Matthews Asia Dividend Fund


Period ended 30 September 2020

For the quarter ending 30 September 2020, the Matthews Asia Dividend Fund returned 17.63%, while its benchmark, the MSCI All Country Asia Pacific Index, returned 8.69%.

Market Environment:

Asian equity markets further extended its strong rebound during the quarter. The broad MSCI Asia Pacific Index fully recovered the losses it suffered from the earlier COVID-19 market meltdown, finishing the third quarter with a positive year-to-date return. With an effective control of the pandemic, China has seen its economic recovery pace gain speed. Elsewhere in Asia, a combination of continued monetary easing policy and fiscal stimulus measures provided the much needed backstop to the real economy and bolstered market sentiment. In addition, the U.S. dollar weakened markedly during the quarter against most Asian currencies, another tailwind for emerging markets equity performance.

Performance Contributors and Detractors:

During the third quarter, the Fund posted strong performance driven mainly by positive stock selection and sector allocation. By country, China/Hong Kong and Japan were the top contributors to performance. By sector, consumer discretionary and consumer staples added most to the performance. Minth Group, our largest holding in the Fund, appreciated 52% in the quarter and was among the top performers in the quarter. A leading auto parts manufacturer from China, Minth Group navigated pandemic related disruptions well and further established its foothold in the global electric vehicle supply chain by gaining key industry leaders as clients. Another top contributor was LIXIL Group, a global supplier of housing fixtures listed in Japan. Under the leadership of CEO Kinya Seto, the company has been refocusing on its core businesses, streamlining cost structure and improving capital allocation. We are optimistic on the company's strategic directions and believe its reforms will boost shareholder returns over the long run.

On the other hand, an underweight in the Philippines and India were slight detractors from relative performance. Additionally, our underweight in the information technology sector also detracted moderately. By individual securities Yuexiu Transport Infrastructure was the top performance detractor. A toll road asset owner in mainland China, Yuexiu's earnings for the first-half of the year were severely impacted by the COVID-19 outbreak. Despite the near-term headwind, Yuexiu's underlying toll road operations started to recover during the third quarter with an improving traffic data. With a cash-generative business model, we believe Yuexiu should be able to restore its earnings power and its dividend growth going into 2021.

Notable Portfolio Changes:

Among the new positions we initiated during the quarter were several regional insurance businesses, namely Dai-ichi Life in Japan, Cathay Financials in Taiwan, and QBE in Australia. As these insurance businesses generally maintain a large fixed-income investment portfolio, their share performance is often sensitive towards a steepening yield curve. From a portfolio construction standpoint, we believe these interest-rate sensitive financial stocks collectively could be used as a "portfolio hedge" against a sudden change of forward-looking inflation expectation and a steepening yield curve, triggered by a potential medical breakthrough of COVID-19 treatment and vaccine and the global economic recovery gaining firm footing.

We exited a few holdings in the consumer staples sector during the quarter, which we either believe the "stay-home" benefits from COVID-19 pandemic have been fully reflected into the company's share price, or the underlying business has deteriorated, making our initial investment thesis no longer valid. These included Sun Art Retail, BGF Retail, and WH Group. We decided to re-deploy capital elsewhere, including funding some of the new positions.

Outlook:

Within the Asian region, while North Asia has been leading the economic recovery effort, Southeast Asia and India are still struggling with an effective control of the virus, making their recovery picture still elusive at this moment.

Externally, the Nov. U.S. election outcome will also undoubtedly influence the post-pandemic economic and geopolitical conditions for Asia. Notwithstanding, corporate earnings in Asia this year have been resilient so far. We see considerable resilience in Asia's dividends, providing global investors with the potential for diversification and growth.

Rolling 12 Month Returns for the period ended 30 September 2020
Matthews Asia Dividend Fund 2020 2019 2018 2017 2016
I (Acc) (USD) 21.60% -6.96% 5.38% 15.01% 18.02%
MSCI All Country Asia Pacific Index (USD) 11.55% -2.60% 5.36% 18.41% 16.02%
I (Acc) (GBP) 16.75% -1.48% 8.18% 11.33% 38.22%
MSCI All Country Asia Pacific Index (GBP) 6.33% 3.07% 8.39% 14.64% 35.29%
I (Acc) (EUR) 13.27% -1.12% 7.45% n.a. n.a.
MSCI All Country Asia Pacific Index (EUR) 3.71% 3.77% 7.23% n.a. n.a.

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 currencies, 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. There is no guarantee that the Fund or the companies in its portfolio will pay or continue to pay dividends. These and other risks associated with investing in the Fund can be found in the Prospectus.



There is no guarantee that a company will pay or continue to increase dividends.

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