A focus on Asia—and providing compelling investment solutions for our clients—is what we believe distinguishes us among investment managers. Our insights into investment opportunities and risks are backed by proprietary research, a collaborative culture and 30 years of experience.
Seeks alpha in innovative, capital efficient entrepreneurial companies in Asia ex Japan
Focus on firms that have a strong competitive advantage through pricing power, distribution capability, and/or differentiated technologies and services
Bias toward businesses that cater to rising domestic consumer demand
The Fund promotes environmental and social characteristics according to Article 8 of SFDR. Furthermore, the Fund uses both activity- and norm-based exclusions. Information relating to the environmental and social characteristics of this Fund is available in the prospectus.
Strategy
The Fund seeks to achieve its investment objective by investing, directly or indirectly, at least 65% of its total net assets, in equities of small companies located in the Asia ex Japan Region, and may invest in other permitted assets on worldwide. The Fund defines Small Companies as companies with market capitalization no higher than the greater of US $5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI All Country Asia ex Japan Small Cap Index.
Risks
The value of an investment in the Fund can go down as well as up and possible loss of principal is a risk of investing. Investments in international, emerging and frontier market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation, which may adversely affect the value of the Fund's assets. The Fund invests in holdings denominated in foreign currencies, and is exposed to the risk that the value of the foreign currency will increase or decrease. The Fund invests primarily in equity securities, which may result in increased volatility. The Fund invests in smaller companies, which are more volatile and less liquid than larger companies.
These and other risks associated with investing in the Fund can be found in the
prospectus.
Asia Ex Japan: Consists of all countries and markets in Asia, excluding Japan but including all developed, emerging and frontier countries and markets in Asia
The Fund seeks to achieve its investment objective by investing, directly or indirectly, at least 65% of its total net assets, in equities of small companies located in the Asia ex Japan Region, and may invest in other permitted assets on worldwide. The Fund defines Small Companies as companies with market capitalization no higher than the greater of US $5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI All Country Asia ex Japan Small Cap Index.
Risks
The value of an investment in the Fund can go down as well as up and possible loss of principal is a risk of investing. Investments in international, emerging and frontier market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation, which may adversely affect the value of the Fund's assets. The Fund invests in holdings denominated in foreign currencies, and is exposed to the risk that the value of the foreign currency will increase or decrease. The Fund invests primarily in equity securities, which may result in increased volatility. The Fund invests in smaller companies, which are more volatile and less liquid than larger companies.
The risks associated with investing in the Fund can be found in the prospectus
Performance
Monthly
Quarterly
Calendar Year
Rolling 12 Month Returns
As of 31/03/2024
Annualized Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asia Small Companies Fund (USD)
-3.51%
-1.39%
-1.39%
4.46%
4.71%
12.47%
7.56%
7.49%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
0.39%
0.52%
0.52%
17.26%
2.83%
8.38%
5.23%
4.94%
Matthews Asia Small Companies Fund (GBP)
-3.46%
-0.79%
-0.79%
2.26%
7.76%
13.27%
n.a.
10.77%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
0.53%
1.44%
1.44%
14.77%
5.90%
9.05%
n.a.
8.37%
Matthews Asia Small Companies Fund (EUR)
-3.30%
0.77%
0.77%
5.02%
7.61%
n.a.
n.a.
8.84%
30/12/2020
MSCI All Country Asia ex Japan Small Cap Index (EUR)
0.59%
2.82%
2.82%
17.96%
5.77%
n.a.
n.a.
9.91%
As of 31/03/2024
Annualized Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asia Small Companies Fund (USD)
-3.51%
-1.39%
-1.39%
4.46%
4.71%
12.47%
7.56%
7.49%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
0.39%
0.52%
0.52%
17.26%
2.83%
8.38%
5.23%
4.94%
Matthews Asia Small Companies Fund (GBP)
-3.46%
-0.79%
-0.79%
2.26%
7.76%
13.27%
n.a.
10.77%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
0.53%
1.44%
1.44%
14.77%
5.90%
9.05%
n.a.
8.37%
Matthews Asia Small Companies Fund (EUR)
-3.30%
0.77%
0.77%
5.02%
7.61%
n.a.
n.a.
