Period ended 31 March 2012
Performance figures discussed in any of the Fund Manager Commentaries reflect that of the Institutional Accumulation Class Shares (USD).
For the one-year period ending 31 March 2012, the Matthews Pacific Tiger Fund declined −1.49% while its benchmark, the MSCI All Country Asia ex Japan Index, fell -6.79%. For the past year, the performance of Asian capital markets was dominated by macroeconomic events with correlation across different asset classes running at relatively high levels. Some of the portfolio’s holdings in the region’s consumer staples sector provided a rare bright spot of positive returns, and were important drivers of relative performance. The portfolio’s financial holdings, especially in some of the smaller markets like Thailand and Philippines, and an underweight in Chinese financials also helped relative performance.
By contrast, for the quarter ending 31 March 2012, the Fund returned 10.06%, underperforming the benchmark which gained 13.76%. Asian equities staged a partial recovery on the back of easing global liquidity, and some early signs of stabilising economic fundamentals, particularly in such developed economies as the United States. As a result, some of the stocks in sectors like industrials, which experienced sharp declines last year, posted strong gains for the first three months of 2012. Consequently, our underweight in industrials was one of the factors behind the Fund’s relative underperformance in the quarter.
Another significant reason for the Fund’s relative underperformance in the last quarter was our holdings in South Korea. In recent periods, the Korean government has become rather active in micro-managing price levels across a broad basket of goods and services, such as insurance and health care, which impacted some Fund holdings. Separately, we exited a relatively newer holding in the portfolio, Himart, a leading South Korean home appliance retailer. While Himart’s operational performance continues to be encouraging, in recent months the divisions within its board and between members of senior management have become more entrenched. It became our view that this might hinder the progress of the company. We held a somewhat modestly sized position which was eliminated earlier this calendar year.
During the past year, we also added to select infrastructure-related Indian equities, particularly as valuations became increasingly attractive toward the second half of 2011. A recovery in the operating performance of these companies is likely to be predicated on the resolution of some of the regulatory bottlenecks that have long been an overhang on the sector. We also continue to see opportunities within small to medium enterprises (SMEs), particularly in China despite the challenges they have faced over the past few years. Following our recent trips to the country, we are increasingly convinced that SMEs continue to make up some of the most vibrant segments of China’s economy, and offer an attractive way to participate in the difficult rebalancing of economic growth that is currently underway in the country.
We believe that confidence is gradually returning among companies and consumers although there is still some wariness about the direction of both the global economy and inflation, which could again become a threat. In our view, in spite of the appreciation in equity prices this year, valuations remain at attractive levels. Furthermore, the progression in earnings revisions may get some boost from a relatively more accommodative monetary cycle, and perhaps lower commodity prices. The near-term business environment may also become more favourable. However, we remain focused on finding businesses that can deliver appreciation in shareholder value across cycles.
The views and opinions in this commentary were current as of 31 March 2012. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund’s future investment intent.
Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.
As of 31 March 2012, the Matthews Pacific Tiger Fund held no positions in Himart Co., Ltd. Current and future portfolio holdings are subject to risk.