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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

8.63%

YTD Return

(as of 06/11/2021)

$17.12

Price

(as of 06/11/2021)

$57.71 million

Fund Assets

(as of 05/31/2021)

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 $57.71 million (05/31/2021)
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 05/31/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
3.51% 3.31% 6.79% 62.28% n.a. n.a. n.a. 65.01% 04/30/2020
MSCI Emerging Markets Index
2.34% 3.35% 7.36% 51.51% n.a. n.a. n.a. 47.73%
As of 03/31/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
-1.78% 1.52% 1.52% n.a. n.a. n.a. n.a. 63.69% 04/30/2020
MSCI Emerging Markets Index
-1.49% 2.34% 2.34% n.a. n.a. n.a. n.a. 45.57%

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 03/31/2021)

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 03/31/2021)
54
Number of Securities

Source: BNY Mellon Investment Servicing (US) Inc.

18.5x
P/E using FY1 estimates
15.9x
P/E using FY2 estimates
$172.3 billion
Weighted Average Market Cap

Source: FactSet Research Systems

Top 10 Holdings

(as of 05/31/2021)
Name Sector Country % Net Assets
Samsung Electronics Co., Ltd., Pfd. Information Technology South Korea 6.5
Taiwan Semiconductor Manufacturing Co., Ltd. Information Technology Taiwan 6.3
Tencent Holdings, Ltd. Communication Services China/Hong Kong 5.6
Alibaba Group Holding, Ltd. Consumer Discretionary China/Hong Kong 3.1
AIA Group, Ltd. Financials China/Hong Kong 2.7
First Quantum Minerals, Ltd. Materials Zambia 2.6
CapitaLand, Ltd. Real Estate Singapore 2.4
FPT Corp. Information Technology Vietnam 2.4
LUKOIL PJSC Energy Russia 2.4
Vale SA Materials Brazil 2.2
TOTAL 36.2

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 03/31/2021)
  • 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.

Commentary

Period ended March 31, 2021

For the quarter ending March 31, 2021, the Matthews Emerging Markets Equity Fund returned 1.52% (Investor Class) and 1.52% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 2.34%.

Market Environment:

In January and early February, equities continued to climb, with particularly strong performance by several companies with perceived high growth but little in terms of current earnings. However, in the middle of February, equity prices became more volatile. The U.S. stimulus and higher U.S. Treasury rates dampened the market appetite for companies who lack current earnings. U.S. dollar strength and higher commodity prices made talk of inflation more frequent. Stocks associated with a cyclical recovery and more value-oriented companies began to outperform high growth stocks. Sectors like energy, materials, real estate and financials performed well while health care and consumer stocks lagged. By the end of the quarter, large caps and growth stocks suffered the most while small caps and lower quality, cyclically oriented stocks rallied the most.

Chinese equities were particularly volatile in the quarter. During the first six weeks of the reporting period, Chinese equities rose amid the transition of power to a Biden administration and persistent upward revisions to 2021 consensus earnings and GDP growth estimates. China’s broader markets then weakened, ending the quarter slightly negative, led by selling among Chinese retail investors. Japan’s markets also experienced some volatility in the quarter, but ultimately ended the period with slightly positive returns. The uptick in global economic activity is broadly positive for Japan’s economy, which has a significant export sector. Meanwhile, Indian equities were a brighter spot in the region. Proposed government spending is favorable for growth. In addition, India’s current account has switched from deficit to surplus as foreign exchange reserves have grown

Contributors and Detractors:

With a benchmark-agnostic approach, the portfolio is broadly diversified by country and sector, based on bottom-up stock selection. Accordingly, contributors and detractors were largely stock specific in the quarter. Among individual securities, the Polish company Allegro experienced stock price weakness in the quarter as markets rotated toward lower valuation stocks and the announced expansion into Poland by other e-commerce companies spooked some investors. However, we believe the perceived threat may be overrated. Allegro’s logistics, technology and local knowledge superiority give the company a strong competitive moat. We have seen similar announcements in Latin America spook markets at times, but without a sustained change in the competitive landscape several years hence. Allegro announced excellent fourth-quarter 2020 results during the first quarter of 2021, and we expect strong revenue growth and smart investment to continue, leading to additional potential growth opportunities.

