Investment Manager Report
We were pleased to launch the Matthews Asia Funds in February 2010. With the recent run-up in the markets and the return of more speculative behaviour and momentum-driven sentiment by some investors and commentators, it is important to outline Matthews’ investment philosophy.
The Companies We Seek
Of prime importance in our philosophy are our long-term focus, and the concepts of survivability and sustainability of businesses. This is partly based on an assessment of how relevant a business and its products will remain over time; no less important, however, is its balance sheet strength. Low levels of debt, coupled with lower than average volatility in margins and returns, give a company a better chance of surviving and sustaining growth. Not too distantly related is our focus on cash flow and dividends. First, they indicate value; second, they are indicators of corporate governance; third, over the long term, dividends have accounted for a large portion of equity investors’ total returns. Also important has been our long-standing focus on Asia’s domestic demand opportunities. The growth in wealth of the Asian household has been a stable secular trend and one that we expect to continue. Just as important, the types of businesses in these sectors tend to be much stronger franchises than those producing for the export market.
Finally, an important part of our strategy is our bias toward mid- and small-capitalisation companies. This is partly because of growth prospects for these companies—which tend to be higher—and also because such growth tends to be reasonably priced relative to large caps.
Cyclical Companies Are Not Our Focus
Equally important is the Funds’ relatively low weighting in materials stocks. These businesses remain very cyclical—with the health of this global industry still very reliant on commodity prices and, therefore, underlying monetary conditions in the world. Added to this is the likelihood that over time, after having built up their modern infrastructure, the GDP of Asian countries is likely to become less intensive in the use of hard commodities. As an offshoot of this, our exposure to Australia is relatively light, given its weight in the region (on a market capitalisation basis). Of course, this is partly a reflection of the high weighting to materials companies in the country and the linkage between the commodity cycle and the Australian dollar.
Assessing The Risks
While we do not wish to be inflexible, these biases are a part of our long-term thinking and strategic outlook for investing in the region. Nevertheless, we realise that at times momentum may take over the market and businesses with exciting near-term performance characteristics outperform those with less stellar but more solid long-term prospects.Our portfolio managers are mindful of these various risks. Nevertheless, it is difficult to sacrifice long-term strategic principle for short-term tactical gain. It presumes greater foresight as to the degree and duration of any cycle than we are comfortable claiming.
It is a privilege to serve as your investment advisor.
Robert J. Horrocks, PhD
Chief Investment Officer
Matthews International Capital Management, LLC