Andrew Mattock, a portfolio manager at Matthews Asia, stated that investors seeking meaningful exposure to artificial intelligence must deliberately target China, as broad emerging market strategies fail to capture this sector effectively. Speaking on CNBC's "ETF Edge," Mattock explained that standard MSCI products and general emerging market funds omit the "Chinese piece" of the AI narrative. He highlighted that companies from South Korea and Taiwan constitute nearly half of the iShares MSCI Emerging Markets ETF (EEM), while the iShares MSCI China ETF (MCHI) lacks a specific focus on AI stocks. Mattock manages the Matthews China Fund (MCHFX), which invests at least 80% of its net assets in Chinese common and preferred stocks, with Tencent and Alibaba among its largest holdings. The fund has declined 4% year-to-date as of Friday's close.
The recommendation coincides with renewed interest in Chinese equities from major institutional players. Billionaire hedge fund manager David Tepper, founder of Appaloosa Management, previously indicated he had increased his positions in "everything" related to China. However, Brendan Ahern, chief investment officer at KraneShares, advised caution regarding volatility, suggesting options strategies around ETFs like the KraneShares CSI China Internet ETF (KWEB) to protect against market swings. According to FactSet data, KWEB shares the same top two holdings as the Matthews China Fund—Tencent and Alibaba—but has fallen more than 27% year-to-date as of Friday's close.
The assertion that traditional emerging market indices underweight Chinese technology highlights a structural disconnect between passive allocation models and thematic investment goals. By concentrating heavily on hardware suppliers in South Korea and Taiwan, broad ETFs like EEM inadvertently exclude the software and platform-driven AI innovation occurring within mainland China. This creates an efficiency gap where investors relying solely on diversified emerging market vehicles may miss significant alpha opportunities tied to domestic Chinese digital infrastructure, forcing them to seek specialized active management or targeted single-country exposures to align their portfolios with actual AI value chains.
However, the stark performance divergence between the Matthews China Fund and the KraneShares CSI China Internet ETF underscores the heightened operational and regulatory risks inherent in direct Chinese equity exposure. While both funds share identical top holdings, the deeper drawdown in KWEB suggests that internet-focused baskets face sharper volatility pressures compared to broader mixed-asset strategies. Investors pursuing this "missing piece" must therefore weigh the potential upside of AI adoption against the necessity of sophisticated hedging mechanisms, such as options overlays, to mitigate the severe downside protection concerns raised by industry experts.
