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 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 31/10/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asia Small Companies Fund (USD)
-5.29%
-10.91%
1.79%
16.02%
9.20%
13.38%
7.38%
7.03%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
-4.75%
-7.76%
6.95%
19.76%
7.45%
8.06%
4.03%
3.77%
Matthews Asia Small Companies Fund (GBP)
-4.52%
-5.77%
0.72%
9.78%
11.59%
14.45%
n.a.
10.85%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
-4.19%
-2.20%
6.02%
13.63%
9.75%
9.18%
n.a.
7.64%
Matthews Asia Small Companies Fund (EUR)
-5.55%
-7.51%
2.22%
8.18%
n.a.
n.a.
n.a.
7.97%
30/12/2020
MSCI All Country Asia ex Japan Small Cap Index (EUR)
-4.59%
-3.79%
7.99%
11.98%
n.a.
n.a.
n.a.
6.97%
As of 30/09/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asia Small Companies Fund (USD)
-1.19%
0.75%
7.48%
19.05%
11.75%
12.19%
8.56%
7.65%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
-2.05%
2.89%
12.28%
22.12%
9.28%
6.35%
4.82%
4.29%
Matthews Asia Small Companies Fund (GBP)
2.20%
3.95%
5.49%
7.23%
13.44%
13.60%
n.a.
11.50%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
1.69%
7.17%
10.66%
11.69%
11.39%
7.77%
n.a.
8.20%
Matthews Asia Small Companies Fund (EUR)
1.31%
3.22%
8.22%
9.48%
n.a.
n.a.
n.a.
10.50%
30/12/2020
MSCI All Country Asia ex Japan Small Cap Index (EUR)
0.41%
6.02%
13.19%
13.00%
n.a.
n.a.
n.a.
9.04%
For the years ended December 31st
Name
2022
2021
2020
2019
2018
2017
2016
2015
2014
Matthews Asia Small Companies Fund (USD)
-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)
-19.93%
21.23%
26.60%
7.58%
-18.63%
33.84%
-2.05%
-3.28%
2.56%
Matthews Asia Small Companies Fund (GBP)
-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)
-9.84%
22.35%
22.69%
3.43%
-13.57%
22.25%
16.83%
2.32%
n.a.
Matthews Asia Small Companies Fund (EUR)
-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)
-14.68%
30.44%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
For the period ended 30/09/2023
Name
2023
2022
2021
2020
2019
Inception Date
Matthews Asia Small Companies Fund (USD)
19.05%
-20.74%
47.90%
22.81%
3.71%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
22.12%
-24.40%
41.35%
13.83%
-8.40%
Matthews Asia Small Companies Fund (GBP)
7.23%
-3.45%
41.02%
17.84%
9.98%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
11.69%
-8.69%
35.53%
8.50%
-3.06%
Matthews Asia Small Companies Fund (EUR)
9.48%
-5.87%
n.a.
n.a.
n.a.
30/12/2020
MSCI All Country Asia ex Japan Small Cap Index (EUR)
13.00%
-10.57%
n.a.
n.a.
n.a.
Source: Brown Brothers Harriman (Luxembourg) S.C.A.
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 31/10/2023)
Fund
Benchmark
Number of Positions
67
1,707
Weighted Average Market Cap
$3.7 billion
$1.8 billion
Active Share
97.7
n.a.
P/E using FY1 estimates
15.2x
13.7x
P/E using FY2 estimates
12.5x
11.7x
Price/Cash Flow
10.9
6.9
Price/Book
2.2
1.3
Return On Equity
10.1
12.6
EPS Growth (3 Yr)
27.6%
22.7%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 31/10/2023)
Category
3YR Return Metric
Alpha
2.74%
Beta
0.86
Upside Capture
79.97%
Downside Capture
72.4%
Sharpe Ratio
0.4
Information Ratio
0.16
Tracking Error
10.88%
R²
66.06
2.74%
Alpha
0.86
Beta
79.97%
Upside Capture
72.40%
Downside Capture
0.40
Sharpe Ratio
0.16
Information Ratio
10.88%
Tracking Error
66.06
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 31/10/2023)
Sector Allocation
Country Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Industrials
26.2
16.3
9.9
Information Technology
21.2
21.3
-0.1
Health Care
16.3
9.9
6.4
Financials
15.2
9.4
5.8
Consumer Discretionary
12.8
11.0
1.8
Real Estate
4.2
7.4
-3.2
Communication Services
2.4
4.1
-1.7
Consumer Staples
1.8
5.2
-3.4
Materials
0.0
12.0
-12.0
Utilities
0.0
1.9
-1.9
Energy
0.0
1.7
-1.7
Liabilities in Excess of Cash and Other Assets
-0.1
0.0
-0.1
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
37.2
13.9
23.3
India
29.5
31.2
-1.7
Taiwan
14.2
24.9
-10.7
South Korea
8.5
15.3
-6.8
Philippines
4.2
0.9
3.3
Vietnam
3.0
0.0
3.0
Thailand
1.5
3.8
-2.3
Indonesia
1.3
2.4
-1.1
Bangladesh
0.5
0.0
0.5
United States
0.3
0.0
0.3
Singapore
0.0
4.6
-4.6
Malaysia
0.0
2.9
-2.9
Liabilities in Excess of Cash and Other Assets
-0.1
0.0
-0.1
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)
6.2
0.0
6.2
Mid Cap ($3B-$10B)
44.3
14.4
29.9
Small Cap (under $3B)
49.6
85.6
-36.0
Liabilities in Excess of Cash and Other Assets
-0.1
0.0
-0.1
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.
