Matthews China Small Companies Fund
Period ended 30 June 2019
For the first half of 2019, the Matthews China Small Companies
Fund returned 16.40%, outperforming its
benchmark, the MSCI China Small Cap Index, which returned 7.99% over the same
period. For the quarter ending 30 June, the Fund returned 1.09% while its
benchmark fell -6.09%.
Global markets were heavily influenced by geopolitics
in the second quarter of 2019 following a first-quarter recovery. In May, U.S. President
Donald Trump's decision to implement additional tariffs on Chinese imports surprised
many market participants. All major indices in Hong Kong and China retreated from
the first quarter's strong gains, which had been driven in part by a recovery
in investor sentiment over macroeconomic data and also market optimism that incremental
fiscal and monetary stimulus policies would further lift consumer sentiment. Such
optimistic assumptions were quickly reversed by trade fears in the second
quarter. 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 the trade conflict may escalate.
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.
Contributors and Detractors:
During the second quarter of 2019, strong stock
selection in the information technology and consumer staples sectors
contributed most to the Fund's outperformance versus the benchmark. The biggest
drag on performance came from the health care sector due to poor stock selection.
Top contributors to Fund performance during the
quarter included Yihai International Holding and Asia Cement China Holdings.
Yihai International Holding manufactures and sells a leading hot pot soup base
and condiment brand for both restaurants and consumers. We believe the company
has strong growth visibility given the popularity of its restaurant chain and
its rapidly growing new business in restaurant supplies. Asia Cement China
Holdings is a subsidiary of Taiwan's Asia Cement Corporation and a top producer
concrete and other related products in China's Jiangxi, Hubei and Sichuan
provinces. The cement industry continues to benefit from supply-side reform due
to higher environmental considerations in China. The cement business is also relatively
insulated from trade conflicts given the difficulty in profitably transporting such
materials over long distances.
TK Group Holdings, a plastics and mold manufacturer,
was a top detractor to Fund performance during both the first half of the year
and in the second quarter. TK Group shares underperformed the market in the
first half because the company generates a significant portion of revenues from
U.S.-based technology companies. We believe the mid- to long-term position of
the company remains sound, however, as it is included among new supply-chain
planning outside of China. Ultimately, TK Group's customers appear to care more
about quality than additional costs due to the significant yield rate
differences between good and bad producers.
Notable Portfolio Changes:
During the quarter, we initiated a position in
Centre Testing International Group after tracking its operational turnaround
for several years. Among non-state-owned enterprises in China, the company is
the leading testing and inspections provider for environmental firms, food,
consumer and industrial products and electronic materials. Due to changes in
management that have driven higher returns on investment for existing assets,
we expect strong free cash flow generation on top of rising structural demand
to benefit shareholders.
We exited our position in Shanghai Putailai New
Energy Technology during the quarter as we expect China's electric vehicle
material and equipment suppliers to have limited demand and pricing visibility
after multiple rounds of subsidy cuts. In addition, a newly announced stimulus measure
that will instead benefit internal combustion engine cars is likely to hurt
electric vehicle demand.
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, health care and technology are among the most
attractive from a secular growth perspective.
Rolling 12 Month Returns for the period ended 30 June 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