Investors searching for a bigger artificial intelligence allocation may be overlooking what one portfolio manager calls the most important part of the puzzle: China.
Andrew Mattock, a portfolio manager at Matthews Asia, said this week that broad emerging-market strategies are not an effective way to capture the AI trade because they do not provide enough exposure to Chinese companies. Speaking on CNBC's "ETF Edge," Mattock said investors need to be more deliberate about where they place their money if they want meaningful participation in the sector's growth.
"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 said. "The big piece that you are missing… is the Chinese piece."
His comments come as investors continue to search for ways to benefit from the global buildout in artificial intelligence, semiconductors, cloud infrastructure and related software. While much of the market's attention has centered on U.S. technology giants, Mattock's view suggests that some of the most relevant opportunities may be embedded in Chinese internet and technology names that are not always prominent in broad benchmark products.
Mattock pointed to the composition of major exchange-traded funds to make his case. He noted that companies from South Korea and Taiwan make up almost half of the iShares MSCI Emerging Markets ETF, known by its ticker EEM, limiting the amount of China exposure investors receive through a standard EM allocation. At the same time, the iShares MSCI China ETF, or MCHI, does not have a strong emphasis on AI stocks, underscoring the need for investors to be selective rather than assume any China fund will automatically deliver the desired exposure.
Mattock manages the Matthews China Fund, ticker MCHFX, which 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 down 4% so far this year as of Friday's close. Its largest holdings include Tencent and Alibaba, two of the best-known Chinese technology and internet companies and names often associated with the country's digital economy.
The discussion reflects a broader shift in sentiment toward Chinese assets after a prolonged period of caution among global investors. China's markets have faced pressure from regulatory crackdowns, property-sector weakness, slowing growth and geopolitical tensions, all of which have weighed on valuations and investor confidence. Yet some prominent market participants have recently signaled renewed interest.
Billionaire hedge fund manager David Tepper, founder of Appaloosa Management, said in September 2024 that he had bought more of "everything" related to China, a comment that drew attention across global markets and suggested that some investors were willing to re-engage with the world's second-largest economy after a long retreat.
Still, not everyone is advocating a simple buy-and-hold approach. Brendan Ahern, chief investment officer at KraneShares, said investors should consider strategies that can help cushion the volatility that often accompanies China-related trades. In the same CNBC interview, Ahern said he likes "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 said. "Give themselves some downside."
That caution is not without reason. According to FactSet, the KraneShares CSI China Internet ETF has the same top two holdings as the Matthews China Fund — Tencent and Alibaba — but the ETF is down more than 27% so far this year as of Friday's close. The sharp divergence between different China-focused products highlights how much the outcome depends on the exact strategy, sector mix and risk management approach an investor chooses.
For investors trying to express an AI view, the message from Mattock is clear: broad emerging-market exposure may not be enough, and China may be the missing component. But the route into that exposure matters just as much as the destination, especially in a market where enthusiasm for artificial intelligence is colliding with the volatility and policy uncertainty that continue to define Chinese equities.