahern’s warning applies to several areas of concern:
- The swift movements of China’s markets
- The need to protect against sudden drops
- The appeal of ETFs that let hedge funds write calls
A buy-and-hold approach may not always serve an investor well when it comes to Ahern’s warning is practical. China’s markets, which are known for their swift movements.
The Numbers Behind the Funds
FactSet reports that the KraneShares CSI China Internet ETF and the Matthews China Fund share their top two holdings, namely Tencent and Alibaba.
The stage presents a different account of the matter. By Friday’s closing hour, the KraneShares fund has declined by more than 27% since the start of the year. The Matthews China Fund, meanwhile, has fallen 4%.
The distance between those two figures matters greatly. It demonstrates that even within funds targeting the same group of companies, the journey can feel entirely different depending on how they are held.
What This Means for Investors
The point to grasp is straightforward: for AI exposure, China stands as the destination to examine. Mattock’s fund is arranged to profit from the expansion of Chinese firms.
It is also plain what the danger is: the KraneShares fund’s deeper loss shows that China’s markets can shift suddenly.
Investors seeking exposure without the volatility can turn to Ahern’s method, which uses options to offer a middle ground. That approach lets you take part in gains while guarding against the losses that have struck China-focused funds this year.
The wider takeaway holds that emerging market funds cannot stand in for focused exposure. Anyone seeking AI must call it by name, which ultimately points toward China.
The right choice comes down to how much risk you can stand. The Matthews China Fund’s 4% loss so far this year is far better than the KraneShares fund’s 27%, yet both funds own the exact same two stocks. The source fails to say what accounts for the difference.
A clear change in investor behavior toward China is becoming visible. Rather than simply taking part in the market, investors now appear to be choosing individual Chinese companies with greater care.
It has yet to be determined whether the Matthews China Fund concludes its tale on a favorable note. Until then, the counsel stands firm: should you wish to acquire AI exposure, it is the Chinese component that has remained unaccounted for in your portfolio.
Source material: “This may be the ‘missing piece’ for investors looking to boost AI exposure,” CNBC.
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