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Global Emerging Markets

Matthews Emerging Markets Equity Fund MEGMX

Snapshot
  • Seeks Alpha in Global Emerging Markets—capitalizes on consumption and innovation trends
  • Quality Growth Portfolio—based on deep, holistic analysis
  • All-Cap, Company-First Approach—emphasizes fundamental research over top-down country or sector allocation

04/30/2020

Inception Date

6.73%

YTD Return

(as of 01/21/2021)

$16.82

Price

(as of 01/21/2021)

$44.79 million

Fund Assets

(as of 12/31/2020)

Objective

Long-term capital appreciation

Strategy

Under normal circumstances, the Matthews Emerging Markets Equity Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in emerging market countries. Emerging market countries generally include every country in the world except the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the countries in Western Europe. Certain emerging market countries may also be classified as “frontier” market countries, which are a subset of emerging market countries with newer or even less developed economies and markets, such as Sri Lanka and Vietnam. The list of emerging market countries and frontier market countries may change from time to time. The Fund may also invest in companies located in developed countries; however, the Fund may not invest in any company located in a developed country if, at the time of purchase, more than 20% of the Fund’s assets are invested in developed market companies.

Risks

Investments in emerging and frontier securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Additionally, investing in emerging and frontier markets countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets.

The risks associated with investing in the Fund can be found in the prospectus.

Fund Facts
Inception Date 04/30/2020
Fund Assets $44.79 million (12/31/2020)
Currency USD
Ticker MEGMX
Cusip 577-130-651
Benchmark MSCI Emerging Markets Index
Geographic Focus Emerging Markets - Countries generally include every country in the world except the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the countries in Western Europe
Fees & Expenses
Gross Expense Ratio 2.77%
Net Expense Ratio 1.15%

Performance

  • Monthly
  • Quarterly
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As of 12/31/2020
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
9.01% 22.15% n.a. n.a. n.a. n.a. n.a. 61.23% 04/30/2020
MSCI Emerging Markets Index
7.40% 19.77% n.a. n.a. n.a. n.a. n.a. 42.23%
As of 12/31/2020
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
9.01% 22.15% n.a. n.a. n.a. n.a. n.a. 61.23% 04/30/2020
MSCI Emerging Markets Index
7.40% 19.77% n.a. n.a. n.a. n.a. n.a. 42.23%

Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.

Year to Date and Since Inception performance with less than one year of history represents actual performance, not annualized.

Assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived. Performance differences between the Institutional class and the Investor class may arise due to differences in fees charged to each class.

Additional performance, attribution, liquidity, value at risk (VaR), security classification and holdings information is available on request for certain time periods.

Growth of a Hypothetical $10,000 Investment Since Inception

(as of 12/31/2020)

Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.

The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.

Portfolio Manager

John Paul Lech photo
John Paul Lech

Lead Manager

Portfolio Characteristics

(as of 12/31/2020)
58
Number of Securities

Source: BNY Mellon Investment Servicing (US) Inc.

26.7x
P/E using FY1 estimates
19.6x
P/E using FY2 estimates
$154.2 billion
Weighted Average Market Cap

Source: FactSet Research Systems

Top 10 Holdings

(as of 12/31/2020)
Name Sector Country % Net Assets
Samsung Electronics Co., Ltd., Pfd. Information Technology South Korea 5.8
Taiwan Semiconductor Manufacturing Co., Ltd. Information Technology Taiwan 5.8
Alibaba Group Holding, Ltd. Consumer Discretionary China/Hong Kong 3.9
Tencent Holdings, Ltd. Communication Services China/Hong Kong 3.2
AIA Group, Ltd. Financials China/Hong Kong 3.0
LVMH Moet Hennessy Louis Vuitton SE Consumer Discretionary France 2.6
LUKOIL PJSC Energy Russia 2.1
CapitaLand, Ltd. Real Estate Singapore 2.0
Heineken N.V. Consumer Staples Netherlands 2.0
Kotak Mahindra Bank, Ltd. Financials India 2.0
TOTAL 32.4

Top 10 holdings may combine more than one security from the same issuer and related depositary receipts.

Source: BNY Mellon Investment Servicing (US) Inc.

Portfolio Breakdown (%)

(as of 12/31/2020)
  • Sector Allocation
  • Country Allocation
  • Market Cap Exposure
Sector Fund Benchmark Difference
Information Technology 19.3 20.5 -1.2
Consumer Discretionary 18.6 18.3 0.3
Financials 17.7 18.0 -0.3
Communication Services 9.0 11.6 -2.6
Materials 6.7 7.6 -0.9
Health Care 6.6 4.7 1.9
Energy 5.2 5.0 0.2
Consumer Staples 5.0 5.9 -0.9
Industrials 4.0 4.3 -0.3
Real Estate 3.9 2.1 1.8
Utilities 0.0 2.0 -2.0
Cash and Other Assets, Less Liabilities 4.0 0.0 4.0

Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.

Country Fund Benchmark Difference
China/Hong Kong 30.0 40.3 -10.3
South Korea 11.9 13.5 -1.6
India 11.2 9.2 2.0
Brazil 6.3 5.1 1.2
Taiwan 5.8 12.6 -6.8
Russia 5.4 3.0 2.4
Singapore 3.3 0.0 3.3
Mexico 3.2 1.7 1.5
Poland 3.1 0.7 2.4
France 2.6 0.0 2.6
Netherlands 2.0 0.0 2.0
United Kingdom 1.8 0.0 1.8
Indonesia 1.7 1.3 0.4
Canada 1.6 0.0 1.6
Philippines 1.3 0.7 0.6
Peru 1.3 0.2 1.1
Argentina 1.3 0.1 1.2
South Africa 1.1 2.3 -1.2
Vietnam 0.7 0.0 0.7
Cyprus 0.4 0.0 0.4
Saudi Arabia 0.0 2.4 -2.4
Thailand 0.0 1.8 -1.8
Malaysia 0.0 1.5 -1.5
Qatar 0.0 0.7 -0.7
Chile 0.0 0.5 -0.5
Kuwait 0.0 0.5 -0.5
United Arab Emirates 0.0 0.5 -0.5
Turkey 0.0 0.4 -0.4
Colombia 0.0 0.2 -0.2
Hungary 0.0 0.2 -0.2
Czech Republic 0.0 0.1 -0.1
Egypt 0.0 0.1 -0.1
Greece 0.0 0.1 -0.1
Cash and Other Assets, Less Liabilities 4.0 0.0 4.0

Not all countries are included in the benchmark index(es).

Equity market cap of issuer Fund Benchmark Difference
Mega Cap (over $25B) 57.4 59.2 -1.8
Large Cap ($10B-$25B) 18.6 20.5 -1.9
Mid Cap ($3B-$10B) 12.1 18.5 -6.4
Small Cap (under $3B) 7.8 1.8 6.0
Cash and Other Assets, Less Liabilities 4.0 0.0 4.0

Source: FactSet Research Systems.

Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.

Commentary

Period ended December 31, 2020

The Matthews Emerging Markets Equity Fund launched on April 30, 2020. From inception to December 31, 2020, the Fund returned 61.23% (Investor Class) and 61.55% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 42.23%. For the quarter ending December 31, 2020, the Fund returned 22.15% (Investor Class) and 22.30% (Institutional Class) versus 19.77% for the index.

Market Environment:

Global equities were volatile in the year, but ultimately generated attractive returns, and this was particularly pronounced in Asian and emerging markets more broadly. Global markets fell in the first quarter, as worries surrounding the spread of COVID-19 moved beyond China. Fears of a global growth slowdown turned into reality as governments worldwide began to implement different versions of ‘shelter in place’ to contain the movement of the virus. Markets recovered in part due to the extraordinary fiscal and monetary measures put in place by many countries. Early in the year, cyclically sensitive sectors like energy, materials, industrials and financials suffered most while companies related to communication services and technology performed better. In the second quarter, most global financial markets, including Asia’s, began to rise as major economies began to relax prior pandemic-related restrictions. The gradual reopening of businesses—especially those focused on services and consumption—helped bolster sentiment and bring a floor to stock prices globally.

In the third quarter, economic recovery and improved sentiment began to take hold as major economies continued to relax COVID-19 lockdown restrictions even further. China’s V-shaped recovery in manufacturing along with a steady recovery in domestic consumption brought some normalcy to daily life. EM currencies rallied slightly against the US dollar in the third quarter, acting as a slight tailwind for EM equities. Growth stocks outpaced value and small caps outperformed large caps in the third quarter. The fourth quarter saw further economic strengthening. Cyclical stocks in beaten up or export driven markets such as Indonesia and Korea rallied most in the fourth quarter, while markets that experienced early recovery like China, Japan and India lagged slightly. Market strength gained momentum following the U.S. Presidential elections in November as markets hoped for less confrontational U.S. – China relations, combined with an announcement of several approved COVID-19 vaccines that were due for distribution early in 2021.

Contributors and Detractors:

For the fourth quarter, stock selection in China/Hong Kong was a notable contributor to performance from a regional perspective. On the other hand, stock selection in South Korea was a detractor. From a sector perspective, stock selection in communication services and financials was a contributor. Meanwhile, stock selection in energy and an overweight in real estate were slight detractors.

Samsung Electronics was a major contributor to portfolio returns in the fourth quarter as expectations regarding the company’s semiconductor business, which is the majority of the firm’s profitability, remain positive. The semiconductor business can be divided between memory and logic, both of which are becoming more consolidated. We believe Samsung Electronics’ governance, balance sheet and competitive position are all attractive attributes.

On the other hand, Anhui Conch Cement was a slight detractor. The company is considered a leader in its industry with some of the lowest costs and a good history of capital allocation. We remain positive on the company’s prospects as its core product is an essential component of any increase in construction or infrastructure spending.

Notable Portfolio Changes:

The year’s market volatility required an active approach to portfolio construction and we initiated positions over the fourth quarter. We added Allegro, an e-commerce company in Poland that does more than 10 times the gross merchandise value (GMV) of its next largest competitor. In China, we augmented our holdings in the consumer discretionary by adding JD.com which has a growing business in grocery delivery—an underpenetrated segment of online retail. We also added a position in Grupo Aeroportuario del Sureste, which operates several airports across Mexico and could be a beneficiary of increased travel once vaccinations against COVID-19 become more widely implemented.

Outlook:

Looking back at an extraordinary year, North Asia handled the pandemic significantly better than other parts of the world, and this was largely reflected in the outperformance of the MSCI Emerging Markets Asia Index from the March lows versus the rest of emerging markets. When considering this outperformance, it is important to remember that equities are fundamentally an anticipatory asset class: What has happened is less important than what is likely to happen and how fast potential changes may happen.

In the year ahead, we will continue to look for good investment opportunities across a broad swath of geographies including Southeast Asia, Russia and Brazil. In all markets, we believe fundamental research is the name of the game. We find that China in particular is a market where looking beyond the leading companies could prove fruitful to active investors. The incoming Biden administration in the U.S. may decrease the vitriol and unpredictability that has existed between the U.S. and China. A more predictable relationship is a positive development for markets globally. Risks in 2021 include the potential for an uneven global economic recovery, but we are also focused on political and ESG risks. In terms of currency moves, the consensus view is for a weakening U.S. dollar versus many emerging market currencies.

Thematically, we are thinking in terms of a re-opening and “next normal.” The key is to separate companies that artificially benefit from the pandemic from companies where long-term fundamentals have been catalytically charged by it. We are encouraged by the rapid scientific progress related to the vaccines. In the third quarter of 2020, many analysts were hoping for a vaccine with perhaps 50% effectiveness. So, distribution challenges aside, the announcement of multiple vaccines with 80%+ effectiveness during the fourth quarter should be seen as positive news. Strong local currencies and a re-opening of the world economy bode well for emerging markets to potentially offer attractive equity gains in 2021.

 

As of December 31, 2020, the securities mentioned comprised the Matthews Emerging Markets Fund in the following percentages: Samsung Electronics Co., Ltd., Pfd., 5.8%; Anhui Conch Cement Co., Ltd. A Shares, 1.4%; Allegro.eu SA, 1.6%; JD.com, Inc. ADR, 1.3%; Grupo Aeroportuario del Sureste SAB de CV ADR, 1.3%. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MEGMX as of 12/31/2020
1YR 3YR 5YR 10YR Since Inception Inception Date
N.A. N.A. N.A. N.A. 61.23% 04/30/2020
Fees & Expenses
Gross Expense Ratio 2.77%
Net Expense Ratio 1.15%

Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class (which is offered through a separate prospectus to eligible investors) to 0.90%, first by waiving class specific expenses (e.g., shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non- class specific expenses (e.g., custody fees) of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 0.90% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 0.90%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

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Index Definitions

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. Neither the funds nor the Investment Advisor accept any liability for losses either direct or consequential caused by the use of this information.

The views and opinions in the commentary were as of the report date, subject to change and may not reflect 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.