Matthews China Small Companies Fund
Period ended 31 March 2019
For the quarter ending 31 March 2019, the Matthews China Small Companies Fund returned 15.15% while its benchmark, the MSCI China Small Cap Index, returned 15.00%.
At the start of the year, global markets cheered on 2019 with a bounce in prices and mainland Chinese markets leading the way. Both the Shanghai and Shenzhen composite indexes saw gains of more than 20% within the first three months of the year. We consider the market recovery by the end of the first quarter of 2019 to be a sign of recovery in investor sentiment, driven by the belief that the worst year-on-year economic figures are likely behind us. The market optimism also reflects growing confidence that the various incremental fiscal and monetary stimulus policies made since the second half of 2018 will begin producing real world impacts to lift the temporary investment and consumption slump driven by trade conflicts. From our on-the-ground company visits during the first quarter of the year, we sensed from management teams that the worst is likely over but most are conservative in predicting a rosy recovery for the second half of the year. Longer term, however, companies are encouraged by the structural growth in China's economy—particularly those that benefit from an increase in domestic sourcing of key value-added components.
From both a top-down and bottom-up perspective, we continue to anticipate long-term sustainable growth in the Chinese economy and in corporate earnings. The market's concerns over escalating trade tensions should, in our view, have little impact on China's smaller companies given their domestic focus and lower dependence on financial leverage.
Performance Contributors and Detractors:
During the first quarter of 2019, our strong stock selection in the information technology and consumer staples sectors as well as our underweight in financials contributed to the Fund's outperformance versus the benchmark. The biggest drag to our performance came from the consumer discretionary sector due to poor stock selection.
Among the top contributors to Fund performance during the quarter were Yihai International Holding and SUNeVision Holdings. Yihai International Holding manufactures and sells a leading hot pot soup base and condiment brand for both restaurants and retail consumers. We believe the company has strong growth visibility given the popularity of its associated hot pot restaurant chain and its rapidly growing new business in restaurant supplies. SUNeVision Holdings is the largest data center operator in Hong Kong. We believe Hong Kong continues to be an attractive hub for both China and global internet service providers to add capacity while supply remains very tight. This bodes well for the company's long-term growth prospects.
Honma Golf, a luxury golf equipment maker, was one of the top individual detractors to Fund performance during the quarter. Honma Golf shares underperformed the market during the first quarter amid profit-taking that followed a strong fourth quarter during which time the company was rumored to be signing with top British golfer Justin Rose. We continue to be impressed with Honma's recruiting of global talent to revitalize its North American business.
Notable Portfolio Changes:
During the quarter we initiated a position in Sangfor Technologies, one of the two leading providers of hyper-converged infrastructure (HCI) equipment in China. Hyper-converged infrastructure is a key enabler for companies to start their journey to the private cloud. Given that China's economy is transitioning structurally to services and consumption, the use of software and particularly cloud-based productivity-enhancing software has become critical for business success. HCI helps companies deploy cloud software while maintaining data security, and thus is seeing high rates of growth. We believe Sangfor has the technology leadership and business model to continue its leadership in this sector.
During the quarter, we exited our position in Dah Sing Banking Group as the U.S. dollar yield curve trended less favorably toward banks.
We remain cautiously optimistic about China's small-cap market amid heightened market volatility as we focus rigorously on the sound fundamentals of our portfolio companies. From a macroeconomic perspective, we continue to believe China has the ability to stabilize its economy through fiscal spending, interest rate adjustments and currency management. In addition, steps taken to correct China's structural issues are continuing on the right track, despite the near-term pains of a deleveraging economy. We are focused on seeking innovative and capital-efficient small companies that are relatively insulated from macroeconomic uncertainties. We will continue to seek companies with sustainable, quality earnings streams, strong cash flows and good balance sheets that can weather uncertain economic conditions. We believe sectors such as industrial automation, health care and technology are among the most attractive from a secular growth perspective.
Rolling 12 Month Returns for the period ended 31 December 2018
|Matthews China Small Companies Fund
I (Acc) (USD)
MSCI China Small Cap Index (USD)
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. The Fund invests in smaller companies, which are more volatile and less liquid than larger companies. These and other risks associated with investing in the Fund can be found in the Prospectus.
Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than larger companies.
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