© Bloomberg. Gantry cranes stand at the Yangshan Deepwater Port, operated by Shanghai International Port Group Co. (SIPG), in Shanghai, China, on Friday, May 10, 2019. The U.S. hiked tariffs on more than $200 billion in goods from China on Friday in the most dramatic step yet of President Donald Trump’s push to extract trade concessions, deepening a conflict that has roiled financial markets and cast a shadow over the global economy.

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Trade tensions between the U.S. and China have been keeping most investors on tenterhooks, but not Tiffany Hsiao of the more than $30 billion Matthews Asia.

Hsiao positioned her fund for a “self-sufficient” China years before the spat escalated, anticipating the mainland’s rise would permanently damage trust between the world’s two biggest economies, the stock picker said. Her top bets include greater Chinese chipmakers, software firms and biotechnology companies.

Investment in promising local players in industries such as semiconductors “was our strategy and we were well-positioned more than five years ago,” Hsiao, the San Francisco-based portfolio manager of a fund of small-cap stocks, said in an interview. “Now the companies that we invest in are really benefiting from the escalation in the trade war.”

Last week, the U.S. banned Huawei Technologies Co. from purchasing technology from American companies. It’s also considering prohibiting five other firms from buying U.S. components, people familiar with the matter said earlier.

These moves will encourage Huawei and others to localize their supply chains, according to Hsiao. Companies in homegrown industries will prosper as “China strikes to domestically source,” she said.

‘Domestic Champions’

Chinese firms can easily tap “up-and-coming domestic champions” if U.S. suppliers aren’t an option, Taiwan-born Hsiao said. Semiconductors, software and biotechnology are the “next trillion dollar industries coming out of China,” she said.

Hsiao’s China Small Companies Fund counts Taiwan-listed analog chipmaker Silergy Corp. as its biggest holding, making up 6.8% of assets at the end of April, according to the fund’s latest fact-sheet. The stock has more than doubled since the start of 2014, beating a return of about 20% for Taiwan’s benchmark Taiex index.

The fund owns companies including Kingdee International Software Group Co. and China Youzan Ltd. as software investments. In biotechnology, it held stocks such as Hong Kong-listed Genscript Biotech Corp. and Innovent Biologics Inc. as of December, according to data compiled by Bloomberg.

Manager Award

Hsiao’s fund, which had $61.4 million in assets at the end of April, is beating 71% of peers over the past five years, posting an average annual return of just under 8%, according to data compiled by Bloomberg. Last August, she was ranked top female fund manager in the U.S. by Citywire in terms of risk-adjusted returns over the previous three years.

However, like many investors, Hsiao was buffeted by the sell-off in Chinese stocks last year. Her fund posted a loss of about 18%, versus a return of about minus 20% for her benchmark, the MSCI China Small Cap Index, according to data compiled by Bloomberg.

“In periods where the markets have positive returns, that’s when we really shine,” Hsiao said. The “downward correlation is still higher” as investors tend to lose appetite for smaller shares during market downturns, she said.

China is now the world’s biggest small-cap market but there isn’t enough capital coming to the asset class, as most investors still think of emerging-market investing as limited to only large-cap firms, Hsiao said.

Matthews Asia, founded by Paul Matthews in 1991, is a U.S.-based firm dedicated to investing in Asia. It had $31 billion in assets under management as of April 30, according to its website.

(Corrects seventh paragraph to say Silergy is listed in Taiwan.)

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