8.84%
30/12/2020
MSCI All Country Asia ex Japan Small Cap Index (EUR)
0.59%
2.82%
2.82%
17.96%
5.77%
n.a.
n.a.
9.91%
For the years ended December 31st
Name
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
Matthews Asia Small Companies Fund (USD)
11.27%
-14.49%
22.19%
46.12%
17.53%
-14.53%
30.80%
-1.09%
-11.08%
11.14%
MSCI All Country Asia ex Japan Small Cap Index (USD)
22.09%
-19.93%
21.23%
26.60%
7.58%
-18.63%
33.84%
-2.05%
-3.28%
2.56%
Matthews Asia Small Companies Fund (GBP)
5.26%
-4.17%
23.80%
41.22%
14.03%
-9.84%
19.38%
18.87%
-6.49%
n.a.
MSCI All Country Asia ex Japan Small Cap Index (GBP)
15.20%
-9.84%
22.35%
22.69%
3.43%
-13.57%
22.25%
16.83%
2.32%
n.a.
Matthews Asia Small Companies Fund (EUR)
7.48%
-9.25%
32.41%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
MSCI All Country Asia ex Japan Small Cap Index (EUR)
17.96%
-14.68%
30.44%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
For the period ended 31/03/2024
Name
2024
2023
2022
2021
2020
Inception Date
Matthews Asia Small Companies Fund (USD)
4.46%
0.86%
8.97%
78.66%
-12.26%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
17.26%
-10.02%
3.07%
87.24%
-26.57%
Matthews Asia Small Companies Fund (GBP)
2.26%
6.98%
14.38%
60.25%
-7.03%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
14.77%
-4.18%
8.00%
68.28%
-22.84%
Matthews Asia Small Companies Fund (EUR)
5.02%
3.04%
15.14%
n.a.
n.a.
30/12/2020
MSCI All Country Asia ex Japan Small Cap Index (EUR)
17.96%
-7.85%
8.87%
n.a.
n.a.
Source: Brown Brothers Harriman (Luxembourg) S.C.A.
All returns over 1 year are annualized
Since inception performance for share classes with less than one year of history represents actual performance, not annualised. In addition, for share classes less than a year old, Year to Date Return is calculated since inception. Where no past performance is shown there was insufficient data available in that year to provide performance.
Performance details provided are based on a NAV-to-NAV basis with any dividends reinvested, and are net of management fees and other expenses. Performance data has been calculated in the respective currencies stated above, including ongoing charges and excluding subscription fee and redemption fee you might have to pay.
All performance quoted represents past performance and is not indicative of future performance. Investors may not get back the full amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of currency exchange fluctuations that may cause a loss of principal.
Additional performance, attribution, liquidity, value at risk (VaR), security classification and holdings information is available on request for certain time periods.
Portfolio Characteristics
(as of 31/03/2024)
Fund
Benchmark
Number of Positions
68
1,727
Weighted Average Market Cap
$4.3 billion
$2.0 billion
Active Share
98.7
n.a.
P/E using FY1 estimates
17.5x
14.6x
P/E using FY2 estimates
14.8x
12.5x
Price/Cash Flow
12.3
8.5
Price/Book
2.3
1.5
Return On Equity
10.1
11.5
EPS Growth (3 Yr)
19.6%
17.1%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 31/03/2024)
Category
3YR Return Metric
Alpha
2.07%
Beta
0.89
Upside Capture
79.02%
Downside Capture
74.37%
Sharpe Ratio
0.12
Information Ratio
0.21
Tracking Error
8.89%
R²
72.94
2.07%
Alpha
0.89
Beta
79.02%
Upside Capture
74.37%
Downside Capture
0.12
Sharpe Ratio
0.21
Information Ratio
8.89%
Tracking Error
72.94
R²
Fund Risk Metrics are reflective of Class I USD ACC shares.
