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 Asia Dividend Fund returned 2.20% while its benchmark, the MSCI All Country Asia Pacific Index fell -4.02%.
The 12-month period was a challenging one for most asset managers punctuated by volatility, which was fed by fleeting worries over both natural and man-made disasters in Japan, Europe’s debt crisis and slowing global growth. More pertinent to Asia, China’s moderating growth outlook weighed on the share prices of companies historically tied to the country’s investment-led expansion. The first three months of 2012, however, saw optimism return in equity markets globally. The European Central Bank stepped up its support of Europe’s banking sector and, by extension, sovereign bond markets. The financial sector rallied in response, not just in Europe, but in Asia as well. Economic data out of the U.S., while still patchy, seemed to indicate the economy had bottomed and was on a slow path to recovery. This sentiment buoyed equities of more cyclical businesses, such as the consumer discretionary and information technology sectors.
In spite of the market volatility, we remained focused on our aim of investing with companies that grow dividends. The Fund’s holdings in the consumer staples, utilities, health care and telecommunication services sectors delivered positive performance. Within the Fund’s consumer discretionary holdings, Shenzhou International Group, a Chinese clothing manufacturer, posted strong performance on the back of ongoing earnings and dividend growth. The company grew its dividend 39% in calendar year 2011.
The Fund’s holdings in KT&G and Japan Tobacco were strong performers as investors found the cash-generative nature of the tobacco business attractive. Another strong performer was Cheung Kong Infrastructure, a Hong Kong-listed utility company with assets mainly in developed economies with better regulatory frameworks. The high dividend yield relative to low interest rates in Hong Kong, combined with yield-accretive acquisitions offered an attractive combination of growth and dividend income.
In mid-February, the Bank of Japan initiated an explicit inflation target of 1%, resulting in a sharp 7.2% sell-off in the yen during the first three months of 2012, as markets expected a more expansionary monetary policy would be needed to fight Japan’s entrenched price deflation. The yen’s weakness did present some headwinds for the value of the Fund’s Japanese holdings. In spite of this, on the whole, our Japanese holdings managed to deliver positive absolute performance.
Our holdings within apparel retailers continued to negatively impact performance during the period. Esprit Holdings, Li Ning, Point and Billabong International all posted steep losses for the 12-month period, and ultimately we exited Point and Billabong. While we generally aim to be long-term shareholders of our holdings, these retailers fell short of our initial expectations. In the case of Point, a multi-brand clothing store operator in Japan, it became apparent that the company’s competitive position had been eroded, raising questions about the ongoing profitability and growth in future dividends.
In recent months, the Fund also exited and took profits in two small Thai holdings, LPN Development and Glow Energy, after the dividend yield had compressed because of significant share price appreciation.
Asia continues to look attractive compared to other regional markets for investors seeking both dividend income and growth. With a dividend yield of about 3.9% at the end of March, the Fund’s holdings offered a higher-than-average yield versus the region, with businesses that we believe seem well-poised to deliver future dividend growth.
There is no guarantee that a company will pay or continue to increase dividends.
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, Shenzhou International Group Holdings, Ltd. represented 2.5%, Cheung Kong Infrastructure Holdings Ltd 2.9%, Japan Tobacco Inc 3.8%, KT&G Corp. 2.9%, Esprit Holdings Ltd. 1.0% and Li Ning Co Ltd 1.1% of the Matthews Asia Dividend Fund. The Fund held no positions in LPN Development, Glow Energy, Billabong International Ltd or Point, Inc. Current and future portfolio holdings are subject to risk.