Matthews Asia Dividend Fund


Period ended 31 December 2019

For the year ending 31 December 2019, the Matthews Asia Dividend Fund returned 10.66%, while its benchmark, the MSCI All Country Asia Pacific Index, returned 19.74%. For the fourth quarter, the Fund returned 6.74% versus 9.51% for the Index.

Market Environment:

Asian equities finished 2019 strongly, despite several macro-related headwinds. For the most part of the year, the specter of an escalating trade war between China and the U.S. remained the biggest market overhang. Such risk was materially deflated during the fourth quarter, as an interim "phase one" trade deal was reached. Asset prices, including equities, responded favorably.

Performance Contributors and Detractors:

The Fund delivered a positive return in 2019 but underperformed its benchmark, driven by negative stock selection and country allocation. Challenges in stock selection were most visible from our holdings in the consumer staples sector during the first half of the year. A few holdings related to tobacco and retail businesses faced stock-specific headwinds from consumer-preference changes and interventionist regulations, resulting in weakened long-term dividend growth prospects. Our dividend strategy takes a holistic view of dividend-paying stocks, evaluating not just the ability of a company to pay ongoing dividends, but also its ability to grow dividends. As some of our portfolio stocks no longer met our total-return criteria due to a reset in growth potential, we exited the positions.

On allocation, the Fund's overweight in China/Hong Kong detracted from relative performance in 2019, particularly during the second half of the year. Political unrest in Hong Kong severely impacted the local economy and weakened sentiment toward Hong Kong-listed Chinese stocks. We believe the short-term underperformance of our China/Hong Kong stocks was driven mostly by market sentiment, not by company fundamentals. Most of our Hong Kong-listed holdings have their businesses within mainland China and their earnings growth is not impacted by Hong Kong. We believe improvement in investor sentiment and attractive valuations in the Hong Kong market will turn into tailwinds for Chinese companies listed there.
 
Turning to individual stocks, the Fund's information technology holdings contributed the most to performance. Hoya, a Japanese IT component company, saw strong profit growth driven by its mask blanks business. Hoya has a dominant global market share in this key component used in the EUV lithography process, the most-advanced semiconductor chip-making technology. Hoya's stock performed strongly during the year and was the top individual contributor.

On the flipside, BGF Retail, a South Korean convenience-store operator, was the largest detractor to performance. During the year, BGF saw its overall same-store sales growth turn negative, impacted by weak domestic consumption in South Korea. The stock's valuation discounted the cyclical slowdown, while cost pressures from recent minimum-wage hikes started to dissipate. Long-term structural growth drivers for its CVS business in South Korea remain intact. We are watching closely to see whether the company stages a rebound in business growth in 2020.

Notable Portfolio Changes:

In the fourth quarter, we initiated several new positions, one of which was Gree Electric Appliances, a leading home-appliance manufacturer listed on China's A-share market. Gree is a key beneficiary of middle-class consumer spending growth in China, with its strong brand equity and cost advantage from large economies of scale. We are particularly positive about the recent transfer of Gree's equity ownership, which transformed the company from a state-owned enterprise to a business controlled by a private equity investor and the company's management team. The ownership change paved the way for a better corporate governance structure and better interest alignment with shareholders. The company's valuation remained attractive at 13.6x 2020 P/E with 4.1% dividend yield.
 
On the other hand, we exited a few positions during the fourth quarter. Among them was our holdings in Fuji Seal, a Japanese plastic-packaging material business. Our initial investment thesis was premised on Fuji Seal's success in restructuring its unprofitable European business and improvement in its dividend payout policy. While the European operations did turn around, our Environmental, Social and Governance (ESG) risk assessment of plastic-package usage in consumer products made us cautious about Fuji Seal's long-term business prospects. We decided to exit the position.

Outlook:

We are constructive on Asian equity markets. Asian central banks and governments were quick to respond with decisive monetary and fiscal measures to arrest the economic slowdown in 2019. We expect the supportive policy environment to continue in 2020. The earnings cycle in Asia has started to turn up, after several consecutive quarters of negative earnings growth. Valuation multiples of Asian equities did not look stretched at 14x forward P/E at this stage of the earnings cycle. In our view, markets increasingly could focus on equity fundamentals in 2020.

Rolling 12 Month Returns for the period ended 31 December 2019
Matthews Asia Dividend Fund 2019 2018 2017 2016 2015
I (Acc) (USD) 10.66% -12.85% 33.49% 4.09% 3.87%
MSCI All Country Asia Pacific Index (USD) 19.74% -13.25% 32.04% 5.21% -1.68%
I (Acc) (GBP) 7.36% -7.98% 21.75% 25.18% 9.10%
MSCI All Country Asia Pacific Index (GBP) 15.12% -7.86% 20.61% 25.50% 4.01%
I (Acc) (EUR) 13.02% -8.85% n.a. n.a. n.a.
MSCI All Country Asia Pacific Index (EUR) 21.94% -8.88% 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