Ratings
Ratings based on risk-adjusted return
(as of 31/10/2023)
CATEGORY: Asia ex-Japan Small/Mid-Cap Equity
OVERALL
3 YEAR
5 YEAR
10 YEAR
OVERALL
5 stars
3 YEAR
5 stars
5 YEAR
5 stars
10 YEAR
5 stars
FE FundInfo Crown Fund Rating
(as of 24/07/2023)
Past performance is no guarantee of future results. High ratings and rankings does not assure favorable performance.
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 Porfolio Manager at Matthews and co-manages the firm’s Emerging Markets Small Companies, Emerging Markets Discovery, Asia Small Companies and Asia ex Japan Total Return Equity 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 quarter ending 30 September 2023, the Matthews Asia Small Companies Fund returned 0.75%, while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index, returned 2.89%.
Market Environment:
During the quarter, U.S. 10-year bond yields rose meaningfully on market concerns over interest rates staying higher for longer. With materially higher yields on offer, equity market relative valuations in relation to bonds deteriorated, leading to weak equity market performance toward the end of the quarter. Oil prices also firmed up on the back of concerted efforts by OPEC to cut supplies.
India was the best-performing major market in the benchmark index during the quarter. Malaysia, Indonesia and Taiwan also posted gains. China/Hong Kong was the worst-performing major market while Singapore and the Philippines also posted losses. From a sector perspective, energy, materials and financials were the best-performers while real estate and consumer discretionary were the worst performers.
From a currency perspective, only the Hong Kong dollar in the region appreciated against the U.S. dollar during the quarter. The Chinese renminbi, Malaysian ringgit and the Indian rupee, which all depreciated against the dollar, were among the other best-performing currencies on a relative basis. The Taiwanese dollar, the Indonesian rupiah and the Thai baht were among the worst performers.
Performance Contributors and Detractors:
From a country perspective, our underweight and stock selection in South Korea was the top contributor to relative performance in the quarter. Our lack of exposure to Singapore benefited performance amid declines in that market and an off-benchmark allocation to Vietnam contributed positively to relative returns. On the other hand, an overweight and stock selection in China/Hong Kong was the biggest combined drag on relative performance, followed by stock selection in India and an overweight in the Philippines.
From a sector perspective, stock selections in industrials and health care were the top contributors to relative performance in the period, while stock selection in information technology (IT) was the biggest detractor, followed by our lack of exposure to materials and energy.
From a stock perspective, Ecopro BM was the biggest contributor to total and relative returns in the period. The South Korean cathode maker gained on the back of strong contract backlog buildup on account of orders from U.S. original equipment manufacturers (OEM) to South Korean battery cell makers. We significantly trimmed our position during the quarter as the stock performed very well. Elite Material, a Taiwanese maker of key raw materials that go into printed circuit boards used in AI servers, was also a top contributor.
On the other hand, China-based Flat Glass Group was the biggest detractor to total returns in the period. The company fell on the back of general weakness in the solar-supply chain amid market concerns over the 2024 demand outlook following better-than-expected 2023 demand out of China, and the pace of capacity addition in the industry. We remain positive on the long-term growth prospects for the industry and Flat Glass’s leadership position within it.
Our Chinese airport holdings, Beijing Capital International Airport (BCIA) and Hainan Meilan International Airport, also detracted. BCIA fell on account of market worries about a slower-than-expected recovery in foreign travel and concerns over increased competition from Beijing Daxing International Airport. Hainan Meilan endured negative sentiment on concerns over decreasing average duty free-spend from travelers as a result of foreign travel resuming and competing duty-free service shops taking market share. We continue to see long-term value in both operators given they are gateway airports to their respective regions and have attractive valuations.
Notable Portfolio Changes:
The Fund initiated some new positions in the quarter including buying shares in the initial public offering (IPO) of Zaggle Prepaid Ocean Service, a leading software-as-a-service (SaaS)/fintech platform that offers payment instruments, mobile applications and application programming interfaces (API) integrations. It is an early-stage growth company that is positioned well to compound earnings over the long-term, in our view. We exited a position in DreamFolks Services, an Indian airport services-aggregator platform, as we found better use of capital elsewhere.
Outlook:
The Federal Reserve’s interest rate strategy and expectation of its evolution were the most important variables impacting the performance of emerging markets over the last few quarters. Notwithstanding the recent increase in 10-year bond yields, we believe the Fed is near or at the end of the interest rate hiking cycle so the focus will now shift to assessing the cumulate impact of all the rate hikes on economic growth prospects over the coming quarters.
