Matthews Asia ex Japan Dividend Fund

Period ended 31 December 2019

For the year ending 31 December 2019, the Matthews Asia ex Japan Dividend Fund returned 16.73%, while its benchmark, the MSCI All Country Asia ex Japan Index, returned 18.52%. For the fourth quarter, the Fund returned 4.74% versus 11.85% for the Index.

Market Environment:

Asian equities finished 2019 strongly, despite several macro-related headwinds. For most of the year, the specter of an escalating trade war between China and the U.S. remained the biggest market overhang. Such risk was materially deflated during the fourth quarter, as an interim "phase one" trade deal was reached. Asset prices, including equities, responded favorably.

Performance Contributors and Detractors:

The Fund delivered a positive return in 2019 but still slightly underperformed its benchmark, due to negative stock selection and country allocation. Challenges in stock selection were most visible in our holdings in the consumer discretionary sector. This was largely attributed to the strong share performance of Alibaba, which this Fund did not own due to the company's lack of commitment to a dividend policy or payment. Not owning Alibaba alone caused a 2.58% relative underperformance for the Fund on a full-year basis. 

On allocation, the Fund's overweight in China/Hong Kong contributed the most to relative performance in 2019. Political unrest in Hong Kong severely impacted the local economy and weakened sentiment toward Hong Kong-listed Chinese stocks. Most of our Hong Kong-listed holdings, however, have their businesses within mainland China and their earnings growth was not impacted by Hong Kong. We believe improvement in investor sentiment and attractive valuations in the Hong Kong market will turn into tailwinds for Chinese companies listed there. On the contrary, our holdings in Vietnam were the largest drag on performance in terms of country allocation. This is probably a surprise to many investors, as Vietnam is widely believed to be a winner amid the U.S.—China trade tensions. This reinforced our belief that a good macroeconomic development does not necessarily translate into good stock market performance.
Turning to individual stocks, Haidilao International, a chain of Chinese hot pot restaurants, saw strong share-price appreciation during the year. Haidilao's unique strength is in managing its employees and delivering highly satisfactory customer service. The market seemed convinced that Haidilao can continue to deliver strong growth as it expands its store network throughout China and overseas. Taiwan Semiconductor Manufacturing Co. (TSMC), one of the world's largest contract semiconductor manufacturers, also saw its earnings surge during the second half of the year as its technology advantage gave it a competitive edge over its global competitors. TSMC was the second-best contributor to the Fund's returns in 2019.

On the flipside, BGF Retail, a South Korean convenience-store operator, was the largest detractor to performance in 2019. During the year, BGF saw its overall same-store sales growth turn negative, impacted by weak domestic consumption in South Korea. The stock's valuation discounted the cyclical slowdown, while cost pressures from recent minimum-wage hikes started to dissipate. Long-term structural growth drivers for its CVS business in South Korea remained intact. We decided to exit the position and deploy the capital elsewhere.

Notable Portfolio Changes:

In the fourth quarter, we initiated several new positions, one of which was Gree Electric Appliances, a leading home-appliance manufacturer listed on China's A-share market. Gree is a key beneficiary of middle-class consumer spending growth in China, with its strong brand equity and cost advantage from large economies of scale. We are particularly positive about the recent transfer of Gree's equity ownership, which transformed the company from a state-owned enterprise to a business controlled by a private equity investor and the company's management team. The ownership change paved the way for a better corporate governance structure and better interest alignment with shareholders. The company's valuation remained attractive at 13.6x 2020 P/E with 4.1% dividend yield.
On the other hand, we exited a few positions during the fourth quarter. Among them was our holdings in Haidilao, the Fund's top performance contributor in 2019, as we believed the market was probably too optimistic about its store expansion and its valuation was stretched even considering the positive fundamentals. We also exited Ayala Land, one of the largest property developers in the Philippines, as we felt that the real estate market in the Philippines was overheating a bit.


We are constructive on Asian equity markets. Asian central banks and governments were quick to respond with decisive monetary and fiscal measures to arrest the economic slowdown in 2019. We expect the supportive policy environment to continue in 2020. The earnings cycle in Asia has started to turn up, after several consecutive quarters of negative earnings growth. Valuation multiples of Asian equities did not look stretched at 14x forward P/E at this stage of the earnings cycle. In our view, markets increasingly could focus on equity fundamentals in 2020.

Rolling 12 Month Returns for the period ended 31 December 2019
Matthews Asia ex Japan Dividend Fund 2019 2018 2017 2016 2015
I (Acc) (USD) 16.73% -12.37% 47.29% 6.89% n.a.
MSCI All Country Asia ex Japan Index (USD) 18.52% -14.12% 42.08% 5.76% n.a.
I (Acc) (GBP) 13.21% -7.38% 34.23% 28.50% n.a.
MSCI All Country Asia ex Japan Index (GBP) 13.94% -8.78% 29.78% 26.15% 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