Matthews Asia Dividend Fund

Period ended 30 June 2019

For the first half of 2019, the Matthews Asia Dividend Fund returned 5.75%, while its benchmark, the MSCI All Country Asia Pacific Index, returned 10.71% over the same period. For the quarter ending 30 June the Fund returned -1.16% compared to the benchmark return of 0.90%.

Market Environment:

After a strong rally in the first quarter of 2019, Asian equities were unable to sustain the positive momentum during the second quarter. A sudden collapse in U.S.-China trade negotiations weighed heavily on the market. Together with the renewed concerns over the strength of global economy, market volatility spiked. It wasn't until June when central banks globally stepped in to signal a readiness to support growth via monetary easing that Asia's markets began to stabilize again. 

Performance Contributors and Detractors:

The Fund's relative underperformance against its benchmark year to date has disappointed. Our investment process, which involves a barbell-approach to investing in both higher-yielding dividend-paying stocks together with faster-growing dividend growth stocks, remains unchanged. However, poor stock selection drove the bulk of the Fund's relative underperformance for the first half of the year. Consumer staples holdings were among the performance detractors. Known for their defensive business models with strong cash flow generation and steady dividend payments, these stocks traditionally have been positive return contributors. But as some of these businesses have begun facing certain structural changes—whether via market disruption brought by new product technologies, changing consumer preference or rising labor cost pressures from demographic changes and government policy intervention—the resilience of those businesses has somewhat eroded. As a result, their share prices languished during the period. This painful investment experience has led us to recognize the need to better emphasize identifying structural trends earlier on, to better foresee the investment implications and take more decisive action. 
On the flip side, among the top performance contributors during the first half was our holding in Chongqing Brewery, a regional beer company listed in the onshore China A-share market. Our initial investment thesis of seeking a sustained profit margin improvement supported by an accelerating beer product "premiumization" trend in China and easing competition intensity whereby major beer brands are prioritizing profit improvement over market share gain, started to play out this year. In addition, the pending public listing of Budweiser's Asia-Pacific beer business further attracted investor attention in the region's beer industry. As a result, Chongqing Brewery, a well-run operation under the ownership of Carlsberg, is seeing positive share price movement.

Notable Portfolio Changes:

During the second quarter, we initiated a few new positions, one of which was Yunnan Hongxiang Yixintang Pharmaceutical Group, a drugstore chain in mainland China. One of China's key health care reforms involves separating drug dispensing functions from Chinese hospitals, which should boost the prescription drug business at drug retailers and bring additional customer traffic for higher-margin, non-prescription drug businesses. At the same time, rising pharmacy quality-control standards and stricter tax compliance for running drugstore businesses also favor large-scale players over small, individual-store operators. This could further speed up the overall drugstore industry consolidation—a long-term growth driver for leading players such as Yixingtang. We believe the company is well-positioned to take advantage of this favorable industry trend. Operating a cash-generative drug retailing business model, with a modest 30% payout ratio, the company also has what we view as untapped potential to deliver growth in its dividends. During the first half of the year, we exited a few existing holdings such as China Resources Power, Japan Tobacco, and Nitori Holdings as their business fundamentals no longer supported our initial investment thesis.


As China and the U.S. restarted trade negotiations in early July, Asia's markets seemed to experience temporary relief from tensions. The medium- to long-term outlook for these bilateral relations, however, is still cloudy given the structural differences between the two countries' political systems and economic growth models. Despite this uncertainty, policymakers in both Asia and the U.S. have signaled a willingness to use policy-support measures to address any significant slowdown. In the meantime, with investor expectations now reset mostly due to macroeconomic concerns and on Asia's equity valuations continuing to trade below long-term averages, we remain constructive that, from a bottom-up perspective, Asia's markets currently offer attractive opportunities for long-term investors.  

Rolling 12 Month Returns for the period ended 30 June 2019
Matthews Asia Dividend Fund 2019 2018 2017 2016 2015
I (Acc) (USD) -4.70% 9.40% 16.78% -2.59% 5.91%
MSCI All Country Asia Pacific Index (USD) -0.76% 10.25% 23.00% -9.35% 3.12%
I (Acc) (GBP) -1.21% 7.97% 20.77% 13.87% 14.99%
MSCI All Country Asia Pacific Index (GBP) 2.94% 8.47% 26.58% 6.65% 12.11%
I (Acc) (EUR) -2.27% 6.99% n.a. n.a. n.a.
MSCI All Country Asia Pacific Index (EUR) 1.74% 7.70% 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