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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

-4.32%

YTD Return

(as of 01/26/2022)

$13.72

Price

(as of 01/26/2022)

$49.56 million

Fund Assets

(as of 12/31/2021)

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.

These and other risks associated with investing in the Fund can be found in the prospectus.

Fund Facts
Inception Date 04/30/2020
Fund Assets $49.56 million (12/31/2021)
Currency USD
Ticker MEGMX
Cusip 577-130-651
Portfolio Turnover 62.3%
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 1.08%

Performance

  • Monthly
  • Quarterly
  • Calendar Year
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As of 12/31/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
2.59% -0.72% -0.60% -0.60% n.a. n.a. n.a. 32.61% 04/30/2020
MSCI Emerging Markets Index
1.93% -1.24% -2.22% -2.22% n.a. n.a. n.a. 21.82%
As of 12/31/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
2.59% -0.72% -0.60% -0.60% n.a. n.a. n.a. 32.61% 04/30/2020
MSCI Emerging Markets Index
1.93% -1.24% -2.22% -2.22% n.a. n.a. n.a. 21.82%
For the years ended December 31st
Name 2021
Matthews Emerging Markets Equity Fund
MEGMX
-0.60%
MSCI Emerging Markets Index
-2.22%

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 12/31/2021)

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 12/31/2021)
Fund Benchmark
Number of Positions 53 1,420
Weighted Average Market Cap $142.7 billion $136.8 billion
Active Share 84.6 n.a.
P/E using FY1 estimates 16.4x 12.2x
P/E using FY2 estimates 14.8x 11.8x
Price/Cash Flow 13.1 9.0
Price/Book 2.8 1.9
Return On Equity 15.5 14.3
EPS Growth (3 Yr) 3.6% -5.8%

Sources: Factset Research Systems, Inc.

Top 10 Holdings

(as of 12/31/2021)
Name Sector Country % Net Assets
Taiwan Semiconductor Manufacturing Co., Ltd. Information Technology Taiwan 8.0
Samsung Electronics Co., Ltd., Pfd. Information Technology South Korea 6.4
Tencent Holdings, Ltd. Communication Services China/Hong Kong 4.5
First Quantum Minerals, Ltd. Materials Zambia 3.2
FPT Corp. Information Technology Vietnam 3.2
Infosys, Ltd. Information Technology India 3.1
Capitaland Investment, Ltd. Real Estate Singapore 3.1
LUKOIL PJSC Energy Russia 3.0
HDFC Bank, Ltd. Financials India 2.7
Novatek PJSC Energy Russia 2.5
TOTAL 39.7

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 12/31/2021)
  • Sector Allocation
  • Country Allocation
  • Market Cap Exposure

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

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

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.

Distributions

Record Date Ex, Pay and
Reinvest Date
Ordinary
Income
Short Term
Capital Gains
Long Term
Capital Gains
Total Distributions
Per Share
% of NAV Nondividend Distribution (Return of Capital)
12/14/2021 12/15/2021 $0.18047 $0.68627 $0.43302 $1.29976 8.5% N.A.
12/15/2020 12/16/2020 $0.00000 $0.35583 $0.00000 $0.35583 2.3% N.A.

 

There is no guarantee that the Fund will pay or continue to pay distributions. 

Past performance is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost.

Commentary

Period ended December 31, 2021

For the year ending December 31, 2021, the Matthews Emerging Markets Equity Fund returned -0.60% (Investor Class) and -0.43% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned -2.22% over the same period. For the fourth quarter of the year, the Fund returned -0.72% (Investor Class) and -0.68% (Institutional Class), while the benchmark returned -1.24%.

Market Environment:

Dispersion best summarizes 2021. The year saw the third consecutive year for double digit gains in many U.S. indices while the emerging markets (EM) asset class declined slightly. Behind this decline were massive differences at the geographical level and within it. China’s large weighting, and consumer internet’s large weighting within it, were ultimately the biggest detractors in our benchmark, the MSCI Emerging Markets Index. Like China, the stock markets of Brazil and South Korea also declined while other large EM markets, including India, Taiwan, Russia and Mexico, posted double digit gains. We always stay close to our guiding principal of evaluating company fundamentals before top-down country allocation. Nevertheless, investors should understand the narrative of 2021 was really driven by weak performance in one or two geographies that masked strong results elsewhere.

Performance Contributors and Detractors:

From a regional perspective, our underweight and stock selection in China and Hong Kong contributed the most to relative performance in 2021, followed by our allocation to Vietnam.  On the other hand, our underweight and stock selection in Taiwan and India detracted the most from performance. What’s notable is the nearly offsetting effect of China and Hong Kong with Taiwan. The Taiwanese index was a reflexive beneficiary of poor investor sentiment for technology within China. However, we did not take that path. Technology in China is predominantly software and consumer facing—areas we were interested in before the regulatory topography challenged the evolution of pricing power and profits—while tech in Taiwan is mainly hardware and componentry, which tends to be quite cyclical and lacks structural pricing power. Vietnam is our only frontier country and one we feel comfortable in as it is an export gainer globally. While our India holdings posted positive absolute gains, they lagged the performance of the index because of our relatively large skew towards financial services. While financials didn’t keep pace with the index, we believe our holdings are well set up for the pending recovery.

At the sector level, our stock selection in consumer discretionary, real estate and information technology (IT) contributed the most to relative performance while our stock selection in financials and materials were the biggest detractors.

Looking at individual securities, Taiwan Semiconductor Manufacturing Company (TSMC), FPT Corp., an IT service company in Vietnam and Infosys, an Indian multinational information technology company, were among the top contributors. TSMC rose as it continued to enjoy a strong competitive position as the world’s leading semiconductor foundry with superior technology. FPT and Infosys both performed well as business spending on IT services seems likely to continue. On the other hand, Tencent, Alibaba and KE Holdings in China detracted the most from performance. While all three consumer-oriented holdings are excellent companies in our view, they continued to face investor consternation about the scale and scope of regulatory changes in China, many of which affect platform internet companies.

Notable Portfolio Changes:

The year’s market volatility required an active approach and in aggregate, we had about one new or exit position per week in 2021. This is more changes than we would like but is perhaps reflective of the heightened volatility as well as the sector and country leadership changes that occurred last year. A lot our activity was driven by awareness that multiples were getting out of control for companies with high prospects and no profits. Those valuation concerns, combined with company structure and regulatory ones, led us to exit names including video content company, Bilibili, e-commerce and logistics company JD.com and health care technology platform company Wuxi Biologics. Within China, these exits were largely offset with new A-share holdings like Centre Testing International, a certification company, Beijing Oriental Yuhong Waterproof Technology, a water-proof materials maker, and Wuliangye Yibin, a liquor manufacturer.

In terms of additions, we sought to sculpt the portfolio to be well positioned for higher inflation, a stronger U.S. dollar and tighter monetary policy. A very diverse set of companies fit these conditions. TDCX in Singapore, for example, is a versatile IT company that offers services including specialized content moderation in Asian languages for large internet platforms like Facebook (now Meta Platforms) and AirBnB. GCC is a cement company in Mexico but generates a lot of profits out of the U.S., and Doosan Bobcat, a South Korean manufacturer of bulldozers, stands to benefit in our view from increased infrastructure spending in America.

Outlook:

The biggest change in market narrative is increased consensus around jettisoning the “transitory” adjective that proceeds inflation. Inflation is not high in all our markets but it is high enough in the U.S. that rate hikes and tighter monetary policy are on the horizon. Typically, tighter monetary conditions and a stronger U.S. currency have been bad for risk assets, including EM. This is precisely why we spent so much time rebalancing our portfolio away from the consumer and towards natural beneficiaries of a stronger dollar, like real assets and certain commodities.

China may be an exception to the tightening narrative but so far monetary easing is not full blown and the positive effect of looser conditions is offset but lingering concerns around weak consumption. At present we don’t view real estate as a systemic issue in China but investors shouldn’t underestimate the logistical and frictional challenges of resolving the snafus of some of the very large developers there. Our preference remains to be modestly involved in China’s domestic A shares and selective elsewhere.

Overall, the backdrop for EM is decidedly mixed with tighter monetary conditions in one corner and inflation being positive for some producers and negative for consumers.  We remain guided by our principles by focusing on company level fundamentals—not sector or top-down geographical calls. We continue to embrace diversity of holdings and seek to maintain a balance as the external environment changes in unpredictable ways. Finally, humility is important. We don’t claim to be able to call the future. Our portfolio therefore remains intentionally comprised of companies that we believe will perform differently under different macro conditions.

As of Dec 31, 2021, the securities mentioned comprised the Matthews Emerging Markets Equity Fund in the following percentages: FPT Corp., 2.5%; Taiwan Semiconductor Manufacturing Co., Ltd., 6.7%; Infosys Ltd., 2.2%; Tencent Holdings Ltd., 5.4%; Alibaba Group Holding, 2.2%; KE Holdings, Inc., 0.4%; Centre Testing International Group Co., Ltd., 0.5%; Beijing Oriental Yuhong Waterproof Technology Co., Ltd., 0.2%; Wuliangye Yibin Co., Ltd., 0.1%; TDCX, Inc., 0.3%; GCC SAB de CV, 1.1%; and Doosan Bobcat Inc., 0.1%. The Fund held no positions in: Airbnb, Inc., Bilibili Inc., Meta Platforms, Inc., JD.com, Inc., and Wuxi Biologics Cayman Inc.

Current and future holdings are subject to change and risk.

 

Average Annual Total Returns - MEGMX as of 12/31/2021
1YR 3YR 5YR 10YR Since Inception Inception Date
-0.60% N.A. N.A. N.A. 32.61% 04/30/2020

All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, 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. Please see the Fund's most recent month-end performance.

Fees & Expenses
Gross Expense Ratio 2.77%
Net Expense Ratio 1.08%

Matthews has contractually agreed to waive fees and reimburse expenses to limit the Total Annual Fund Operating Expenses until April 30, 2022. Please see the Fund’s prospectus for additional details.

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.

 

Visit our Glossary of Terms page for definitions and additional information.

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.