AI portfolios may need China to grab the biggest gains

Investors looking to boost their exposure to artificial intelligence should target China, according to Matthews Asia portfolio manager Andrew Mattock.

He said investors will need a more deliberate approach because broad emerging market strategies won’t be that effective.

“Investors need to be aware when they buy an emerging market fund or when they buy a plain vanilla MSCI product… they’re not getting a lot of it,” Mattock told CNBC’s “ETF Edge” this week. “The big piece that you are missing… is the Chinese piece.”

He noted that companies from South Korea and Taiwan comprise almost half of the iShares MSCI Emerging Markets ETF (EEM) while the iShares MSCI China ETF (MCHI) lacks a focus on AI stocks.

Mattock is behind 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.

The fund is off 4% so far this year, as of Friday’s close. Its largest holdings include Tencent and Alibaba.

Billionaire hedge fund manager David Tepper, founder of Appaloosa Management, found the world’s second economy attractive again – telling CNBC in September 2024 that he bought more of “everything” related to China.

However, KraneShares’ Brendan Ahern recommended that investors consider strategies that could protect them from wild market swings in China.

“I like the idea of utilizing options around some of those ETFs… like with KWEB [KraneShares CSI China Internet ETF],” the firm’s chief investment officer said in the same interview.

“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.”

According to FactSet, the KraneShares CSI China Internet ETF has the same top two holdings as the Matthews China Fund: Tencent and Alibaba. But as of Friday’s close, the fund is down more than 27% so far this year.