Matthews China Small Companies Fund
Period ended 31 December 2019
For the year ending 31 December 2019, the Matthews China Small Companies Fund returned 31.36%, outperforming its benchmark, the MSCI China Small Cap Index, which returned 6.63%. For the fourth quarter, the Fund returned 10.17% versus 7.19% for the Index.
Thanks to accommodative monetary policies around the globe and initial signs of a U.S.—China trade truce, Chinese equity markets performed well in the fourth quarter. We expect the trade negotiations to be an ongoing process for the foreseeable future while China works on areas of self-sufficiency.
Economic data from China were generally healthy in 2019. On the consumer end, value-added tax cuts and payroll tax reductions drove positive effects on consumer spending, keeping retail sales in high single-digit growth year-over-year into the fourth quarter. The targeted stimulus toward helping small to medium enterprises announced near the end of the second quarter also helped business sentiment. The Caixin China General Manufacturing PMI signaled continued expansion toward a three-year high. Longer term, we still expect structural growth in China's economy—particularly among companies that benefit from an increase in domestic sourcing of key value-added components as trade conflicts remain a risk.
From both a top-down and bottom-up perspective, we anticipate long-term sustainable growth in the Chinese economy and in corporate earnings. Market concerns over 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 fourth quarter, strong stock selection in the consumer discretionary, information technology and health care sectors contributed most of the Fund's outperformance versus the benchmark. Our overweight in consumer staples was a drag on performance. For the full-year 2019, all sectors provided positive attribution to performance. The largest positive performance attributors were strong stock selection in information technology, industrials, health care, consumer staples and consumer discretionary.
Top contributors to Fund performance during the fourth quarter included Silergy and China Meidong Auto. Top contributors for the year included Silergy, Yihai International and China Meidong Auto. Silergy is our top holding and is the largest fabless analog semiconductor company in China. Silergy has strong product, process and systems technologies to allow it to make integrated analog circuits for its clients' various needs. In a seemingly deglobalizing world, Silergy's scarcity value has emerged as China tries to become more self-sufficient. Although the semiconductor cycle is still far from a full recovery, we expect Silergy to gain share as the cycle recovers. China Meidong Auto is one of the largest luxury import car dealers and service companies in China, specializing in Lexus, BMW and Porsche. The company has embraced data-driven decision-making and management to successfully expand its business. Yihai is a company we discussed throughout the year. It is a top condiment and hot-pot sauce provider in China. It strives to offer innovative products with strict quality standards and a strong brand name. As consumption upgrades continue in China both for the restaurant market and cook-at-home young families, complex sauces such as the ones Yihai provides are increasing in popularity.
FIT Hon Teng and Honma Golf were the top detractors to Fund performance during the fourth quarter. Honma Golf and Huami were the top two detractors to Fund performance for the full year. Honma Golf is a luxury golf brand originating in Japan. The company struggled with the headwind of a sluggish golf-equipment market, despite its success in signing Justin Rose as its sponsored golfer. The company's turnaround was slower than our expectations and we reduced our position throughout the year. FIT Hon Teng, a subsidiary of Hon Hai, focuses on manufacturing connectors and cables for the consumer electronics industry. The company suffered from a de-rating event in the fourth quarter as it reversed part of its acquisition of Avago's optical module group. We were disappointed with the company's inability to move up the value chain and become an original design manufacturer but still saw value in its business given the structural growth in wireless charging and wireless consumer electronics. We will continue to closely monitor developments. Huami is a Chinese wearables brand and a wearables original-design manufacturer. We exited Huami in the first half of the year after the trade war escalation had an irreversible negative impact on the company's ability to recoup its research and development expenses.
Notable Portfolio Changes:
During the fourth quarter, we initiated positions in Alphamab Oncology and Venus MedTech. Alphamab Oncology is a clinical-stage biopharmaceutical company dedicated to the discovery, development manufacturing and commercialization of innovative biologics for cancer therapy globally. The company has a unique technology platform that is being used in its global potentially first-in-class PD-L1 and CTLA-4 bispecific antibody, which could serve as a backbone combination in immuno-oncology treatments of various cancer types. We look forward to new data releases as the company moves forward with its clinical trials and partnerships. Venus MedTech is a leading structured heart-device company in China. Its transcatheter aortic valve replacement (TAVR) product leads the Chinese market for high-risk patients and may expand into lower-risk patients, similar to approvals in the U.S. This product helps heart-disease patients avoid open-heart surgery and reduces in-patient hospital time. Both companies are in therapeutic areas that are rapidly expanding off of a smaller base in China with well-validated targets and approaches.
During the fourth quarter we exited our position in Glodon, a leading software solution provider for the construction industry in China. Over the long run, we saw expansion in its addressable market in construction digitalization in China. We expected slower growth and higher costs in the medium term, however, as the company continued to educate the market.
We remain 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 believe China can stabilize its economy through fiscal spending, tax reform, interest-rate adjustments and currency management. In addition, we believe that steps to correct China's structural issues are on the right track, despite the near-term pains of a deleveraging economy. We are focused on finding 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, consumer, health care and technology are among the most attractive from a secular growth perspective.
Rolling 12 Month Returns for the period ended 31 December 2019
|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