Matthews China Fund

Period ended 31 March 2020

For the quarter ending 31 March 2020, the Matthews China Fund returned -10.32% while its primary benchmark, the MSCI China Index returned -10.22%. The Fund's secondary benchmark, the MSCI China All Shares Index, returned -9.88%.

Market Environment:

Chinese equities were negative in the quarter, but held up notably better than the U.S. and global equity markets. In January, the U.S. and China signed phase one of a trade agreement, which was light on specifics but represented an improvement in rhetoric. However, Chinese equities experienced fresh volatility later in the month as investors feared fallout from the coronavirus. Chinese authorities acted decisively, limiting internal travel and controlling its borders while working with world health organizations to control the outbreak.

Chinese equities were then flat in February. The slowdown in the percentage rise in new virus cases along with comprehensive policy action helped stabilize sentiment within Chinese markets, especially A-shares. Policy actions meant to assist small- and medium-size enterprises were implemented including an increase in loan quotas; lowering of borrowing rates; a delay in loan repayments; and VAT tax relief. Nevertheless, a temporary downturn in economic activity appeared inevitable driven by the travel cancellations by incoming and outbound tourists, along with severely diminished consumer activity.

In March, a further slowdown in the percentage rise in new coronavirus cases in China helped stabilize investor sentiment within Chinese markets. China's government hinted toward a “more proactive” fiscal policy opening the door to higher budget deficits and raising of debt quotas including local bond issuance for infrastructure projects. Recovery has begun. Factory workers are reporting back to work, local shops and restaurants are accepting walk-in customers and some travel restrictions are being lifted. Life in China began slowly normalizing. Economic disruption aside, global investors saw clear benefits to having some China exposure within their portfolios. Chinese equities diversified return streams and helped to dampen downside volatility.

Performance Contributors and Detractors:

From a sector perspective, the Fund's overweight to financials and underweight to communication services were relative detractors. In contrast, the Fund's lack of energy exposure contributed to relative performance, as oil prices collapsed in the quarter amid a price war between Saudi Arabia and Russia. Turning to stock selection, the Fund's holdings in financials were a detractor. Holdings in the information technology sector were relative contributors to performance.

A detractor among individual stocks was brokerage firm China International Capital Corp., which saw its price decline along with other financials in the quarter. China International Capital has a large institutional business engaged in investment banking activities. We believe China International Capital is the premier investment bank in China and has room to grow its investment-banking business. We continue to like the company's prospects over the longer term. A contributor among individual stocks was NAURA Technology Group, a leading domestic manufacturer of semiconductor equipment, with a diverse range of clients including foundries and LED manufacturers. The company benefits from the trend towards its clients looking for more local supply chain providers. With a relatively small market share, the company has an opportunity to ramp up quickly and an ability to scale up.

Notable Portfolio Changes:

During the quarter, we sold a handful of positions that appeared overvalued Positions sold remain on the team's watch list and we would consider purchasing again at more attractive reentry prices. We also took advantage of market conditions to add to existing holdings where valuations appeared more attractive. We also increased the quality and concentration of the portfolio by trimming some smaller/lower conviction holdings on valuation opportunities elsewhere.


While recognizing the significant health care and economic impacts of the crisis on China's citizens and businesses, economic activity is resuming in China. Most workers in China are back to work. In Wuhan, the epicenter of the COVID-19 outbreak, malls and many restaurants are open again. People continue to wear masks and domestic travel within China could resume as early as May. We believe China's central government now has a playbook on how to act more quickly at a micro level to contain the spread of the virus.

Considering risks to China's economy, we note that China is not immune to a global slowdown in economic growth. At the same time, there is increased discussion of a possible stimulus from Chinese policymakers. Moreover, the Fund's holdings tend to have strong cash flows and strong competitive moats. This may enable them to weather a more prolonged recovery phase and at the same time consolidate the market as smaller and less efficiently run businesses fall behind. Economic disruption may help better run companies strengthen their competitive positions.

Looking ahead, earnings are likely to be revised down meaningfully. Prior to the outbreak of the virus, Chinese businesses were forecasting a strong earnings cycle for 2020. As the impact of the virus begins to dissipate, we have reasons to believe that economic growth may remain healthy. There are fundamental reasons why the corporate growth earnings cycle in China can potentially restart as concerns about the coronavirus begin to recede. We expect that China's economy could show signs of recovery in the second half of 2020.

Rolling 12 Month Returns for the period ended 31 March 2020
Matthews China Fund 2020 2019 2018 2017 2016
I (Acc) (USD) -2.29% -5.73% 43.53% 22.17% -14.53%
MSCI China Index (USD) -5.66% -6.08% 39.15% 19.93% -18.66%
I (Acc) (GBP) 3.51% 1.39% 27.27% 40.92% -12.26%
MSCI China Index (GBP) -0.86% 1.11% 24.04% 37.85% -15.99%

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