Matthews China Fund

Period ended 30 September 2019

For the quarter ending 30 September 2019, the Matthews China Fund returned -4.74%, while its benchmark, the MSCI China Index, returned -4.67%.

Market Environment:

Chinese equities were down in the third quarter, succumbing to trade-related pressure and negative sentiment. U.S.-listed Chinese ADRs were particularly weak amid U.S–China trade tensions. Although the near-term outcome of trade negotiations remains unpredictable, a slowing U.S. economy could put pressure on U.S. President Donald Trump to negotiate as U.S. elections draw closer.

Meanwhile, Hong Kong protests and tensions continued. Looking back to an earlier protest, the umbrella movement of 2014 lasted for several months, so current protests could take time to subside. Notably, the portfolio has limited exposure to companies directly impacted by the protests. Hong Kong protests continued to be prominent in global headlines, contributing to negative sentiment among foreign investors.

On a positive note, domestically listed Chinese stocks, known as A-shares, generated attractive gains year to date, even as returns for Chinese stocks listed in Hong Kong were essentially flat for the same period. The notable divergence in returns indicates a more positive mindset among mainland Chinese investors toward local economic conditions, where domestic consumption remains healthy and continues apace.

Performance Contributors and Detractors:

From a sector perspective, the Fund's holdings in the financials, communication services and consumer discretionary sectors detracted from relative performance. A detractor among individual stocks was International, a travel booking site. Weakened sentiment on outbound travel from mainland China to Hong Kong and Taiwan due to the Hong Kong protests and government restrictions on individual travel to Taiwan dampened the company's near-term growth prospects. However, we continue to like the company's long-term prospects. Increased demand for travel services is a long-term, secular trend in China and Ctrip continues to diversify its revenue sources in catering to both increasing domestic as well as global travel among Chinese consumers.

Turning to contributors, the Fund's holdings in the health care, information technology and consumer staples sectors contributed to performance. A contributor among individual stocks was Sino Biopharmaceutical, a leading pharmaceutical drug manufacturer in China. Despite the government's push for affordable health care and the overhang of price cuts in generic drugs, Sino Biopharmaceutical has been executing well in terms of diversifying and enhancing its product mix to include more innovative oncology drugs, which have shown considerable growth. The company also has increased its spending on research and development in past years, and we believe it has built a sufficiently strong pipeline to capitalize on the growth of innovative drugs in China in the years ahead.

Notable Portfolio Changes:

During the quarter, we initiated a new position in Frontage Holdings, a health care services company that operates in both the U.S. and China. The company is a contract research organization providing integrated, scientifically driven product-development services throughout the drug discovery and development process that enables pharmaceutical and biotechnology companies to achieve their drug development goals. The company benefits from having operations in both the U.S. and China, the two largest pharmaceutical markets in the world, and is well-placed to capture growth opportunities in both markets.

We also initiated a position in China East Education, a vocational training company based in the eastern provincial capital of Hefei. The company operates schools that train graduates to work in services-based industries, such as food preparation, information technology support and auto-repair services. As services continue to make up the largest part of China's economy, we believe demand for skilled workers in these areas will rise.

During the quarter, we exited several smaller positions while streamlining the portfolio in favor of higher-conviction positions. Companies we exited included semiconductor equipment maker ASM Pacific Technology; fiberglass manufacturer China Jushi; petroleum refinery China Petroleum & Chemical; diary producer Inner Mongolia Yili Industrial; employee recruiter 51Job; and laminate producer Kingboard Holdings. We also exited some streaming media and entertainment companies, including iQiyi, Tencent Music Entertainment, and YY.


Following the reporting period, sales figures during China's semiannual holiday of Golden Week looked resilient as consumers continued to make upgrades in purchases. Domestic tourism remained robust and hotel bookings were up among travelers visiting family members within mainland China. Restaurant revenues also were up during the holidays, another sign of healthy consumer spending.

Meanwhile, U.S.–China trade tensions remain unresolved. The Chinese government continues to balance the long-term goal of deleveraging the economy and maintaining consumption-related growth. Thus far, the government has refrained from launching broad-based measures aimed at boosting growth within the economy. While we believe the pattern of targeted relief aimed at parts of the economy may continue, we also note that policymakers have considerable fiscal ability to step in, if necessary.

Domestic consumption and the growing services sector within China remain the primary drivers of China's growth. We see significant consumption growth coming from China's less-developed urban centers, which are often home to millions of inhabitants per city who have rising incomes and a strong interest to upgrade their quality of life. Our portfolio construction process, designed to identify the most compelling opportunities from the bottom up, will continue to look for quality growth companies with attractive, long-term secular growth potential.

Rolling 12 Month Returns for the period ended 30 September 2019
Matthews China Fund 2019 2018 2017 2016 2015
I (Acc) (USD) 2.62% 0.99% 33.75% 12.75% -8.14%
MSCI China Index (USD) -3.77% -2.05% 33.27% 13.18% -4.83%
I (Acc) (GBP) 8.69% 3.70% 29.47% 31.93% -1.96%
MSCI China Index (GBP) 1.83% 0.77% 29.03% 31.98% 1.85%

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 and emerging market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The Fund invests in holdings denominated in foreign currency, 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. Investments in a single-country fund may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. These and other risks associated with investing in the Fund can be found in the Prospectus.

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 International Capital Management, LLC (“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.

Sources: Brown Brothers Harriman (Luxembourg) S.C.A, Matthews Asia, FactSet Research Systems, Bloomberg