Matthews China Dividend Fund


Period ended 30 September 2018

For the quarter ending 30 September 2018, the Matthews China Dividend Fund returned -6.19%, while its benchmark, the MSCI China Index, fell -7.42%. 

Market Environment:

In the third quarter in 2018, Chinese equities experienced their worst sell-off since 2016. The quarter began with a currency crisis in both Turkey and Argentina that raised serious concerns for overall emerging markets. Then in September, escalating trade tensions between China and the U.S. weighed heavily on Asia's equity markets. President Trump threatened to impose tariffs on all Chinese imports. China retaliated with additional tariffs on U.S. goods, and also canceled once-revived trade negotiations. Even more concerning, these trade tensions spilled over into other areas—the U.S. imposed sanctions against China's military for purchasing Russian military equipment. On the positive side, global index provider MSCI announced that it is considering significantly increasing the weight of China A-shares within its global indexes next year.

Performance Contributors and Detractors:

During the quarter, our stock selection in the financials sector detracted from the Fund's relative performance, while the portfolio's underweight in the information technology sector contributed the most to relative performance. 
 
Two leading telecom operators, CITIC Telecom International Holdings and HKBN, in Macau and Hong Kong respectively, were among the top performance contributors during the quarter. As both firms have been operating in a stable market environment, we believe investors should feel confident in their operating currencies, as the currencies in both Macau and Hong Kong are pegged to the U.S. dollar. China Petroleum & Chemical (Sinopec), which benefited during the quarter from rising oil prices, was the second-best contributor to Fund performance.

On the flip side, Hua Hong Semiconductor, whose share price rose significantly during the first half of the year, suffered a heavy sell-off of its shares during the quarter due to profit-taking and concerns over the potential negative impacts of a trade war. Tencent Holdings, which reported its slowest earnings growth in recent years, posed the second-largest drag on performance during the quarter. Investors were surprised to discover new Chinese government regulation pertaining to the online gaming industry. It is important to note, however, that regulation changes tend to benefit larger companies such as Tencent, which have more resources to adapt in new environments. In addition, investors should view Tencent as a firm that goes well beyond online gaming.

Notable Portfolio Changes:

During the third quarter, we initiated a position in Yangzijiang Shipbuilding Holdings, China's largest privately owned ship builder. We believe Yangzijiang stands out among Chinese shipyards due to its product quality. After years of a global shipping slump, a potential recovery of demand for new ships and higher environmental standards for new ships should benefit Yangzijiang. A weaker Chinese currency can also be a tailwind for Yangzijiang. 
 
We also exited our positions in Guangshen Railway as we believe its business may suffer following increased competition from a new high-speed rail project connecting Guangzhou and Hong Kong. In addition, we also sold our position in NetEase as the company continued to struggle in developing popular game titles. Its operations outside of gaming have not seen any meaningful progress in terms of profitability. 

Outlook:

After the severe sell-off in China's equities markets, the economic damage of a full-blown trade war appears to already be reflected in current valuations. Investors should be mindful of China's policy responses in adverse trade environments. While we believe China's government may have been rash in implementing new regulations in several industries, we continue to find compelling opportunities in China's equity markets. 

Rolling 12 Month Returns for the period ended 30 September 2018
Matthews China Dividend Fund 2018 2017 2016 2015 2014
I (Acc) (USD) 5.11% 21.35% 19.69% -1.18% 7.07%
MSCI China Index (USD) -2.05% 33.27% 13.18% -4.83% 4.87%

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. 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