Matthews Asia Small Companies Fund

Period ended 31 March 2019

For the quarter ending 31 March 2019, the Matthews Asia Small Companies Fund returned 9.39%, outperforming its benchmark, the MSCI All Country Asia ex Japan Small Cap Index, which returned 8.54%. 

Market Environment:

During the first quarter of the year, market sentiment reversed sharply from the fourth quarter of 2018 as the U.S. Federal Reserve indicated intentions to not raise rates in 2019. Additionally, there was increased optimism that the U.S. and China would reach a trade deal after nearly one year of back-and-forth trade negotiations that cast major overhangs for emerging and Asian markets. Thus far this year, most Asian currencies strengthened against the U.S. dollar and Asian equities generally registered reasonable gains. The market also became more constructive on China's growth prospects following the government's easing posture. Chinese equities were the best performers in the Asia region at the start of this year. Indian markets on the other hand were somewhat volatile leading up to the country's general elections. Recent geopolitical tensions between India and Pakistan also rocked market sentiment. In Indonesia, the country geared up for its presidential election in April. Meanwhile, Thailand's general election took place in late March with the Pheu Thai Party unofficially winning the most parliamentary seats; however, official election results are not expected until May.

Performance Contributors and Detractors:

The portfolio's absolute returns were largely supported by holdings from China/Hong Kong and Taiwan as share prices recovered for most of these companies after previously experiencing steep sell-offs due to macroeconomic and geopolitical concerns during the second half of 2018. The portfolio's holdings in Chinese companies that possess a strong domestically oriented franchise and revenue streams performed strongly due to solid earnings results. Times China Holdings, a real estate developer focused on southern China, was the largest contributor to the Fund's absolute performance. It had consistently shown great project execution capabilities and recent strong earnings further boosted investor confidence in the company.
Meanwhile, some holdings in Vietnam detracted from performance due to negative developments in their operations that might adversely impact growth momentum. As a result valuation multiples for some Vietnamese holdings contracted. Vietnam's Yeah 1 Group, a media platform company, experienced some operating issues with one of its subsidiaries, which would adversely impact the company's growth momentum. Hence, its share price fell sharply and we shed most of our holdings in this company during the quarter.

By sector, most portfolio holdings in consumer staples, industrials, and health care performed well due to company-specific factors and solid earnings results. Some companies operating in the internet space performed below market expectations and saw their share price suffer, as explained above.

Overall, good stock selection and the portfolio's overweight in China were key drivers of outperformance during the quarter. 

Notable Portfolio Changes:

During the quarter we substantially adjusted our holdings in China/Hong Kong and India due to valuation merits and risk/reward profiles across companies operating in a variety of industries. As a result, we took profits in a number of highflyers in China/Hong Kong—either trimming or exiting the positions. We trimmed Yihai International Holding, a leading soup and condiment manufacturer in China due to a strong share price run-up following earnings results. We also exited Bilibili, China's leading online entertainment platform, after the company's market cap grew past US$5 billion following a strong run-up since the summer of last year. With the proceeds, we initiated a position in China BestStudy Education, an after school tutoring operator, which in our view offers good growth exposure to education spending with reasonable valuations.

Some of our holdings in India performed below our expectations. Natco Pharma, a generic drug maker, experienced competitive pressure and uncertainties relating to new product launches. Despite undemanding valuations, we believed that it would be more beneficial to exit the holding and invest in other companies with more robust growth prospects. Consequently, we increased our weighting in consumer discretionary companies, as well as financial holdings in India as market corrections last year presented opportunities to build positions at attractive valuations. 


As China's stimulus and easing policies start to take hold, we are hopeful that consumer and business confidence will continue to improve and should in turn translate into more robust corporate investments and company fundamentals. Market uncertainties might impact sentiment in the capital markets of India and Indonesia due to general elections. While short-term volatility may be inevitable, we believe that low investor expectations and attractive valuations in some segments of the market present opportunities for long-term, bottom-up stock selection.

We remain focused on seeking opportunities in domestically oriented companies that are beneficiaries of structural growth trends. We believe that over the long term, they have the potential to compound in size and reward shareholders, although market participants at times could be overly focused on the short term, de-emphasizing company fundamentals.
With a growing middle class and a dynamic entrepreneurial landscape in Asia, many small companies in the region are poised to grow because their domestic revenue streams are less impacted by global factors. We continue to be constructive on efficient and innovative companies, particularly those in the health care, communications and information technology sectors.

Rolling 12 Month Returns for the period ended 31 December 2018
Matthews Asia Small Companies Fund 2018 2017 2016 2015 2014
I (Acc) (USD) -14.53% 30.80% -1.09% -11.08% 11.14%
MSCI All Country Asia ex Japan Small Cap Index (USD) -18.63% 33.84% -2.05% -3.28% 2.56%
I (Acc) (GBP) -9.84% 19.38% 18.87% -6.49% n.a.
MSCI All Country Asia ex Japan Small Cap Index (GBP) -13.57% 22.25% 16.83% 2.32% n.a.

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 currencies, 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. 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