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Turn to Smaller Companies for Asia Growth

Portfolio manager Vivek Tanneeru says active research is key to finding innovative and dynamic companies.

  • 28/02/2023
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At Matthews Asia, we think small companies are a great way to generate alpha, whatever the market conditions. If we look at the past three years, for example, a combination of the COVID-19 pandemic, a regulatory crackdown in China and a global inflation spike saw many growth companies struggling. This impacted Asian equity performance. The MSCI AC Asia ex Japan Index posted average annual returns of 3.04% versus 11.08% for the MSCI AC Asia ex Japan Small Cap Index in the three-year period ending 31 January 2023. The Matthews Asia Small Companies Fund outperformed both indices with average annual returns of 17.74% over this period.1

There are two core tenets that drive the Fund’s investment philosophy. The first is that investing in smaller companies is a fundamental way to access the spending power of the fast-growing, large middle class in Asia. Large consumer companies, especially multi-nationals, can be good at what they do but they can also be slow in responding to the ever-changing needs of consumers. Smaller, local companies, in our view, are better at identifying and responding to commercial and consumer trends and creating products and services to address them.

The second tenet is that Asia is a leader in innovation, which we think will be one of the major economic growth drivers and value creators for the region in the next 30 years. The region has not only invested heavily in physical infrastructure but also in soft infrastructure such as education. This has led to strong economic growth, the creation of a well-educated and increasingly productive workforce, and broader and deeper capital markets. As a result, we have seen an explosion of innovative businesses coming to the market.

“While consumer and innovation stories are exciting, what matters for investor returns is finding the right companies. Discovering the hidden gems has been critical to the Fund’s outperformance.” Vivek Tanneeru, Portfolio Manager

Active Research Uncovers Hidden Gems

Finding innovative businesses early in their life cycle is a big focus of the Fund. We track private companies and entrepreneurs before they go public and our track record shows we have participated in the initial public offerings (IPOs) of smaller companies that have quickly gone on to become much larger companies. Outside of the U.S., we believe China, and to a lesser extent India, are the only two markets in the world where a given small cap can double or triple sales in a short space of time and that is what makes Asia such an exciting place to be.

While consumer and innovation stories are important, what really matters for investor returns is finding the right companies. Roughly half of Asian small-cap companies have no research coverage. We aim to identify well-managed, underappreciated companies whose stocks have the potential to “re-rate” once they become noticed by the marketplace. In our view, the key to successful small-cap investing is to research companies thoroughly in order to find the winning combination of a sustainable business model and a quality management team.

Looking beyond the obvious names and discovering the hidden gems has been critical to the Fund’s outperformance. As an investment team, we conduct over 4,000 meetings a year and out of these we have been able to find what in our view are high-quality companies that are attractively valued and broadly undiscovered by the market.

Over the past three years, the Fund’s performance has held up well because of our focus on stock selection. Indeed in 2022, four of the 10 largest contributors to performance were growth companies despite the sell-off in the broader growth space. And while we consider China to be a very important market in our universe, our company-first, bottom-up focus has helped us adjust our weighting to China and mitigate the top-down headwinds it has encountered.

What we have demonstrated over the last few years, and over the longer term, is that this approach to small-cap investing may generate attractive returns that are on a par or exceed large-cap allocations while being relatively shielded from regulatory risks and offering diversification benefits. We believe this is just one of the many reasons why investors should consider an allocation to Asian small caps.

Vivek Tanneeru
Portfolio Manager
Matthews Asia


ROLLING 12 Months Returns

For the period ended 31/12/2022

Name

2022

2021

2020

2019

2018

INCEPTION DATE

Matthews Asia Small Companies Fund (USD)

-14.49%

22.19%

46.12%

17.53%

-14.53%

 30/04/2013

MSCI All Country Asia ex Japan Small Cap Index (USD)

-19.93%

21.23%

26.60%

7.58%

-18.63%

 

MSCI All Country Asia ex Japan Index (USD)

-19.36%

-4.46%

25.36%

18.52%

-14.12%

 

 

Source: Brown Brothers Harriman (Luxembourg) S.C.A.
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. The investment policy of the Fund was changed on 15 December 2021. The performance prior to this date was achieved under circumstances that no longer apply.

