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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

0.25%

YTD Return

(as of 09/28/2021)

$15.80

Price

(as of 09/28/2021)

$56.06 million

Fund Assets

(as of 08/31/2021)

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.

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

Fund Facts
Inception Date 04/30/2020
Fund Assets $56.06 million (08/31/2021)
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
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As of 08/31/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
1.05% -2.91% 3.68% 25.03% n.a. n.a. n.a. 46.86% 04/30/2020
MSCI Emerging Markets Index
2.65% -4.00% 3.07% 21.50% n.a. n.a. n.a. 33.12%
As of 06/30/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
2.38% 7.69% 9.33% 51.05% n.a. n.a. n.a. 62.53% 04/30/2020
MSCI Emerging Markets Index
0.21% 5.12% 7.58% 41.36% n.a. n.a. n.a. 43.98%

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 06/30/2021)

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 06/30/2021)
Fund Benchmark
Number of Positions 53 1,412
Weighted Average Market Cap $173.3 billion $167.9 billion
Active Share 80.9 n.a.
P/E using FY1 estimates 19.0x 13.6x
P/E using FY2 estimates 16.4x 12.7x
Price/Cash Flow 14.9 9.5
Price/Book 3.1 2.1
Return On Equity 10.9 13.5
EPS Growth (3 Yr) 23.0% 12.7%

Sources: BNY Mellon Investment Servicing (US) Inc., Factset Research Systems, Inc., Zephyr StyleADVISOR, Matthews Asia

Top 10 Holdings

(as of 08/31/2021)
Name Sector Country % Net Assets
Taiwan Semiconductor Manufacturing Co., Ltd. Information Technology Taiwan 6.9
Samsung Electronics Co., Ltd., Pfd. Information Technology South Korea 6.5
Tencent Holdings, Ltd. Communication Services China/Hong Kong 5.4
FPT Corp. Information Technology Vietnam 3.0
AIA Group, Ltd. Financials China/Hong Kong 2.7
Infosys, Ltd. Information Technology India 2.7
LUKOIL PJSC Energy Russia 2.6
HDFC Bank, Ltd. Financials India 2.6
First Quantum Minerals, Ltd. Materials Zambia 2.4
Nice, Ltd. Information Technology Israel 2.4
TOTAL 37.2

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 06/30/2021)
  • 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)
12/15/2020 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 June 30, 2021

For the first half of 2021, the Matthews Emerging Markets Equity Fund returned 9.33% (Investor Class) and 9.32% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 7.58% over the same period. For the quarter ending June 30, the Fund returned 7.69% (Investor Class) and 7.68% (Institutional Class), while the benchmark returned 5.12%.

Market Environment:

The second quarter of 2021 saw a high degree of dispersion below what appeared to be a calm quarter. Chinese equities were essentially flat in the second quarter and underperformed global emerging markets (“EM”). Sectors also displayed a high degree of return dispersion. Many of the larger Chinese internet companies, in particular, had a hard quarter as regulatory pressure continues to weigh on sentiment. The drag created by these large platform companies also led to smaller capitalization companies outperforming their larger peers.

The market remains dominated by a few key questions. One large debate relates to the structural vs. transitory nature of inflation in several economies, including the U.S. The easing of supply constraints should dissipate inflationary pressure for quite a few categories; however, expectations have also probably risen and at the Federal Open Market Committee meeting in June, the Fed had a more hawkish tone than that of March. Notably, the median projection of the Fed Funds Rate is for two hikes by the end of 2023. Gradual increases in U.S. rates are, on balance, not bad for EM and could indeed be positive if they are in part predicated upon strong economic activity coming out of the pandemic. Certain EM economies may see positive terms of trade impacts, should the positive price evolution in certain commodities like energy and base metals continue.

The other big question is where the world stands related to COVID-19. There’s been significant progress among many developed economies in terms of vaccine rollouts, which has been counterbalanced a bit by new coronavirus variants emerging and ongoing health care challenges in countries such as India. Continued uncertainty has muted enthusiasm, but many countries where the virus remains problematic are also experiencing high levels of investor interest.

Contributors and Detractors:

For the first half of the year, our overweight to Vietnam (which is not represented in the benchmark) was a contributor to relative performance from a regional perspective. On the other hand, stock selection in Taiwan was a detractor. From a sector perspective, stock selection in energy and health care contributed to relative performance, while stock selection in financials was a detractor.

Turning to individual securities, our two positions in Vietnam, FPT Corp. and Military Commercial Joint Stock Bank, were among the largest contributors during the first half of the year. Vietnam has a large current account surplus, positive real GDP growth, a growing population and relatively benign inflation. Our attraction to Vietnam has to be backed up by company-level fundamentals, however. FPT Corp. is among the largest technology companies in the country, and is a top 10 holding. It is both a leader in providing broadband internet as well as in information technology (“IT”) services to companies abroad, mainly in the U.S. and Japan. Military Commercial Bank is a leading joint-stock bank in the country and has among the larger exposures to Vietnamese consumers within the financial system. Vietnam is the only frontier market the portfolio is currently invested in.

On the other hand, New Oriental Education & Technology Group was a detractor. The company is among the older, larger and more established education companies in China. We bought the company partly on the expectation of a positive evolution in enrollment with the re-starting of in-person learning post pandemic. Ultimately, we sold out of the company as regulatory clouds persist in the education space which may limit the timing and types of services that private education companies can offer in China.

Notable Portfolio Changes:

We had a quite active second quarter, adding seven new unique positions and exiting nine. New positions in the quarter include Chinese A-share company Beijing Oriental Yuhong, a leader in waterproofing coatings. We believe the company’s market is set to grow as construction spend shifts to quality. In contrast to many of the tech companies that are suffering from regulatory headwinds, we think better construction durability is aligned with China’s development objectives. In contrast, we sold Anhui Conch Cement Co., a leading and profitable Chinese cement company, during the quarter after seeing little to be excited about in terms of earnings evolution. We also initiated a position in Fix Price Group, a Russia-based chain of discount companies, comparable to a “dollar store” in the U.S. It sells mostly low-priced merchandise, rotating most of its items to generate consumer excitement while being one of the most reliable value stores for basic consumers. We believe the business model of Fix Price will allow the company to expand rapidly in the regions it operates as well as within existing stores via densification. In our view, the company is in the rare position of being able to grow fast and pay a sizable dividend at the same time. With a net-cash balance sheet, high management ownership and solid returns on capital, the company fits our strategy’s philosophy.

Outlook:

In its own words, the Fed is “talking about talking about tapering.” As previously mentioned, higher rates that accrue gradually due to increased economic activity could be viewed as net positive for emerging market assets. We believe valuations on a relative basis are attractive in EM, as all asset classes are fairly picked over after years of very accommodative monetary policy. We’ve seen select EM currencies—notably the Brazilian real—strengthen over the quarter, which may continue over the second half of the year.

While there’s been significant progress in vaccine rollouts among many developed economies, it has been counterbalanced a bit by new variants of the virus emerging. That said, firms and countries have adapted to the challenges of operating during a pandemic, and we’re quite optimistic that reopening and the next normal will be a durable trend in the second half of 2021. The scope and nature of durable change at the company level as a result of pandemic is something we are highly focused on.

With a benchmark-agnostic approach, the portfolio is broadly diversified by country and sector, based on bottom-up stock selection. China is our largest underweight relative to its position in the MSCI Emerging Markets Index. The regulatory topography in internet/internet-adjacent, education and healthcare sectors, in particular, is hard to decipher, and this keeps us on the sidelines. More clarity on the regulatory environment in these sectors would be a welcomed development. However, there are still many great companies with durable advantage and the country remains our largest overall allocation in an absolute sense. As previously mentioned, relative to the benchmark one of our largest overweight markets is Vietnam. We believe it is quite possible that Vietnam will be upgraded from frontier to EM status by one or more of the relevant indices in the next few years. Our positions in Vietnam are by and large driven by the positive evolution of the domestic economy there. We have three positions in Mexico, but each is partly predicated upon the recovery of the global economy as much as the domestic conditions of Mexico. We highlight this contrast explicitly because it is in keeping with our “company then country” approach. We do not allocate to countries top down.

We continue to seek out high-growth, high-quality companies across emerging markets and across the market capitalization spectrum, looking for companies that can adapt and thrive across a broad range of conditions.

 

As of June 30, 2021, the securities mentioned comprised the Matthews Emerging Markets Equity Fund in the following percentages: FPT Corp., 2.6%; Military Commercial Joint Stock Bank, 1.6%, Beijing Oriental Yuhong Waterproof Technology Co., 1.1%; and Fix Price Group, Ltd., 1.2%. The Fund held no positions in Anhui Conch Cement Co. and New Oriental Education & Technology Group.

Current and future holdings are subject to change and risk.

Average Annual Total Returns - MEGMX as of 06/30/2021
1YR 3YR 5YR 10YR Since Inception Inception Date
51.05% N.A. N.A. N.A. 62.53% 04/30/2020
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.