Matthews Asia Small Companies Fund


Period ended 30 September 2019

For the quarter ending 30 September 2019, the Matthews Asia Small Companies Fund returned 0.24%, while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index, returned -5.12%.

Market Environment:

Asia's equity markets continued to be affected by U.S.—China trade tensions. China's economic data also showed moderated growth, further exacerbating trade concerns. Chinese equities were noticeably weak during the third quarter. Protests and unrest continued to disrupt the day-to-day functioning of Hong Kong. Correspondingly, tourism and retail businesses contracted.

In late September, the U.S. Federal Reserve cut rates by 25 basis points (0.25%) for the second time this year amid uncertainties over trade tension.

Central banks in Southeast Asia also turned accommodative in light of softness in the global macroeconomic environment. Indonesia central bank cut policy rates by 25 basis points. Its government also laid out initiatives such as easing labor laws and tax incentives to attract foreign direct investment (FDI). Thailand's central bank also cut interest rates by 25 basis points. The Thai government also announced a stimulus package that included emergency loans and additional subsidies to low-income groups. India's government, meanwhile, sharply cut the corporate tax rate for domestic companies to 22% from 30%, aiming to boost economic growth. India's equity market followed with a meaningful two-day rally. While the corporate tax cuts were positive for sentiment in the short term, India's current accounts deficit and issues surrounding its shadow banking sector's stability still curbed investor enthusiasm.

Performance Contributors and Detractors:

During the third quarter, the portfolio's performance was resilient and held up better than the benchmark in a roller coaster-like stock market. Our holdings in Taiwan across various industries were a key source of positive returns. Despite trade tensions being front and center in the market, our China/Hong Kong holdings performed solidly and helped our relative performance.  Our key holdings in Silergy was a main performance contributor. The analog integrated-circuit design company had made investments in cultivating its domestic client base with the semiconductor supply in China for years. Those initiatives were increasingly being recognized by the market as future growth drivers. Whereas our other holdings in China, Huifu Payment, a third-party payment service provider was a drag on performance during the quarter as the market didn't appreciate the company's investments into developing software as a service (SaaS) that compresses margins in the short run.

Our stock selections in India contributed to both absolute and relative performance. Throughout the year, we had identified multiple opportunities in Indian companies that showed promising long-term growth prospects and yet valuations were not excessive. Hence, our portfolio holdings were able to participate in the run-up in India equities late in the quarter. Our holdings in Malaysia and Singapore, however, were performance detractors due to lack of positive catalysts.

By sector, our longstanding overweight and stock selections in health care were key performance contributors in the third quarter, thanks to their defensive business models. On the other hand, our holdings in real estate were the main performance detractors due to the fact that this sector is more sensitive during market sell-offs.

Notable Portfolio Changes:

During the quarter, we continued to adjust our holdings within China/Hong Kong with the intention of replacing companies with a stronger moats. For example, we exited our holdings in China Beststudy Education, an afterschool tutoring-service provider, because of our concerns that both online and offline competition was escalating. We initiated a position in a Chinese A-share company Jiajiayue Group, a leading operator of supermarkets with a focus on fresh foods. We like the company's focus and dominance in the Shandong province and believe that it is well-positioned to capture the tastes and needs of the younger and more demanding demographic. Similarly, we adjusted our holdings in India based on fundamentals and valuation merits. We exited AIA Engineering, a grinding media producer, due to our concerns that its relatively large capex commitments will pressure cash flow and margins in the medium term. We initiated a new positions in Escorts, a key manufacturer of agricultural tractors and construction equipment. We believe the combination of undemanding valuations and improving corporate focus and executions will be positive drivers for the stock.

Sector-wise, certain consumer staples holdings in China/Hong Kong were trimmed due to valuation considerations. The portfolio increased weightings in selective companies that we believe are poised to benefit from the recovery of investments in information technology. 

Outlook:

As the year end approaches, geopolitical tensions between China and the U.S. are likely to be an overhang for equity markets. Specifically, the run-up to next year's U.S. presidential election could contribute more weakness and uncertainty to investor sentiment. Despite near-term challenges, Asia is one of the world's fastest-growing regions with promising innovations and thriving entrepreneurism. To be sure, some Asian economies are experiencing cyclical weaknesses and are hampered by inefficiencies in some areas. We still are able to uncover what we believe to be attractive investment opportunities, however, by taking a nuanced, bottom-up investment approach in each country and industry.

We will continue to focus on companies with strong fundamentals and balance sheets that are poised to capitalize on Asia's domestic structural growth.  We believe valuations are generally reasonable among Asia's small caps given their long-term growth trajectory. Over the long term, we believe small companies have the potential to compound in size and reward shareholders. At times, market participants can be too focused on the short term when considering smaller companies as an asset class, creating buying opportunities for managers who take an active approach.

Rolling 12 Month Returns for the period ended 30 September 2019
Matthews Asia Small Companies Fund 2019 2018 2017 2016 2015
I (Acc) (USD) 3.71% 0.33% 11.33% 12.19% -15.97%
MSCI All Country Asia ex Japan Small Cap Index (USD) -8.40% -2.33% 13.03% 10.51% -12.39%
I (Acc) (GBP) 9.98% 2.94% 7.76% 31.36% -10.37%
MSCI All Country Asia ex Japan Small Cap Index (GBP) -3.06% 0.48% 9.44% 28.87% -6.23%

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