Matthews China Dividend Fund
Period ended 31 December 2019
For the year ending 31 December 2019, the Matthews China Dividend Fund returned 14.82%, while its benchmark, the MSCI China Index, rose 23.66%. For the fourth quarter, the Fund returned 6.01% versus 14.72% for the Index.
Chinese equities had another dramatic year, enduring the back and forth of trade negotiations between the U.S. and China. Market expectations were high at the beginning of the year and a “phase one” trade deal was reached at year end. In addition, Hong Kong endured social unrest that was triggered by an unpopular extradition bill. Initial peaceful protests often erupted into violence that targeted public transportation and mainland Chinese business outlets. Hong Kong still set a record in 2019 as the world's biggest IPO market, thanks in part to Alibaba's listing in Hong Kong.
Among Chinese equities, A-shares performed the best, helped by increasing inflows from global investors due to MSCI index inclusion in 2019. China's new Science and Technology Innovation Board, or “STAR Market,” also excited some investors who were eyeing new growth opportunities. Prices of American depositary receipts (ADRs) were initially suppressed due to trade war concerns and news surrounding possible legislation threatening their listing status in U.S. capital markets due to a lack of accounting supervision by U.S. regulators. ADRs performed strongly in the fourth quarter, however, as Alibaba's successful secondary listing in Hong Kong boosted investor confidence. Hong Kong stocks were the worst-performing in China due to the social unrest, as investors worried about Hong Kong's future as China's international financial center.
During the year, central banks led by the U.S. Federal Reserve started a fairly aggressive cycle of interest-rate cuts. One notable exception was China's central bank, which almost did not change its policy rate at all in 2019. This was due to the spread of African swine flu that caused a spike in pork prices in China, which in turn caused consumer inflation (CPI) to exceed the central bank's comfort zone.
Performance Contributors and Detractors:
As an all-cap strategy, the Fund benefited from the growth potential of small-cap companies during an up cycle in the market. Our stock selection among small caps in 2019, however, underperformed versus the benchmark and compared with our own track record. Thus it was not surprising that for the full-year 2019, two of three largest performance detractors were small-cap companies: Yixintang Pharmaceutical and JNBY Design, both retailers that faced significant challenges in their sectors. While Yixintang coped with changing regulations for Chinese pharmaceutical distribution and reimbursement systems, JNBY dealt with slower discretionary spending by cautious consumers. We are carefully re-evaluating whether these two companies, as relatively small operators, still have enough resources to survive the challenge. The largest performance detractor for the year was Shenwan Hongyuan. We had hoped that Shenwan Hongyuan, as China's oldest securities broker, could close the gap with its peers given its vast retail network, but the revival plan fell below our expectations and we decided to exit the position.
From a sector perspective, our security selection in consumer discretionary was the largest performance detractor on a relative basis. This was largely due to the strong share performance of Alibaba, which the Fund does not own due to the company's lack of commitment to a dividend policy or payment. Not owning Alibaba alone caused a 7% relative underperformance for the Fund on a full-year basis, or 3.9% relative underperformance during the fourth quarter. As we have mentioned in earlier commentaries, the Fund generally underperforms when there is a strong rally led by a few companies concentrated in one or two sectors.
On the flip side, almost all of our top-three performance contributors doubled their share price in 2019. The three companies—New Oriental Education & Technology, China Overseas Property and Wuliangye Yibin—demonstrated that high-quality businesses with strong pricing power and consistent cash-flow generation could be rewarded handsomely.
Notable Portfolio Changes:
During the fourth quarter, the Fund initiated a position in A-share-listed Gree Electric Appliances, the largest air-conditioner maker in China. The company finalized its privatization process in 2019, as the local government sold its stake in the company to a private-equity firm. We believe that the company, with a better management incentive plan, will be able to deliver stronger growth and that the new owner also is committed to a relatively high payout ratio. We also initiated a position in Chengdu Hongqi Chain, a leading regional supermarket operator in western China. We believe the company will continue to grow in the area surrounding the city of Chengdu and that its synergy with a rival chain it acquired about three years ago will finally emerge.
We exited our position in China Gas Holdings as we believed its valuation fully reflected its growth prospectus. In addition, we exited a few companies whose growth fell below our expectations, such as Crystal International and Shenwan Hongyuan Group.
In 2019, China demonstrated its economic resilience under significant external and internal uncertainty. Without strong fiscal or momentary stimulus, the Chinese economy performed well, in our view. We do believe it is time for the Chinese government to deliver its promised economic reforms, however, including further opening up various sectors to foreign and private capital and accelerating the reform of its vast state-owned enterprises. And the trade deal between U.S. and China should serve as a catalyst for China to deliver these reforms for its own benefit.
Given low valuations, especially in the Hong Kong market, we believe plenty of attractive businesses have not been valued in light of the possible upside of reform. We also believe that the Fund, with its focus on high-quality businesses and improving corporate governance led by dividend policy, is well-positioned in this market.
Rolling 12 Month Returns for the period ended 31 December 2019
|Matthews China Dividend Fund
I (Acc) (USD)
MSCI China 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. There is no guarantee that the Fund or the companies in its portfolio will pay or continue to pay dividends. 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.
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