For the first quarter of the year, the Fund returned -12.56% (Investor Class) and -12.55% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -7.95% over the same period.

Market Environment:

The first quarter brought into stark relief the U.S. Federal Reserve’s struggle to gain control of both inflation and to a lesser extent inflation expectations. The threat of rising prices was elevated by Russia’s invasion of Ukraine as energy and commodity prices surged over concerns about supply disruptions in the oil, gas, fertilizers, wheat and corn markets. Russia’s invasion has led to a rapid reassessment of geopolitical, energy security and defense priorities broadly all over the world but more specifically in Europe and did not help the market sentiment.

Prospects of China’s potential collaboration with Russia during Ukraine invasion, in light of its “No limits” friendship announcement in early February, led to market worries about China and Chinese companies potentially coming under the threat of Western sanctions like Russia. Lingering issues such as threat of delisting of Chinese ADRs and seeming ineffectiveness and economic cost of continued Zero-COVID and its variant policies also led to further weakness in Chinese equities.

Given these developments, energy was the best performing sector in Asia during the quarter. The financials sector also had positive returns, while health care and consumer discretionary were the worst performers. As a large energy importer, many of the markets of Asia, including South Korea and Taiwan, were negatively impacted by rising oil and gas prices. The best performers were in Southeast Asia, led by Indonesia and Thailand.

Asian currencies mostly held their own against the U.S. dollar. The Thai baht and the Chinese renminbi were the best performers, while the worst performers were from energy importers and included the Japanese yen, the Taiwanese dollar, the Indian rupee and the Korean won.

Performance Contributors and Detractors:

On a country basis, our overweight allocation and stock selection within India contributed the most to the Fund’s relative performance during the quarter. Our stock selection within Singapore also aided performance. On the other hand, stock selection within China, Taiwan and South Korea detracted from performance.

At the sector level, the Fund’s underweight and stock selection within communication services and consumer discretionary, and our overweight and stock selection in real estate added to the Fund’s relative performance. On the other hand, stock selection within information technology, health care and financials detracted most from relative performance. In light of the market’s fast-evolving rate expectations and the energy and commodity price spikes during the quarter, the rotation away from expensive growth stocks continued apace, impacting high-growth sectors such as technology and biotech, which had done well last year.

In terms of individual holdings, Indian stocks contributed most to the Fund’s absolute and relative performance during the quarter, led by Bandhan Bank Ltd., India’s largest microfinance lender. After several quarters of turbulence on the back of COVID lockdowns, general weakness in India’s rural economy, and political risks emanating from state elections, the operations have seemingly stabilized and problem assets mostly provided for, giving a positive background for Bandhan’s stock price.  On the other hand, our health care holdings were among the biggest detractors to performance. Health care holdings in China, including Wuxi Biologics and Innovent Biologics, were further impacted by worries about the effect of the U.S. Unverified List (UVL) on names such as Wuxi and the potential change in clinical trial design requirements by the U.S. Food and Drug Administration (FDA), requiring multi-regional trials for U.S. drug approval instead of single country trials, in the case of Innovent.

Notable Portfolio Changes:

Given the fast-evolving expectations of a global rate upcycle (except for in China where expectations are for looser monetary conditions) and potential for surprises on the upside over the coming quarters, we increased the Fund’s exposure to South Korean financial services during the quarter. We initiated positions in two regional banks in South Korea: DBG Financial Group Inc. and BNK Financial Group Inc. Both have a strong franchise in their respective regions and support small and medium enterprises. We exited small stub holdings in names like Indian Railway Catering & Tourism Company, from which we took profits.

Outlook:

Looking ahead, the Fed’s pace and scope of interest rate hikes and quantitative tightening and the market’s expectation of its evolution remain the most important variables to watch and will have near-term implications for regional, sector and style performance. Russia’s invasion of Ukraine and the attendant impact on inflation also needs careful watching.

We expect corporate earnings to moderate in 2022 as the global recovery continues to expand. We remain watchful about the impact of inflation on corporate earnings. Across the region we see sufficient liquidity, and while we have not seen as much uptake in credit, any meaningful pick up in credit issuance should further support economic growth. In many parts of Asia COVID-19 vaccination is progressing well and provides hope for economic activity normalization in the coming quarters but China’s zero-COVID policy and its variants need watching.

Over the mid-long term we continue to believe that companies that address critical challenges such as climate change and inclusive development will continue to thrive. And for investors interested in sustainability themes, including reducing carbon emissions, alleviating poverty and creating greater financial inclusion in the developing world, Asia remains a key investment destination, in our view. To tackle sustainable themes globally, we believe we need to include the world’s most populous economies, many of which lie in Asia.

As the global economy embarks on a post-pandemic recovery path and markets contend with macro headwinds and volatility, we believe there are attractive opportunities for alpha generation throughout our large, diverse, sustainable investment universe.

View the Fund’s Top 10 holdings as of March 31, 2022. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MASGX as of 03/31/2022