Matthews China Fund

Period ended 30 June 2020

For the first half of 2020, the Matthews China Fund returned 10.82%, while its benchmark, the MSCI China Index, returned 3.58% over the same period. For the quarter ending 30 June 2020, the Matthews China Fund returned 23.57%, while the benchmark returned 15.37%.

Market Environment:

Chinese equities were resilient in the first half. Our colleagues on the ground in China report the country was highly successful at flattening its curve of COVID-19 infections through testing, contact tracing and mask adoption. Reports from our local offices and official economic data imply that recovery is well under way. Factory workers have reported to the assembly line, local shops and restaurants are accepting walk-in customers and some travel restrictions are being lifted. Life in China is slowly normalizing. However in the second quarter, volatility in Chinese equities resurfaced as the Chinese government proposed—and eventually passed—an amendment to the national security laws in Hong Kong. This action attracted international attention and protests from Hong Kong citizens. Uncertainty around this legislation combined with feared backlash from foreigners caused additional pockets of volatility. However, Chinese equities were strong diversifiers for global investors, posting double-digit positive returns in the first half, while U.S. equities were slightly negative. The Chinese government's track record of willingness and ability to support markets and their economy during volatile times has become a source of confidence for investors.

Performance Contributors and Detractors:

Strong stock selection drove the Fund's outperformance in the first half. From a sector perspective, stock selection in the consumer discretionary and information technology sectors contributed to relative performance. In the consumer discretionary space, strong online sales amid the COVID-19 pandemic benefited the Fund's holdings and we continue to see ecommerce attracting new consumers. A contributor among individual stocks was Meituan Dianping, China's largest food delivery service. The company enjoys a dominant market share in food delivery, capturing roughly 60% of the market. In addition to its core operations around food delivery, the company also runs a successful business review service, similar to Yelp, as well as a travel booking service for hotels. Forecasts of increased profitability caused the stock to rise in May. Meituan Dianping is also leveraging the benefits of scale to drive down its logistics costs.

Turning to detractors, stock selection in the health care sector was a slight detractor from relative performance. The portfolio remains overweight the sector relative to the benchmark, which was a plus for relative performance. However, one health care stock in the portfolio experienced share price weakness amid market volatility. Sinopharm is China's largest pharmaceutical distributor. It is one of China's few distributors with a meaningful nationwide presence. Sinopharm saw weak results in the first half of 2020 owing to negative economic impact from the COVID-19 outbreak. Hospital visitation during the pandemic fell, which reduced pharmaceutical distribution needs. At the same time, the company saw increased operational expenses associated with the prevention and containment of the virus situation. Sinopharm trades at attractive valuations and commands a still large and dominant presence in China's health care distribution industry. We continue to monitor this position for updates and operational improvements.

Notable Portfolio Changes:

In the second quarter, we added two new communication services stocks, as well as a utilities stock. Demand for digital entertainment and online social media platforms continues to grow and is being accelerated by social distancing conventions. Joyy Inc. is a social media platform we recently added that allows users to interact in real time. Utilities stocks experienced price declines in the reporting period, creating the opportunity to pick up a high-quality provider at a very attractive valuation. ENN Energy Holdings is one of the largest clean energy distributors in China. We also exited a position in outdoor advertising amid falling ad sales company Focus Media, while also reducing exposure to U.S.-listed Chinese ADRs. We also sought to take advantage of the volatility to increase the quality and concentration of the portfolio by trimming some smaller/lower conviction holdings on valuation opportunities elsewhere.


While China's economic recovery is still in very early stages, recent data suggests the pace and progress of the recovery may be sustainable. CapEx spending among businesses, auto sales among consumers and property sales all began to rebound in the second quarter of 2020. This is not to suggest that China is out of the woods yet. The potential for a second wave of virus infections remains, particularly as Chinese citizens return home from abroad. Unemployment remains high in China, as it does globally, which could create a drag on spending. In addition, a slowing global economy could slow China's rebound.

On the positive side, China has done a much better job of flattening its curve of new infections than any other large economy. Public health policy is, in our view, robust and run by the central government, providing coordinated response. China still has considerable dry powder in its arsenal of stimulus tool, and long-term secular growth trends in China remain in play. Consumers continue to seek upgrades across all facets of quality of life. Some of these upgrades may be delayed, but we believe consumer behavior remains remarkably consistent over the long term.

While additional volatility could lie ahead, we believe the long-term prospects for Chinese companies with strong competitive positions remain attractive. The pandemic has enabled some strong players to become even stronger and gain market share. Moreover, periods of market disruption have historically spurred new opportunities for innovation and business investment.

Rolling 12 Month Returns for the period ended 30 June 2020
Matthews China Fund 2020 2019 2018 2017 2016
I (Acc) (USD) 21.92% -2.89% 24.89% 38.57% -23.97%
MSCI China Index (USD) 13.28% -6.55% 21.42% 32.34% -23.20%
I (Acc) (GBP) 26.13% 0.54% 23.25% 43.50% -11.13%
MSCI China Index (GBP) 16.68% -3.06% 19.46% 36.19% -9.65%

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