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AlphaShares Monthly Letter: February 2011

AlphaShares Indexes February 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) -1.36% -1.29% 13.99% 0.53%
AlphaShares China Small-Cap Index (NYSE HAO) -4.62% -6.59% 11.88% 5.26%
AlphaShares China Real Estate Index (NYSE: TAO) -7.03% -7.13% 10.49% -1.47%
AlphaShares China Technology Index (NYSE: TAO) -0.25% 5.29% 13.63% 17.92%
FTSE/Xinhua China 25 Index -0.87% -1.94% 8.41% -3.93%
CSI 300 (A-Shares) 5.68% 3.85% 0.97% -9.61%

China News:

On February 27th, Chinese Premier Wen Jiabo confirmed that the new economic growth target in the country's upcoming 12th five-year plan would be 7% each year, down from 7.5% during the past ten years. As the target level is largely symbolic of a floor on growth, the move notes a shift in government priorities to put the breakneck economy on a more stable footing, and to "raise the quality and efficiency of economic growth." The move implies a shift away from China's reliance on heavy polluting industries - often characteristic of low value-added exports.

Wen also addressed that while a stronger yuan is in the interest of the country's economy and people, he noted that such appreciation must be gradual, as he feared that a rapid rise in value may "cause many (local export) processing enterprises to go bankrupt or out of business." A stronger yuan can help shift resources into other parts of the economy to promote greater domestic consumption, as well as help combat inflation. China's consumer price index (CPI) rose 4.9% in January. Wen emphasized, "Rapid inflation affects people's livelihoods and may affect social stability. I know the impact that prices can cause a country and am deeply aware of its importance."

China's annual National People's Congress meeting is set to begin on March 5th, and will discuss more details of China's 12th five-year plan will likely follow its annual National People's Congress meeting set to begin on March 5th.

China Equity Markets:

The AlphaShares China All-Cap Index (ACNACTR) declined -1.36% in February, as investors continued to reduce their exposure to China on rising tightening concerns. The People's Bank of China (PBoC) continued its efforts to curtail inflation, including increasing interest rates for the third time since mid-October (from 5.81% to 6.06%) after raising its required reserve ratio in January. Small cap stocks (represented by the AlphaShares Small-Cap index: ACNSC) fared worse than their larger sized counterparts (measured by the FTSE China 25 Index) by falling -4.62% versus -0.87% in February. The two contrasting size capitalization indexes are down -6.59% and -1.94% YTD respectively.

The AlphaShares Chinese Volatility Index, or "CHIX" (CHIX), gained 5.09% to finish February at 20.01, driven in part by concerns that unrest in the Middle East would spread to other emerging markets countries. Online postings called for similar 'jasmine revolution' pro-democracy rallies to be held in Beijing and Shanghai to protest local corruption and misrule, but potential demonstrators were met by hundreds of Chinese police. In his February 27th online forum, Wen addressed the nascent unrest by holding an online forum to address local citizens, pledging to punish the corruption that remains concentrated among key officials, while underscoring that the government's top priority is to raise livings standards.

During the month, unrest in the Middle East led to substantial increases in energy prices and volatility, with oil trading at a 29 month high and posting its largest weekly gain in almost two years during the week of February 25th. Seventy-seven employees working in Libya at China National Offshore Oil Corporation, CNOOC (883 HK), were sent back to China due to the unrest there. Influenced by the rising cost of oil, CNOOC was the third-largest positive contributor to February returns, gaining 2.88%.

Technology was the best performing sector for the second month in a row, as the AlphaShares China Technology Index (ACNITTR) slipped only -0.25% in February. Shares of Baidu (BIDU US) was the largest positive contributor to index returns on the month and YTD, gaining 11.53% and 25.25% in those respective periods. The company reported Q4 earnings of $176 million from $64.9 million the year earlier, exceeding analysts' expectations of $156.3 million. The stock closed at an all-time high of $129.58 on February 11th. The information technology sector makes up 13.74% of the AlphaShares China All-Cap Index (ACNACTR).

Jonathan J. Masse, CFA Dr. Burton G. Malkiel
Senior Portfolio Manager Chief Investment Officer

Disclaimer text

Past performance is no guarantee of future results. The information presented in this letter is for background purposes only and is subject to updating, revision and amendment, and no representation or warranty, expressed or implied, is made, and no liability is accepted by AlphaShares, LLC in relation thereto. This letter is neither an offer to sell nor a solicitation of any offer to buy interests in the Fund. Any such offering is made only pursuant to the Fund’s Private Placement Memorandum and subscription agreement, which should be read in their entirety. No offer to purchase shares in the Fund will be accepted prior to receipt by the offeree of the aforementioned documents and completion of all appropriate documents. These materials have been sent to you in a confidential manner. The information contained herein may be proprietary. No part of these materials may be reproduced in any manner without the Investment Manager’s prior consent.