1 Data as of 31 January 2023, in USD, I (Acc) for the Fund. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than the original cost. Current performance may be lower or higher than performance shown. Investors investing in Funds denominated in non-USD should be aware of the risk of currency exchange fluctuations that may cause a loss of principal. Performance details provided are based on a NAV-to-NAV basis with any dividends reinvested,and are net of management fees and other expenses. The investment policy of the Fund was changed on 15 December 2021. The performance prior to this date was achieved under circumstances that no longer apply. Source: Brown Brothers Harriman (Luxembourg) S.C.


Risk Considerations

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.

Important Information
For Institutional/Professional Investors Only

This is a marketing communication. This document is not a Prospectus/Offering Document and does not constitute an offer to the public. No public offering or advertising of investment services or securities is intended to have taken effect through the provision of these materials. Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before making an investment decision. The current prospectus, Key Investor Information Document or other offering documents ("Offering Documents") contain this and other information. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.

The Fund is a sub-fund of Matthews Asia Funds SICAV, an umbrella fund, with segregated liability between sub-funds, established as an open-ended investment company with variable capital and incorporated with limited liability under the laws of Luxembourg.

Investment involves risk. Past performance is no guarantee of future results. The value of an investment in the Fund can go down as well as up. This is not intended for distribution or use in any jurisdiction in which such distribution, publication, issue or use is not lawful. Investors should not invest in a Fund solely based on the information in this document. An investment in Matthews Asia Funds may be subject to risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Additionally, investing in emerging and frontier securities involves greater risks than investing in securities of developed markets, as issuers in these countries generally disclose less financial and other information publicly or restrict access to certain information from review by non-domestic authorities. Emerging and frontier markets tend to have less stringent and less uniform accounting, auditing and financial reporting standards, limited regulatory or governmental oversight, and limited investor protection or rights to take action against issuers, resulting in potential material risks to investors. Pandemics and other public health emergencies can result in market volatility and disruption. The current prospectus, Key Investor Information Document or other offering documents (“Offering Documents”) contain this and other information and can be obtained by visiting global.matthewsasia.com. It is the responsibility of any persons wishing to subscribe for shares to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdictions. Prospective investors should inform themselves as to the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares, and any foreign exchange restrictions that may be relevant thereto. 

An investment in the Matthews Asia Funds is not available in all jurisdictions. The Fund’s shares may not be sold to citizens or residents of the United States or in any other state, country or jurisdiction where it would be unlawful to offer, solicit an offer for, or sell the shares. No securities commission or regulatory authority has in any way passed upon the merits of an investment in the Fund or the accuracy or adequacy of this information or the material contained herein or otherwise.

Matthews Asia is the brand for Matthews International Capital Management, LLC and its direct and indirect subsidiaries.

The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock of markets of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.

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, Philippines, Singapore, South Korea, Taiwan and Thailand.

Indices are for comparative purposes only and it is not possible to invest directly in an index.

In Singapore, this document is available to, and intended for Institutional Investors under Section 304 of the Securities and Futures Act. It should not be circulated or distributed to the retail public in Singapore.

In the UK, this document is only made available to professional clients and eligible counterparties as defined by the Financial Conduct Authority (“FCA”). Under no circumstances should this document be forwarded to anyone in the UK who is not a professional client or eligible counterparty as defined by the FCA. Issued in the UK by Matthews Global Investors (UK) Limited (“Matthews Asia (UK)”), which is authorised and regulated by the FCA, FRN 667893.

 

IMPORTANT INFORMATION

The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies. Past performance is no guarantee of future results. 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.