Our focus on the end of 2023 and into 2024 will be on assessing how China’s economic recovery and growth prospects play out and how they might affect the dynamics of other emerging markets. In addition, OPEC’s efforts to keep oil prices high will require ongoing, careful monitoring.
Over the coming years, 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 30/09/2023 - I (Acc)
Name
2023
2022
2021
2020
2019
Inception Date
Matthews Asia Small Companies Fund (USD)
19.05%
-20.74%
47.90%
22.81%
3.71%
30/04/2013
MSCI All Country Asia ex Japan Small Cap Index (USD)
22.12%
-24.40%
41.35%
13.83%
-8.40%
Matthews Asia Small Companies Fund (GBP)
7.23%
-3.45%
41.02%
17.84%
9.98%
30/04/2014
MSCI All Country Asia ex Japan Small Cap Index (GBP)
11.69%
-8.69%
35.53%
8.50%
-3.06%
Matthews Asia Small Companies Fund (EUR)
9.48%
-5.87%
N.A.
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 30 September 2023
For the quarter ending 30 September 2023, the Matthews Asia Small Companies Fund returned 0.75%, while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index, returned 2.89%.
Market Environment:
During the quarter, U.S. 10-year bond yields rose meaningfully on market concerns over interest rates staying higher for longer. With materially higher yields on offer, equity market relative valuations in relation to bonds deteriorated, leading to weak equity market performance toward the end of the quarter. Oil prices also firmed up on the back of concerted efforts by OPEC to cut supplies.
India was the best-performing major market in the benchmark index during the quarter. Malaysia, Indonesia and Taiwan also posted gains. China/Hong Kong was the worst-performing major market while Singapore and the Philippines also posted losses. From a sector perspective, energy, materials and financials were the best-performers while real estate and consumer discretionary were the worst performers.
From a currency perspective, only the Hong Kong dollar in the region appreciated against the U.S. dollar during the quarter. The Chinese renminbi, Malaysian ringgit and the Indian rupee, which all depreciated against the dollar, were among the other best-performing currencies on a relative basis. The Taiwanese dollar, the Indonesian rupiah and the Thai baht were among the worst performers.
Performance Contributors and Detractors:
From a country perspective, our underweight and stock selection in South Korea was the top contributor to relative performance in the quarter. Our lack of exposure to Singapore benefited performance amid declines in that market and an off-benchmark allocation to Vietnam contributed positively to relative returns. On the other hand, an overweight and stock selection in China/Hong Kong was the biggest combined drag on relative performance, followed by stock selection in India and an overweight in the Philippines.
From a sector perspective, stock selections in industrials and health care were the top contributors to relative performance in the period, while stock selection in information technology (IT) was the biggest detractor, followed by our lack of exposure to materials and energy.
From a stock perspective, Ecopro BM was the biggest contributor to total and relative returns in the period. The South Korean cathode maker gained on the back of strong contract backlog buildup on account of orders from U.S. original equipment manufacturers (OEM) to South Korean battery cell makers. We significantly trimmed our position during the quarter as the stock performed very well. Elite Material, a Taiwanese maker of key raw materials that go into printed circuit boards used in AI servers, was also a top contributor.
On the other hand, China-based Flat Glass Group was the biggest detractor to total returns in the period. The company fell on the back of general weakness in the solar-supply chain amid market concerns over the 2024 demand outlook following better-than-expected 2023 demand out of China, and the pace of capacity addition in the industry. We remain positive on the long-term growth prospects for the industry and Flat Glass’s leadership position within it.
Our Chinese airport holdings, Beijing Capital International Airport (BCIA) and Hainan Meilan International Airport, also detracted. BCIA fell on account of market worries about a slower-than-expected recovery in foreign travel and concerns over increased competition from Beijing Daxing International Airport. Hainan Meilan endured negative sentiment on concerns over decreasing average duty free-spend from travelers as a result of foreign travel resuming and competing duty-free service shops taking market share. We continue to see long-term value in both operators given they are gateway airports to their respective regions and have attractive valuations.
Notable Portfolio Changes:
The Fund initiated some new positions in the quarter including buying shares in the initial public offering (IPO) of Zaggle Prepaid Ocean Service, a leading software-as-a-service (SaaS)/fintech platform that offers payment instruments, mobile applications and application programming interfaces (API) integrations. It is an early-stage growth company that is positioned well to compound earnings over the long-term, in our view. We exited a position in DreamFolks Services, an Indian airport services-aggregator platform, as we found better use of capital elsewhere.
Outlook:
The Federal Reserve’s interest rate strategy and expectation of its evolution were the most important variables impacting the performance of emerging markets over the last few quarters. Notwithstanding the recent increase in 10-year bond yields, we believe the Fed is near or at the end of the interest rate hiking cycle so the focus will now shift to assessing the cumulate impact of all the rate hikes on economic growth prospects over the coming quarters.
Our focus on the end of 2023 and into 2024 will be on assessing how China’s economic recovery and growth prospects play out and how they might affect the dynamics of other emerging markets. In addition, OPEC’s efforts to keep oil prices high will require ongoing, careful monitoring.
Over the coming years, 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 30/09/2023 - I (Acc)
Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg