For the year ending December 31, 2021, the Matthews Pacific Tiger Fund returned -4.41% (Investor Class) and -4.29% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -4.46% over the same period. For the fourth quarter of the year, the Fund returned -0.19% (Investor Class) and -0.18% (Institutional Class), while the benchmark returned -1.18%.

Market Environment:

Most Asian equity markets failed to recover the losses sustained in the third quarter as continuing concerns around the real estate sector in China along with the potential shift in the inflationary regime weighed on investor sentiment. Stocks with higher valuation multiples, especially in growth sectors like health care and internet software, continued to underperform the broader market in the fourth quarter. On the flip side, rate sensitive companies like banks outperformed.

For the full year, sectors like energy, utilities and industrials have delivered outsized gains compared to growth-sensitive stocks, as investors anticipate a more reflationary environment in Asia. Sub-industries such as shipping are benefiting from disruptions in supply chains, although the sustainability of this trend remains uncertain. Small-cap stocks continued to outperform during the fourth quarter, and finished the year with stronger gains compared to large cap peers.

Tourism- and consumption-oriented economies like Indonesia and Thailand are beginning to attract foreign investor flows as the recovery from COVID-19 is starting to gain hold, and equity valuations in those countries remain relatively attractive. In addition, most Asian currencies depreciated against the U.S. dollar during 2021 (with the exception of the Chinese renminbi), though the magnitude of depreciation was well contained owing to the improved current account balances and foreign currency reserves of many Asian countries.

Performance Contributors and Detractors:

During the year, contributors to performance included stock selection in India and South Korea. Indian utility company Tata Power is emerging as a potential beneficiary of the transition to renewable energy in India, and market participants appreciated the positive governance attributes of the management team, pushing Tata’s stock price significantly higher during the year. Several South Korean holdings contributed to relative performance. While these companies operate in different sectors, investors have continued to be impressed by their earnings power and operational excellence.

On the other hand, stock selection in China and Taiwan were significant detractors to relative performance in 2021. The portfolio’s information technology (IT)-related holdings suffered an erosion in valuation multiples, weighed down by the underperformance of Chinese internet platform companies. Investors were concerned that China’s proposed regulations within the sector may lead to higher cost burdens for some of these companies. For example, portfolio holding Ming Yuan Cloud Group Holdings, provider of SaaS/ERP (Software as a Service Enterprise Resource Planning) services for the real estate sector, suffered from weakness during 2021. Nevertheless, we believe our investment thesis is intact, as the digitization of real estate transactions looks to be a durable trend in China.

The portfolio’s underweight allocations to sectors like financials, energy and materials were sources of relative underperformance during 2021, while stock selection in utilities and consumer discretionary helped overall performance.

Notable Portfolio Changes:

At a country level, the biggest change was a decline in the weight in the China/Hong Kong region, and a corresponding increase in the weight in Taiwan. The decline in China was primarily driven by a consolidation in holdings in the consumer discretionary, consumer staples and financial sectors, compounded by a fall in Chinese equity prices. As a part of the consolidation process, we chose to increase the weights of companies in which we have a high conviction in the long term, taking advantage of recent share price weakness. A good example is web-based shopping platform Meituan. We believe that the recent increase in regulatory and compliance costs within the industry will increase the moat around their delivery business, while their offerings in travel and in-store marketing continue to strengthen.

The increase in Taiwan was primarily driven by diversification of holdings into the financials and consumer discretionary sectors, as we continue to seek diversified growth. Chailease Holding Co. is an example of this, as the company skillfully operates their leasing business in China with strict control over their underwriting processes. Chailease has continued to show solid growth with a sustained return on equity profile.

At the sector level, the biggest change during the course of 2021 was an increase in industrials holdings, led by the introduction of two mid-size companies: Indian automotive manufacturer Ashok Leyland and South Korean industrial and construction equipment maker Doosan Bobcat. In both these cases, management teams continued to sharpen their operational capabilities, and are well placed for a recovery within the markets they operate, in our view.

Outlook:

There are several crosscurrents that are likely to impact earnings across the region. Cost pressures are proving to be more intransigent than previously anticipated, although the inflation readings in Asia have not been as remarkable as in the U.S. With the anticipated tightening of U.S. monetary policy, China’s central bank has stayed neutral to slightly dovish, while other Asian central bank have started or are likely to begin to raise interest rates. It remains unclear how the evolution of monetary and fiscal policies will impact the flow and availability of capital for businesses across the region, and ultimately the valuations for stocks within Asia. Foreign institutional flows (FII) have remained resilient thus far—in fact, China was the highest recipient of foreign equity flows.

Meanwhile, consumer demand patterns continue to improve, especially in India and Southeast Asia, while still remaining robust in countries like China. In our view, the risk to demand and consumer spending stems from further setbacks to consumer sentiment from COVID-19, or weakness in sectors like real estate in China. Other risks that we continue to monitor stem from policy-related missteps that may result in unintended downward pressure on business and consumption activities—recent examples of this include the implementation of electrical power production cuts in China and the continuation of its zero-COVID policy.

That being said, we continue to believe that the pandemic has catalyzed and accelerated positive changes for businesses across Asia. The most obvious impacts have been the embrace of technology and an increasing regard for environmental, social and governance (ESG)-related factors. Along with these factors, and continued uncertainty from regulatory changes in China, we believe that there will be greater divergence in operating performance in companies in coming periods. The core of the portfolio continues to be invested in businesses that we believe are capable of harnessing these changes and improving their stature and share.

Secular growth opportunities in areas like renewable energy, health care, and various aspects of IT continue to deepen across the region. At the same time, the increasing purchasing power of the consumer and a more aspirational lifestyle throughout Asia are creating fertile ground for innovation in traditional areas related to domestic consumption. We continue to see the opportunity set broaden, and the team remains focused on finding uncorrelated and diversified long-term growth in Asian equities.

As of December 31, 2021, the securities mentioned comprised the Matthews Pacific Tiger Fund in the following percentages: Tata Power Co., 1.6%; Ming Yuan Cloud Group Holdings, 0.8%; Meituan, 2.1%; Chailease, 1.6%; Ashok Leyland, 1.6%; and Doosan Bobcat, 1.3%.

Current and future portfolio holdings are subject to change and risk.

The Fund does not have a dedicated ESG mandate. 

Earnings growth is not representative of the Fund’s future performance.

Average Annual Total Returns - MAPTX as of 12/31/2021