Matthews Asia ex Japan Dividend Fund

Period ended 31 March 2020

For the quarter ending 31 March 2020, the Matthews Asia ex-Japan Dividend Fund returned -14.52%, while its benchmark, the MSCI All Country Asia ex-Japan Index, returned -18.36%.

Market Environment:

Faced with the grave socio-economic damage inflicted by the COVID-19 pandemic, Asian equity markets experienced tremendous volatility during the first quarter of 2020. An initial selloff of Chinese equities in late January morphed into a global financial market selloff by mid-Feb. When the virus spread hit hard the developed countries, shutting down many of the economies in the West was the only option to avert the worse-case scenario. Such selloff was further exacerbated by forced liquidation from leverage investors and the collapse of oil price, causing significant market dislocations. Normality only partially returned after unprecedented global responses from both central banks' monetary-easing policies and governments' fiscal stimuli, and Asian equity markets bounced off its recent lows.

Performance Contributors and Detractors:

During the quarter, contributors to performance included AK Medical Holdings, a domestic leader orthopedic joint implant market in China. The company reported strong earnings growth for 2019, and expected to continue its strong growth as penetration rate of orthopedic implant in China is still very low. Another contributor was Hope Education Group, a private operator of higher education institutions in China. Hope Education's revenue had very limited impact from the COVID-19 outbreak as much of the tuitions were pre-collected. In addition, the company reported strong 2019 earnings.

Our holdings in regional auto-parts stocks were the top detractors to the Fund's performance. Names including Minth Group, Hyundai Mobis, and Minda Industries experienced a significant decline in their share prices, as broad-based, global auto manufacturing shutdown concerns mounted due to the virus impact. Recognizing the near-term challenge faced by these auto-parts businesses, we decided to consolidate our holdings. We trimmed names whose long-term growth prospect did not look as attractive as other new opportunities presented by the market selloff, while maintaining exposure in holdings with strong, structural growth driver intact, and with a strong balance sheet to withstand any market liquidity stress.

Notable Portfolio Changes:

While the near-term earnings outlook for many Asian companies will be impacted negatively by the virus outbreak, the competitive position and structural growth drivers for certain businesses should be less affected from a long-term perspective. Operating with this framework, the market selloff during the quarter, as painful as it was, presented a great opportunity to improve the quality of our portfolio holdings by picking up what we believe are high-quality, structural growth businesses at a discounted price which is rarely available to investors.

We initiated several new positions during the quarter, mostly in China and Taiwan, and in the consumer discretionary and technology sectors. Two of those new positions are China Int'l Travel Service, a Chinese duty-free retailer listed in China's domestic A-share market, and MediaTek, an IC chip design company based in Taiwan. While we agree that both companies' near-term operations will be significantly affected by the virus containment measures, the long-term investment appeal becomes even stronger with share prices coming off significantly from pre-virus valuations. With a net-cash balance sheet, both companies have the financial strength to weather the current downturn. We consider China International Travel Service and Mediatek as two good additions to our "dividend growers" bucket in the portfolio. To fund these new purchases, we exited a few positions including China Mobile, Ping An Insurance, China Unicom during the quarter.


Although the major manufacturing economies in North Asia have passed the worse phase of the virus outbreak thanks to their aggressive mitigation measures adopted early on, Asian companies are facing a strong, near-term earnings headwind, caused by the sudden demand shock from the western economies. On the other hand, the growth model for Asian economies today, led by China, has evolved significantly over last decade, with domestic consumption replacing export as the key driver for growth. Such structural shift away from export-led growth and towards domestic consumption is also reflected in the changing equity market composition. Many of today's largest listed companies in Asia are domestic-facing businesses. Because of such structural shift, we believe corporate earnings in Asia today are potentially more resilient to external shock, and we believe the same to be true for the resilience of dividends in Asia. While uncertainty abounds, we remain constructive on the long-term Asian equity story. 

Rolling 12 Month Returns for the period ended 31 March 2020
Matthews Asia ex Japan Dividend Fund 2020 2019 2018 2017 2016
I (Acc) (USD) -9.99% -4.31% 32.01% 19.06% n.a.
MSCI All Country Asia ex Japan Index (USD) -13.18% -4.95% 26.16% 17.82% n.a.
I (Acc) (GBP) -4.62% 2.87% 17.09% 37.32% n.a.
MSCI All Country Asia ex Japan Index (GBP) -8.76% 2.33% 12.45% 35.42% 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. There is no guarantee that the Fund or the companies in its portfolio will pay or continue to pay dividends. 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