Top 10 holdings may combine more than one security from the same issuer and related depositary receipts. Source: Brown Brothers Harriman (Luxembourg) S.C.A
Portfolio Breakdown (%)
(as of 31/03/2024)
Sector Allocation
Country Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Information Technology
28.6
21.9
6.7
Industrials
23.4
17.8
5.6
Financials
14.0
9.1
4.9
Consumer Discretionary
13.5
11.2
2.3
Health Care
12.1
9.9
2.2
Real Estate
5.1
6.9
-1.8
Consumer Staples
1.9
5.0
-3.1
Communication Services
1.9
4.0
-2.1
Materials
1.4
10.6
-9.2
Utilities
0.0
2.0
-2.0
Energy
0.0
1.6
-1.6
Liabilities in Excess of Cash and Other Assets
-1.8
0.0
-1.8
Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.
Country
Fund
Benchmark
Difference
China/Hong Kong
32.3
13.8
18.5
India
29.8
29.6
0.2
Taiwan
18.9
26.8
-7.9
South Korea
9.8
16.0
-6.2
Vietnam
3.9
0.0
3.9
Philippines
3.4
0.9
2.5
Thailand
1.5
3.6
-2.1
Indonesia
1.2
2.1
-0.9
Bangladesh
0.5
0.0
0.5
United States
0.5
0.0
0.5
Singapore
0.0
4.3
-4.3
Malaysia
0.0
2.9
-2.9
Liabilities in Excess of Cash and Other Assets
-1.8
0.0
-1.8
Not all countries are included in the benchmark index(es).
Equity market cap of issuer
Fund
Benchmark
Difference
Mega Cap (over $25B)
0.0
0.0
0.0
Large Cap ($10B-$25B)
13.9
0.0
13.9
Mid Cap ($3B-$10B)
37.5
20.1
17.4
Small Cap (under $3B)
50.4
79.9
-29.5
Liabilities in Excess of Cash and Other Assets
-1.8
0.0
-1.8
The Portfolio’s market cap exposure breakdown presented is used for comparison purposes and the definition of the capitalization breakdown is from MSCI.
The Fund defines Small Companies as companies with market capitalization no higher than the greater of US$5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI All Country Asia ex Japan Small Cap Index.
Source: FactSet Research Systems unless otherwise noted. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.
Sustainability-related Disclosures
This Fund
Yes
No
Complies with Article 8 of SFDR
Investment process integrates ESG factors and sustainability risks based on proprietary and third-party research
Applies norms- and activity-based exclusions
Promotes environmental and social characteristics
Has a sustainable investment objective
Conducts engagement
Exercises Voting Rights
Investors should not invest in the Fund solely based on the information in this material alone. Please refer to the Prospectus for further details of the Fund’s investment objective and risk factors.
The Overall Morningstar®️ Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and (if applicable) ten-year ratings.
Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Vivek Tanneeru is a Portfolio Manager at Matthews and manages the firm’s Emerging Markets Sustainable Future, Emerging Markets Small Companies, Emerging Markets Discovery, Asia Small Companies and Asia Sustainable Future Strategies. Prior to joining Matthews in 2011, Vivek was an Investment Manager on the Global Emerging Markets team of Pictet Asset Management in London. While at Pictet, he also worked on the firm’s Global Equities team, managing Japan and Asia ex-Japan markets. Before earning his MBA from the London Business School in 2006, Vivek was a Business Systems Officer at The World Bank and served as a Consultant at Arthur Andersen Business Consulting and Citicorp Infotech Industries. He interned at Generation Investment Management while studying for his MBA Vivek received his Master’s in Finance from the Birla Institute of Technology & Science in India. He is fluent in Hindi and Telugu.
Jeremy Sutch is a Portfolio Manager at Matthews and co-manages the firm’s Emerging Markets Equity, Emerging Markets ex China Equity, Emerging Markets Small Companies, Emerging Markets Discovery, Asia Small Companies, Asia ex Japan Total Return Equity and Pacific Tiger Strategies. Prior to joining Matthews in 2015, he was Director and Global Head of Emerging Companies at Standard Chartered Bank in Hong Kong from 2012 to 2015, responsible for the fundamental analysis of companies in Asia, with a particular focus on small- and mid-capitalization companies. From 2009 to 2012, he was Managing Director at MJP Capital in Hong Kong, which he co-founded. His prior experience has included managing small-cap equities at Indus Capital Advisors and serving as Head of Hong Kong Research for ABN AMRO Asia Securities. Jeremy earned an M.A. in French and History from the University of Edinburgh.
For the year ending 31 December 2023, the Matthews Asia Small Companies Fund returned 11.27%, while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index returned 22.09%. For the fourth quarter of the year, the Fund returned 3.53% versus 8.73% for the benchmark.
Market Environment
2023 was a year of opportunities and challenges marked by two distinct narratives: the Federal Reserve’s ‘higher for longer’ interest rate strategy and China’s labored and ongoing struggle to recover from the pandemic. Elevated interest rates and a strong U.S. dollar posed headwinds while China’s travails impacted the economies of markets like Thailand. But there were also strong performances by markets like India which benefited from national infrastructure programs and strong domestic investor inflows. Smaller companies in emerging markets also thrived in many cases in 2023. And toward the end of the year there was a general consensus that inflation had peaked in the global economy and that the Fed would pivot toward cutting rates in 2024. This provided some tailwinds across markets.
Taiwan was the best-performing market in the benchmark index during 2023, followed by India, South Korea and Malaysia. China/Hong Kong was the worst-performer followed by Thailand and Indonesia. From a sector perspective, information technology (IT) was the top performer, supported by market exuberance over advancements in commercial artificial intelligence (AI), followed by industrials while consumer discretionary and real estate were the worst performers, impacted in part by China’s challenges in these sectors.
From a currency perspective, the Thai baht, Indonesian rupiah and Philippine peso appreciated against the U.S. dollar. The Malaysian ringgit, Chinese renminbi, South Korea won and India rupee depreciated against the greenback.
Performance Contributors and Detractors
From a country perspective, stock selection in South Korea was the top contributor to total and relative returns in 2023. Underweights in Thailand and Singapore supported relative performance while stock selection in Indonesia was a positive contributor to returns. On the flip side, an overweight and stock selection in China/Hong Kong was by far the biggest detractor to total and relative returns in the period. As the year progressed, markets grew more pessimistic about the prospects of China’s economic recovery, for a turnaround in its real estate sector and for an improvement in consumer sentiment. In our view, the MSCI AC Asia ex Japan Small Cap Index has a much smaller allocation to China than is warranted as it doesn’t have mainland A-shares representation and this accounts for the bulk of the small-cap investment universe in China. An underweight and stock selection in India also impacted relative performance as did an underweight in Taiwan.
At the sector level, an underweight and stock selection in real estate and consumer staples contributed the most to relative returns in the period. An overweight in financials also contributed. In contrast, stock selection in industrials was the greatest detractor to relative performance in 2023. Stock selection in IT and a slight overweight and stock selection in consumer discretionary also detracted.
From a holdings perspective, Ecopro BM, a South Korean cathode maker, Shriram Finance, an Indian financial services provider, and Elite Material, a Taiwanese maker of base materials for the printed circuit board (PCB) industry, were among the top contributors to total and relative returns in the year. Ecopro BM’s share price rallied on the expectations of strong pickup in orders from U.S. battery manufacturing capex spend. Shriram continued to deliver strong results and, given its very attractive valuations, the stock performed well. Elite Material did well as the market assessed positively the company’s dominant position in the key raw material involved in making printed circuit boards for high performance chips used for applications such as AI.
On the other hand, China consumption-oriented names such as Hainan Meilan International Airport, Beijing Capital International Airport and Xtep International, a sporting goods company, were among the biggest detractors to total and relative returns. The Chinese airport operators were weak on the back of reduced expectations on the rebound in consumption broadly, and in air travel services, in particular, as 2023 progressed. We remain positive on the longer-term outlook for international travel in the case of Beijing Capital International Airport and for domestic tourist arrivals in the case of Hainan Meilan, despite near-term headwinds as people tilt their travel budgets internationally.
Notable Portfolio Changes
In 2023, we participated in the initial public offering (IPO) of Wuxi XDC. The company is an affiliate of Wuxi Biologics, a leading Chinese contract, development and manufacturing entity. XDC specializes in bioconjugates, including anti-body drug conjugates, a promising area of growth within the biotech industry globally. Among our exits, we sold Lemon Tree, an Indian mid-market hotel chain operator, to take profits, and sold our position in Bank Tabungan Negara in Indonesia to deploy capital elsewhere.
