Matthews India Fund

Period ended 31 December 2018

For the year ending 31 December 2018, the Matthews India Fund returned -9.78% while its benchmark, the S&P Bombay Stock Exchange 100 Index, returned -6.00%. For the fourth quarter of the year, the Fund returned 4.44% versus 4.54% for the Index.

Market Environment:

During 2018, India's stock market experienced volatility alongside global stock market indices. Despite higher global oil prices, a weaker rupee and tighter monetary policy, its stock market delivered positive returns through the year until August. Improving GDP growth numbers and globally positive equity sentiment fueled a rally in India's equity market for much of the year. In late summer, however, the equity market changed course on account of domestic and global factors. By September, a quasi-governmental entity in India defaulted on its debt payments, which led to tight liquidity and a higher cost of capital across the board. This was accentuated by a global equity sell-off on the back of trade-related tensions between the U.S. and China. India's equity market approached year end with some investor anxiety over questions around the autonomy of India's central bank, the Reserve Bank of India, as well as concerns over the potentially waning popularity and influence of Prime Minister Narendra Modi's government. Despite these challenges, December was more upbeat for India as a change of guard at the central bank signaled to investors the end of a hawkish monetary policy regime.

Performance Contributors and Detractors:

The portfolio's higher allocation to small-cap stocks and lower allocation to mega-cap stocks hurt our relative performance, which was mitigated by stock-specific factors. Small-cap stocks had become highly overvalued following India's demonetization as savings moved from physical assets to financial assets. While the Fund has reduced its exposure to small caps over time, we continue to have fairly significant exposure given our belief that the stocks we hold have solid underlying business fundamentals. By sector, our higher allocation to health care and consumer staples versus the benchmark detracted from our relative performance. Within health care, customer consolidation and a faster pace of new drug approvals by U.S. regulators led to significant pricing pressure for generic drug manufacturers. Within consumer staples, some of our exposure to small- and mid-cap companies struggled as they adapted to India's new regulatory environment imposed by its Goods and Services Tax and demonetization. In the third quarter of the year, India's credit markets took a hit after Infrastructure Leasing and Financial Services (IL&FS), a major financier of infrastructure and power plants, announced a default. The portfolio's higher allocation to non-banking financials became a detractor to performance given the liquidity concerns that resulted.

Our avoidance of holdings in the utilities and metals sectors, and stock-specific factors within communication services and consumer discretionary were performance contributors amid a volatile market. One such stock was Info Edge India, which owns an online classified ads business focused on recruitment, matrimony and real estate. Info Edge also has investments in Zomato, which is a restaurant search and discovery service. Info Edge's stock did well after Zomato's valuations rose after it struck an agreement over fundraising with China's Alibaba.

Notable Portfolio Changes:

During the year, we exited or trimmed many companies across sectors where we deemed the risk/reward asymmetry to be unfavorable. We also added to new positions across sectors like information technology, financials, pharmaceuticals and materials. One such addition was UPL, a crop protection business that sells generic agrochemicals, industrial chemicals and seeds. UPL's stock had corrected following its acquisition of agrochemical firm Arysta LifeScience amid concerns over equity dilution and significant debt on its balance sheet. UPL, however, has a good track record with acquisitions. We believe its potential for synergy was far higher than most realized and its stock was trading at very attractive valuations.


Volatility in the short term is likely to persist. Modi's government is likely to push populist measures such as farm loan waivers, which will have a positive impact on consumption in the near term. There seems to be increasing sentiment, however, that India's upcoming general elections may likely result in a coalition government, which may not be popular with India's markets. Given the correction in oil prices, coupled with the sustained low consumer price inflation we saw in 2018, it is likely that the Reserve Bank of India will become more dovish in its monetary policy outlook. Leading indicators suggest that corporate-level stress is past its peak and some of the corporate-focused banks are beginning to heal rapidly. This should result in greater availability of credit to corporate India. Lower cost of capital and greater availability of credit should bode well for the revival of private capital expenditure over the short to medium term. Valuations for large-capitalization stocks are in line with history and India's large-cap universe remains a good hunting ground for investments. There were sharp corrections within mid-caps and small-caps throughout 2018. Valuations seem to have normalized within mid-caps, and we are excited to now find more opportunities for bottom-up stock picking compared to the prior year.

Rolling 12 Month Returns for the period ended 31 December 2018
Matthews India Fund 2018 2017 2016 2015 2014
I (Acc) (USD) -9.78% 37.88% -3.05% -2.73% 54.46%
S&P Bombay Stock Exchange 100 Index (USD) -6.00% 41.88% 2.32% -6.41% 31.40%
I (Acc) (GBP) -4.76% 25.78% 16.54% 2.28% 63.93%
S&P Bombay Stock Exchange 100 Index (GBP) -0.23% 29.51% 22.13% -1.02% 39.60%

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