Matthews Asia Credit Opportunities Fund


Period ended 30 June 2019

For the first half of 2019, the Matthews Asia Credit Opportunities Fund returned 9.75% while its benchmark, the J.P. Morgan Asia Credit Index (JACI), returned 8.04% over the same period. For the quarter ending 30 June, the Fund returned 3.09% compared to the benchmark return of 3.00%.

Market Environment:

Asian credit bond markets enjoyed a positive first half, with high yield credit spreads peaking at 622 basis points in early January and ending June at 539 basis points. The first quarter was characterized by a strong risk-on environment and spread tightening, while during the second quarter, despite spreads widening modestly, the combination of falling U.S. interest rates and coupon income resulted in positive total returns for investors in the asset class. 

The constructive environment for Asian credit over the period was largely due to supportive central banks around the world. The U.S. Federal Reserve, the European Central Bank and emerging market central banks all moved in a dovish direction, seemingly ending the momentum for higher rates around the world. Meanwhile, the G-20 Summit ended without an escalation of the U.S.—China trade war, at least temporarily removing the risk of a further tariff shock from the global economy.

While the second quarter was positive overall, geopolitics led to unexpected volatility in credit spreads. The quarter began with a continuation of the positive tone in risk markets from the first quarter, as data from the U.S. and China implied that fears of a synchronized growth slowdown may have been overdone. As the U.S.-China trade war flared up, however, spreads widened in May, before gradually tightening as the late-June G-20 summit approached. 

Performance Contributors and Detractors:

During the first half and the second quarter, the biggest contributor to performance was the portfolio's overweight allocation to Asian high yield bonds, which as a group outperformed in the risk-on environment. Within high yield corporate bonds, the strongest contributors over the quarter included Tata Steel (ABJA Investment), Lippo Karawaci (Theta Capital) and the Vietnam government-backed Debt and Asset Trading. Tata Steel performed well as it has moved toward a deleveraging plan following an unsuccessful merger of its European operations. Lippo Karawaci continues to execute on its turnaround plan, which includes raising new capital and increasing discipline around capital expenditures. Our exposure to convertible bonds, including Weibo and CP Foods Holdings as well as our positions in SoftBank Group and HSBC Holdings perpetual bonds, were also contributors.

The biggest detractors to performance were our positions in Indika (Indo Energy Finance II BV) and our convertible bond position in Ctrip.com International, a Chinese online travel agency. The Indika bonds were sold during the quarter to buy longer-dated bonds of the same issuer, allowing us to extend our duration. The longer-dated Indika bonds were in fact among our highest contributors to returns in the quarter.

Notable Portfolio Changes:

With weaker-than-expected economic data released in the U.S. leading to speculation about rate cuts by the Fed, we increased duration in the portfolio to 4.8 years from 3.5 years over the quarter. We achieved this both by rotating into longer duration issues of companies we already owned, such as CIFI Holdings Group and KWG Group Holdings, as well as by adding exposure to longer duration securities of other issuers, including the Indonesian state-owned enterprise INALUM (PT Indonesia Asahan Aluminium Perser), which is investment grade-rated, thereby allowing us to add duration without taking on excessive spread duration.

New bonds added to the portfolio included Shriram Transport Finance, an Indian non-bank finance company that issued a USD bond with an attractive spread premium given the recent NBFCs funding crisis, and Pakistan Government Bonds, which are long-duration bonds of a high yield country under an IMF-led turnaround program.

In China, we initiated positions in two companies: China Jinmao (Franshion Brilliant, Ltd.) perpetual bonds, higher yielding bonds of a central SOE-backed property developer, and the technology firm Weibo, via convertible bonds trading close to their lowest possible level, which we see as offering an asymmetric risk profile.

We sold a number of bonds that had reached their price target and had limited upside for the portfolio. These included India's Bharti Airtel, Krung Thai Bank Public in Thailand, Indonesia's Tower Bersama (TBG Global), and in China, Chinalco Capital Holdings and China Minmetals. In addition, we sold several convertible bond holdings that were short duration and/or had reached our price target. These included China Mengniu Dairy, CP Foods Holdings, Ctrip.com International and Johnson Electric Holdings.

Outlook:

In our view, Asian high yield bonds continue to offer attractive value for long-term investors. Asian high yield credit spreads are 86 basis points (0.86%) above their historic averages and are about 132 basis points (1.32%) above U.S. high yield spreads at the index level. We think there is room for this relationship to tighten back closer to historical levels. Default rates in Asia have remained low and we believe could stay low in the medium term as interest costs and recession risks remain low. For many of the riskiest borrowers, refinancing has become easier in 2019 as investor risk appetite has returned. We believe this continues to be a key risk to monitor, and we prefer to invest in holdings that have taken steps to refinance upcoming maturities or improve their balance sheets in other ways to be resilient to further turmoil.

We continue to see value in Chinese property, particularly given the magnitude of the sell-off last year. Policymakers are incrementally easing restrictions on developers, pointing to an improving business environment in the second half of the year. We also see value in a number of sectors in Indonesia, including manufacturing and mining. With the momentum among developed and emerging market central banks shifting toward synchronized easing, we expect domestic business environments in Asia to be supportive in an environment of slowing global growth and trade.

To be sure, there continue to be risks on the horizon. If a further slowdown in global growth materializes, we expect investor appetite for emerging markets to diminish. Any re-escalation in trade shocks could also put pressure on Asian fixed income markets. If the Chinese economy deteriorates, corporate defaults will likely rise, and Asian credit could come under pressure. Our base case, however, remains a benign one, with most of the key global macro tail risks fading, with supportive central banks and Chinese economic growth to rebound. 


Tata Steel is listed as ABJA Investment Co. Pte, Ltd.

Lippo Karawaci is listed as Theta Capital Pte, Ltd.

INALUM is listed as PT Indonesia Asahan Aluminium Perser

China Jinmao is listed as Franshion Brilliant, Ltd.

Tower Bersama is listed as TBG Global Pte, Ltd.

Rolling 12 Month Returns for the period ended 30 June 2019
Matthews Asia Credit Opportunities Fund 2019 2018 2017 2016 2015
I (Dist) (USD) 8.76% -1.05% 9.11% n.a. n.a.
J.P. Morgan Asia Credit Index (USD) 10.01% -0.70% 3.10% n.a. n.a.
I (Dist) (GBP) 12.71% -2.35% 12.78% n.a. n.a.
J.P. Morgan Asia Credit Index (GBP) 14.12% -2.30% 6.10% n.a. 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. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. The Fund may invest in the following: derivatives which can be volatile and affect Fund performance; high yield bonds (junk bonds) which can subject the Fund to substantial risk of loss; and structured investments which can change the risk or return, or replicate the risk or return of an underlying asset. 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. These and other risks associated with investing in the Fund can be found in the Prospectus.


Performance figures discussed in the Fund Manager Commentary above reflect that of the Institutional Distribution 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