Outlook
Today, we believe the Asia ex Japan region contains many companies with solid business models and quality management. In addition, U.S. interest rates are looking downward which should create some macro tailwinds for the coming year. As well as the macro landscape and global trade, our focus in 2024 will be on key emerging markets that are generating robust growth, like India, and those that are challenged, like China.
Longer term, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
We believe small companies in Asia offer long-term growth opportunities given their innovation and domestic consumption orientation while also being less exposed to regulatory and geo-political risks. We continue to find quality businesses at attractive valuations in this asset class.
Rolling 12 Month Returns For the period ended 31/03/2024 - I (Acc)
Name
2024
2023
2022
2021
2020
Inception Date
Matthews Asia Small Companies Fund (USD)
4.46%
0.86%
8.97%
78.66%
-12.26%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
17.26%
-10.02%
3.07%
87.24%
-26.57%
Matthews Asia Small Companies Fund (GBP)
2.26%
6.98%
14.38%
60.25%
-7.03%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
14.77%
-4.18%
8.00%
68.28%
-22.84%
Matthews Asia Small Companies Fund (EUR)
5.02%
3.04%
15.14%
N.A.
N.A.
30/12/2020
MSCI All Country Asia ex Japan Small Cap Index (EUR)
Performance figures discussed in the Fund Manager Commentary above reflect that of the Institutional Accumulation Class Shares and has been calculated in USD. Performance details provided for the Fund are based on a NAV-to-NAV basis, with any dividends reinvested, and are net of management fees and other expenses. Past performance information is not indicative of future performance. Investors may not get back the full amount invested.
The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
Information contained herein is sourced from Matthews Asia unless otherwise stated. The views and opinions in this commentary were as of the report date, subject to change and may not reflect the writer’s current views. 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. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. The information does not constitute a recommendation to buy or sell any securities mentioned.
Investors should not invest in the Fund solely based on the information in this material alone. Please refer to the Prospectus for further details of the risk factors.
The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI All Country Asia Pacific Index is a free float–adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Index is a free float-adjusted market capitalization-weighted index of Chinese equities that includes H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges, Hong Kong-listed securities known as Red chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China) and foreign listings (e.g. ADRs).
The MSCI China All Shares Index captures large and mid-cap representation across China A shares, B shares, H shares, Red chips (issued by entities owned by national or local governments in China), P chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g. ADRs). The index aims to reflect the opportunity set of China share classes listed in Hong Kong,Shanghai, Shenzhen and outside of China.
The MSCI China A Onshore Index captures large and mid cap representation across China securities listed on the Shanghai and Shenzhen exchanges. Index is for comparative purposes only and it is not possible to invest directly in an index.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets ex China Index is a free float-adjusted market capitalization-weighted index that captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries excluding China: Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Small Cap Index is a free float-adjusted market capitalization weighted small cap index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungry, India, Indonesia, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan Thailand, Turkey and United Arab Emirates.
The S&P Bombay Stock Exchange 100 (S&P BSE 100) Index is a free float–adjusted market capitalization–weighted index of 100 stocks listed on the Bombay Stock Exchange.
The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan.
The MSCI All Country Asia ex Japan Small Cap Index is a free float–adjusted market capitalization–weighted small cap index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Small Cap Index is a free float-adjusted market capitalization-weighted small cap index of the Chinese equity securities markets, including H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges,Hong Kong-listed securities known as Red Chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g., ADRs).
The MSCI India Index is a free float-adjusted market capitalization-weighted index of Indian equities listed in India.
Indexes are for comparative purposes only and it is not possible to invest directly in an index.
Commentary
Period ended 31 December 2023
For the year ending 31 December 2023, the Matthews Asia Small Companies Fund returned 11.27%, while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index returned 22.09%. For the fourth quarter of the year, the Fund returned 3.53% versus 8.73% for the benchmark.
Market Environment
2023 was a year of opportunities and challenges marked by two distinct narratives: the Federal Reserve’s ‘higher for longer’ interest rate strategy and China’s labored and ongoing struggle to recover from the pandemic. Elevated interest rates and a strong U.S. dollar posed headwinds while China’s travails impacted the economies of markets like Thailand. But there were also strong performances by markets like India which benefited from national infrastructure programs and strong domestic investor inflows. Smaller companies in emerging markets also thrived in many cases in 2023. And toward the end of the year there was a general consensus that inflation had peaked in the global economy and that the Fed would pivot toward cutting rates in 2024. This provided some tailwinds across markets.
