Matthews Asia Dividend Fund

Period ended 31 March 2019

For the quarter ending 31 March 2019, the Matthews Asia Dividend Fund returned 6.99% while its benchmark, the MSCI All Country Asia Pacific Index, returned 9.73%.

Market Environment:

Asia's equity markets rebounded strongly during the first quarter of 2019, recovering some of the double-digit losses seen in 2018. Despite the region's near-term economic slowdown and decelerating earnings growth among Asian companies, investor sentiment toward Asian equities started to recover. Fueling the recovery were improved macro conditions, including the pause of U.S. monetary tightening, progress in China—U.S. trade negotiations and China's policy support measures designed to address its slowing economy. Amid improving sentiment, Asian equities, led by China A-shares, delivered solid returns. 

Performance Contributors and Detractors:  

Among the top contributors to Fund performance during the quarter was our position in Breville Group, a branded Australian kitchen-appliance maker. Breville reported strong 2018 earnings due to its sustained growth momentum in overseas markets. The positive earnings surprise dispelled market concerns over the company's exposure to weaker Australian consumer spending, and Breville's shares substantially rallied. 
On the flip side, our holdings in Chinese stocks were the main reason for the Fund's underperformance relative to its benchmark. A slowing Chinese economy starting in the spring of 2018 took its toll on corporate earnings. Several Chinese stocks in the portfolio were sold off aggressively following disappointing 2018 earnings. China Resources Power Holdings, a Chinese independent power producer, detracted the most from Fund performance. While the firm's weak earnings were mostly anticipated by the market and therefore a nonfactor for the share underperformance, the company's surprising decision to cut its dividend triggered a severe sell-off. Its management said its new aggressive push into renewable energy was behind the dividend cut—a complete reversal of the company's previously stated dividend policy. The market responded negatively. At quarter end, we were re-evaluating our investment thesis in this holding. 

Notable Portfolio Changes:  

During the quarter, Katitas, a Japanese real estate developer, was among several positions we initiated. Specialized in refurbishing and selling previously owned houses in Japan, Katitas has carved out a niche market segment and consistently delivered double-digit growth. We think the company continues to have significant headroom for growth. With a modest dividend payout ratio just over 20% since its initial public offering, we believe Katitas is well-positioned to deliver significant growth in dividends. 
We exited Seven & i Holdings during the quarter. While convenience store operators in Japan have been under cost pressure posed by Japan's labor shortage, the severity of the pressure caused changes to its business model and could attract more government intervention in such areas as minimum wage increases. Our initial investment in Seven & i was based on its potential for delivering better dividend growth backed by a restructuring of its various retailing assets and improving its corporate governance. This investment case, however, has weakened without strong, healthy operation of its core convenience store business. 


An easing of macro uncertainties is helping to restore investor sentiment toward Asia. While the near-term macro data could continue to disappoint, the market is likely to be more focused on a potential recovery later in the year. From a bottom-up perspective, decelerating earnings growth among Asia's firms has been more or less captured by a muted consensus outlook. Asian equity valuations continue to trade below long-term averages, providing long-term investment opportunities.

Rolling 12 Month Returns for the period ended 31 December 2018
Matthews Asia Dividend Fund 2018 2017 2016 2015 2014
I (Acc) (USD) -12.85% 33.49% 4.09% 3.87% -0.96%
MSCI All Country Asia Pacific Index (USD) -13.25% 32.04% 5.21% -1.68% 0.29%
I (Acc) (GBP) -7.98% 21.75% 25.18% 9.10% 5.11%
MSCI All Country Asia Pacific Index (GBP) -7.86% 20.61% 25.50% 4.01% 6.53%
I (Acc) (EUR) -8.85% n.a. n.a. n.a. n.a.
MSCI All Country Asia Pacific Index (EUR) -8.88% n.a. n.a. 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