Another detractor in the quarter was Credicorp, which is among Peru’s leading banks. The stock sold off on country developments, which we believe may prove temporary. These included a new wave of COVID infections, turmoil at the top of the government following the impeachment and removal of the president late last year, and anxiety about the coming presidential election. In addition, a major positive macroeconomic development for Peru has not yet been priced into Credicorp’s shares—the strength in copper prices, as Peru is one of the largest producers of copper in the world. Looking past politics, we expect strong return on equity expansion and book value growth in the next few years.

Turning to contributors, shares of Novatek, a private sector liquefied natural gas producer in Russia, gained in the quarter. The stock rebounded on the back of rising natural gas prices globally. A cold winter, supply disruptions and stronger oil prices contributed to the secular recovery in gas prices. Over the medium term, we expect strong global demand for liquefied natural gas to continue, and supply looks constrained for the next few years. As an exporter, Novatek is also a beneficiary of a weak Russian ruble. The ruble weakened in the quarter, even as U.S. dollar-based oil prices have strengthened, an unusual and positive combination for an energy exporter. Another contributor in the energy sector was Lukoil, a large, private sector oil company operating mostly in Russia. Oil prices rose in the quarter on OPEC+ discipline and the pick up in global economic activity.

Notable Portfolio Changes:

New positions in the quarter include CP All, the largest convenience store chain and cash-and-carry operator in Thailand. CP All’s per-store traffic, revenue and operating margin are high compared to convenience store average globally. Store-level margins have held up well during the pandemic, illustrating the durability of its business model. The company still has a growing store count, while efficiencies of scale make incremental stores more valuable and profitable. Amid market volatility, we were able to purchase the stock at a meaningful discount to its historical average valuation. Thailand is an economy that should benefit highly from the return of tourism as COVID wanes.

Another new position in the quarter was Banco Bradesco, which is among the largest banks in Brazil. As Brazil comes out of its deep health-care crisis associated with COVID, we believe the market may be underestimating Bradesco’s potential earnings growth and return on equity resilience. Based on our research, incumbent banks may have more resilient ecosystems than challenger banks in emerging markets, a trend that may be underappreciated by market participants. We expect that Bradesco’s stock price may return to its historical valuation levels as Brazil’s economy continues to re-open and interest rates normalize in Brazil.

Outlook:

Economic recoveries historically favor risk assets including Asian and emerging market equities. Typical recoveries are accompanied by an expansion of nominal GDP growth rate differentials favoring emerging versus developed economies that typically leads to a recovery in relative earnings growth, a favorable foreign exchange tailwind, contracting emerging markets credit spreads (lower risk premium), a boost to sentiment and ultimately a recovery in investor inflows.

Even considering the past six weeks of reversal, we believe 2021’s recovery in asset prices will continue to favor emerging markets and Asia and that the fierce rotation into cyclically oriented names will slow substantially in coming months. The surge of U.S. Treasury rates was largely fueled by news of potential U.S. stimulus, surging commodities (metals and oil) and fears of inflation. Commodity prices are reaching five-year resistance and should pause pending further global demand. The pace of U.S. Treasury rate increases should slow substantially, in our view. We do not expect that large developed market central banks will hike policy rates, leaving only select emerging market central banks to increase rates, such as Turkey and Brazil.

Therefore, as inflation fears dampen in the second half of 2021 and U.S. rates stabilize, we expect Asian and emerging markets risk assets to revert back to fundamentals, reflecting a strong earnings rebound expected in the 2021-22 period allowing for growth stocks to mean revert and cyclical stocks to continue to climb albeit with decreased outperformance.

 

As of 3/31/21, the securities mentioned comprised the Matthews Emerging Markets Equity Fund in the following percentages: Allegro.eu SA, 1.1%; Credicorp, Ltd., 1.2%; Novatek PJSC GDR, 2.4%; LUKOIL PJSC ADR, 2.7%; CP ALL Public Co., Ltd., 1.6%; Banco Bradesco SA ADR, 0.9%. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MEGMX as of 03/31/2021
1YR 3YR 5YR 10YR Since Inception Inception Date
N.A. N.A. N.A. N.A. 63.69% 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.

 

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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.