Taiwan was the best-performing market in the benchmark index during 2023, followed by India, South Korea and Malaysia. China/Hong Kong was the worst-performer followed by Thailand and Indonesia. From a sector perspective, information technology (IT) was the top performer, supported by market exuberance over advancements in commercial artificial intelligence (AI), followed by industrials while consumer discretionary and real estate were the worst performers, impacted in part by China’s challenges in these sectors.
From a currency perspective, the Thai baht, Indonesian rupiah and Philippine peso appreciated against the U.S. dollar. The Malaysian ringgit, Chinese renminbi, South Korea won and India rupee depreciated against the greenback.
Performance Contributors and Detractors
From a country perspective, stock selection in South Korea was the top contributor to total and relative returns in 2023. Underweights in Thailand and Singapore supported relative performance while stock selection in Indonesia was a positive contributor to returns. On the flip side, an overweight and stock selection in China/Hong Kong was by far the biggest detractor to total and relative returns in the period. As the year progressed, markets grew more pessimistic about the prospects of China’s economic recovery, for a turnaround in its real estate sector and for an improvement in consumer sentiment. In our view, the MSCI AC Asia ex Japan Small Cap Index has a much smaller allocation to China than is warranted as it doesn’t have mainland A-shares representation and this accounts for the bulk of the small-cap investment universe in China. An underweight and stock selection in India also impacted relative performance as did an underweight in Taiwan.
At the sector level, an underweight and stock selection in real estate and consumer staples contributed the most to relative returns in the period. An overweight in financials also contributed. In contrast, stock selection in industrials was the greatest detractor to relative performance in 2023. Stock selection in IT and a slight overweight and stock selection in consumer discretionary also detracted.
From a holdings perspective, Ecopro BM, a South Korean cathode maker, Shriram Finance, an Indian financial services provider, and Elite Material, a Taiwanese maker of base materials for the printed circuit board (PCB) industry, were among the top contributors to total and relative returns in the year. Ecopro BM’s share price rallied on the expectations of strong pickup in orders from U.S. battery manufacturing capex spend. Shriram continued to deliver strong results and, given its very attractive valuations, the stock performed well. Elite Material did well as the market assessed positively the company’s dominant position in the key raw material involved in making printed circuit boards for high performance chips used for applications such as AI.
On the other hand, China consumption-oriented names such as Hainan Meilan International Airport, Beijing Capital International Airport and Xtep International, a sporting goods company, were among the biggest detractors to total and relative returns. The Chinese airport operators were weak on the back of reduced expectations on the rebound in consumption broadly, and in air travel services, in particular, as 2023 progressed. We remain positive on the longer-term outlook for international travel in the case of Beijing Capital International Airport and for domestic tourist arrivals in the case of Hainan Meilan, despite near-term headwinds as people tilt their travel budgets internationally.
Notable Portfolio Changes
In 2023, we participated in the initial public offering (IPO) of Wuxi XDC. The company is an affiliate of Wuxi Biologics, a leading Chinese contract, development and manufacturing entity. XDC specializes in bioconjugates, including anti-body drug conjugates, a promising area of growth within the biotech industry globally. Among our exits, we sold Lemon Tree, an Indian mid-market hotel chain operator, to take profits, and sold our position in Bank Tabungan Negara in Indonesia to deploy capital elsewhere.
Outlook
Today, we believe the Asia ex Japan region contains many companies with solid business models and quality management. In addition, U.S. interest rates are looking downward which should create some macro tailwinds for the coming year. As well as the macro landscape and global trade, our focus in 2024 will be on key emerging markets that are generating robust growth, like India, and those that are challenged, like China.
Longer term, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
We believe small companies in Asia offer long-term growth opportunities given their innovation and domestic consumption orientation while also being less exposed to regulatory and geo-political risks. We continue to find quality businesses at attractive valuations in this asset class.
Rolling 12 Month Returns For the period ended 31/03/2024 - I (Acc)
Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg