Matthews Asia Sustainable Future Fund Update
Portfolio manager Vivek Tanneeru says the Fund’s first year has been both challenging and rewarding.Subscribe Now
Asia is at the epicentre of many of the world’s most important sustainability challenges, from environmental issues to social inclusion and economic development, but these challenges also provide a unique investment case in our view.
We launched the Matthews Asia Sustainable Future Fund in July 2022 based on the belief that Asian companies with both innovative and scalable solutions can offer tremendous growth potential and generate attractive investment returns as well as driving positive environmental and social changes.
We also find that sustainability-oriented companies generally do a better job of not only identifying but also mitigating long-terms business risks. These companies are able to identify opportunities and threats emanating from environmental and societal trends and can position themselves to benefit from the opportunities while managing threats successfully. If a company is focused on doing the right things by their business and employees, it will also likely be a better place to work compared with its peers, and it may be better able to retain and attract talent.
“The first year of the Fund has shown that there is no substitute for focusing on stock selection.”
When a company is mindful of their environmental impact, it can potentially benefit their brand image and lower the likelihood of reputational damage. In addition, in our experience, sustainable companies are also more likely to be mindful of how investors view them and offer better alignment with minority shareholders.
Since launch, the Matthews Asia Sustainable Future Fund has demonstrated that a sustainable approach does not need to be at the expense of returns. On the contrary, despite a difficult year for Asian markets overall, the Fund generated 3.4% in excess of the returns generated by its benchmark, the MSCI AC Asia ex Japan Index, over the 12 months since its inception1. Holdings exposed to renewable energy, affordable health care and financial inclusion accounted for most of the positive performance.
In renewable energy, the Fund’s allocation to electric vehicle (EV) battery suppliers benefitted from U.S. efforts to localise battery supply chains as part of its Inflation Reduction Act (IRA). Currently around 98% of global batteries that go into EVs are made by Asian companies. U.S. moves to curtail China’s contribution to its domestic battery supplies have aided South Korean battery and component suppliers.
One such beneficiary was South Korean cathode material company EcoPro BM, a name we have held since the Fund launched. It has been a top performer and while we remain positive on the prospects for the company, we have trimmed our position to take profit throughout the year.
In the social arena, key areas for the portfolio have been providing access to affordable health care and accelerated health-care innovation. The Fund has invested in generics but today we think there are many more innovative treatments in the fields of cancer therapies and neurological diseases and in the area of medical devices that offer attractive long-term growth opportunities.
Health care and financial inclusion
Financial inclusion is another key segment that has shone over the past year. South and Southeast Asia are leaders in this field. Many of the world’s largest and most scaled micro finance companies are based in India, for example.
In these two areas, top contributors to performance have included Legend Biotech, a Chinese biotech company, and Shriram Finance, a financial services company. The latter has put socioeconomic advancement at the core of its business by providing financing to truck drivers who often don’t qualify for bank loans due to a lack of stable income.
On the flip side, our Chinese or China-exposed holdings such as Full Truck Alliance, a Chinese freight marketplace operator, and Ginlong Technologies, a leading Chinese manufacturer and distributor of solar inverter, detracted as the market worried about the slow pace of the Chinese economic recovery and potential slowdown in solar installations in China next year, respectively. We remain positive about the long-term prospects of these companies and our base case remains a steady, not spectacular, recovery of China’s economy over the coming quarters and attractive mid-long term growth prospects for solar energy globally.
From a country perspective, we split the portfolio into three buckets. Some 70% of the Fund is invested in emerging Asia, namely China and India, 25% is held in developed Asia (South Korea, Taiwan, Singapore and Hong Kong) and the remaining 5% is in frontier markets.
In the 12 months since inception, South Korea and Taiwan were the biggest contributors to relative performance while our overweight in China was by far the biggest detractor. Given China represents around 42% of the benchmark index, approaching the size of the next three largest-markets combined, it can have an outsized impact on overall performance.
The last year has been tough for investors in China. It’s the only Asian market that is down over 12 months to 31 July 2023, hampered by a cocktail of softness in real estate, exports and employment markets, and in consumer sentiment, which have combined to drag down near-term economic growth prospects.
Looking forward, we do expect some supportive measures from different parts of the Chinese government including the central bank. While at the baseline, the economy will no longer grow at historical annual rates of 8%-10%, in our view a gradual return to a sustainable 4%-5% annual growth should hopefully stabilize economic activity.
The first year of the Matthews Asia Sustainable Future Fund has shown that there is no substitute for focusing on stock selection. In some periods, not owning the mega-cap technology stocks in areas like social media and platform companies, due to our sustainable investment remit, can be painful. But in our view, by only investing in what we believe to be well-governed companies that also proactively manage long-term risks associated with regulatory challenges we are not limiting the opportunity set or return opportunity but managing potential undue risk while seeking returns elsewhere. For example, the Fund’s 60% allocation to small-cap and medium-cap companies has been a source of above-benchmark returns since inception to 31 July 2023.
We believe that our framework of seeking companies that are either at the forefront of addressing global sustainability challenges, avoid causing significant environmental or social harm, or have good governance practices, not only differentiates our approach but also taps into powerful global trends.
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.
1 Data as of 31 July 2023. 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. Source: Brown Brothers Harriman (Luxembourg) S.C.A.