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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

4.13%

YTD Return

(as of 10/26/2021)

$16.41

Price

(as of 10/26/2021)

$54.00 million

Fund Assets

(as of 09/30/2021)

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 $54.00 million (09/30/2021)
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 09/30/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
-3.43% -8.42% 0.13% 22.30% n.a. n.a. n.a. 40.14% 04/30/2020
MSCI Emerging Markets Index
-3.94% -7.97% -0.99% 18.58% n.a. n.a. n.a. 27.28%
As of 09/30/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews Emerging Markets Equity Fund
MEGMX
-3.43% -8.42% 0.13% 22.30% n.a. n.a. n.a. 40.14% 04/30/2020
MSCI Emerging Markets Index
-3.94% -7.97% -0.99% 18.58% n.a. n.a. n.a. 27.28%

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 09/30/2021)

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 09/30/2021)
Fund Benchmark
Number of Positions 54 1,418
Weighted Average Market Cap $145.0 billion $135.3 billion
Active Share 80.9 n.a.
P/E using FY1 estimates 17.1x 12.3x
P/E using FY2 estimates 15.4x 11.7x
Price/Cash Flow 14.7 8.9
Price/Book 3.0 1.9
Return On Equity 10.5 13.6
EPS Growth (3 Yr) -11.6% -2.5%

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

Top 10 Holdings

(as of 09/30/2021)
Name Sector Country % Net Assets
Taiwan Semiconductor Manufacturing Co., Ltd. Information Technology Taiwan 6.7
Samsung Electronics Co., Ltd., Pfd. Information Technology South Korea 6.4
Tencent Holdings, Ltd. Communication Services China/Hong Kong 5.4
FPT Corp. Information Technology Vietnam 3.1
LUKOIL PJSC Energy Russia 3.1
Capitaland Investment, Ltd. Real Estate Singapore 2.8
Infosys, Ltd. Information Technology India 2.7
AIA Group, Ltd. Financials China/Hong Kong 2.6
HDFC Bank, Ltd. Financials India 2.6
Novatek PJSC Energy Russia 2.5
TOTAL 37.9

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 09/30/2021)
  • 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 September 30, 2021

For the quarter ending September 30, 2021, the Matthews Emerging Markets Equity Fund returned -8.42% (Investor Class) and -8.29% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned -7.97% over the same period.

Market Environment:

The third quarter of 2021 was quite challenging for emerging market (“EM”) equities. While the U.S market (S&P 500 Index) was broadly flat, the EM universe saw substantial differentiation between geographies, with some like India up more than 10 percent and others, notably, China, down by a similar amount. Brazil also suffered meaningfully during the quarter. The market narrative continued to be dominated by the regulatory environment in China. The regulatory environment has kept us on the sidelines again for themes that would normally fit within the Fund’s philosophy. Inflation remains a hot topic of debate among market participants. Energy prices have risen substantially and the international oil benchmark Brent was pushing $80 per barrel as the quarter ended. Energy prices have different effects on different geographies within EM and have not—to date—been deterministic for geography-level performance. In aggregate, EM valuations remain attractive relative to history and to a U.S. market that is trading at high multiples.

Performance Contributors and Detractors:

On a country basis, Singapore, China and the Philippines were the biggest contributors to relative performance during the third quarter, while Brazil and Taiwan were the biggest detractors. From a sector standpoint, stock selection in consumer discretionary and information technology were the biggest positive contributors, while materials and financials stock selection were notable detractors to relative performance.

Looking at individual securities, the three largest contributors to returns during the third quarter were CapitaLand Investment Ltd., Wilcon Depot and Novatek JSC, located in Singapore, the Philippines and Russia, respectively. CapitaLand Investment Ltd, a global real estate investment manager, is a new listing that was spun out of a former longstanding holding CapitaLand Ltd., which was delisted following shareholder approval to receive cash for the development portion and shares in the new CapitaLand Investment Ltd. for the management portion. CapitaLand Investment is asset light, growing, and we believe structurally advantaged. It enjoys unprecedented scale vis-a-vis its Asian peers. Wilcon Depot is a smaller capitalization company that runs a chain of home improvement stores across the Philippines. The company is influenced by economic activity, lower COVID-19 mobility restrictions and demographics. Novatek is among the largest producers of natural gas in Russia. The company’s export production is increasingly oriented towards East Asian markets, with India being a longer-term opportunity.

The three biggest detractors over the quarter were Tencent and Alibaba of China, and Vale of Brazil. Tencent and Alibaba are facing investor consternation about the scale and scope of regulatory changes in China, many of which affect internet platform companies and touch upon key business lines like video games, as well as issues like data security. We are constructive on the valuations of, and prospects of, each of these two companies though we maintain an aggregate cautious stance on consumer internet in China at the present time. Our holding in Tencent exceeds that of the MSCI EM Index, while our holding in Alibaba is quite a bit lower. As such, Alibaba was a detractor from absolute performance but positive attribution vs. the benchmark. Vale is one of the world’s largest producers of Iron Ore, which sold off during the quarter. We believe the company remains attractive and is trading at over a 20% free cash flow yield.

Notable Portfolio Changes:

We were quite active in what was a volatile quarter. The most notable change was the aforementioned receipt in stock of CapitaLand Investments Ltd. from the delisting of CapitaLand Ltd. We ultimately decided to exit Livechat Software SA of Poland and consolidate into other holdings that facilitate customer service online. We also exited Chinese video content company Bilibili, which was one of our strongest contributors to returns over the strategy’s first year. We continue to like the company’s fundamentals and growth but are cautious on potential regulatory impacts for the business. We also had changes within the financials sector, exiting positions in Indonesia and Brazil and initiating a position in Grupo Financiero Banorte of Mexico.

Three notable additions to the portfolio were LG Chem, Avenue Supermarkets and Centre Testing Intl. South Korea’s LG Chem is a top three player in the electric vehicle battery space that has had certain setbacks, causing it to be priced at a material discount to its two nearest competitors. We believe the company represents a good risk reward and is integral to worldwide adoption of next-gen vehicles. Avenue Supermarkets is a modern retailer in India where food retail in particular remains unconsolidated. Centre Testing is the Chinese leader in the Testing Inspection and Certification Industry (“TIC”), which may consolidate to the benefit of the company. Centre Testing is an example of how we are favoring Chinese A-shares and companies that indirectly benefit from consumption without touching the end consumer in China.

Outlook:

The end of the third quarter was marked by high energy prices, concerns over power shortages in China and India and worries surrounding one of the largest players in the Chinese property sector, China Evergrande Group. We are of the view that adequate resources and tools exist to resolve Evergrande’s liabilities in a relatively orderly fashion. The Fund, however, does not currently own any banks or property developers in China. We are hesitant to ever predict the future evolution of commodity prices.  That said, higher cost of capital and a reluctance for producers to commit capital expenditures has us thinking that risk is skewed towards higher prices as the world further emerges from pandemic mobility restrictions.

The ultimate impact of the pandemic is hard to discern. Vietnam and New Zealand are among two Asia Pacific geographies that have recently announced moves away from “zero-COVID” policies. While the road back is not straight, we think the direction is clearly towards less vs. more economic impact over time. The U.S. Fed has started to reduce asset purchases but rate rises for 2021 are probably unlikely. Several EM central banks are ahead of the Fed—Russia, Brazil, Poland and Mexico are all among the geographies where rates are already rising. Thus, we’re thinking quite deeply about the impact of tighter monetary policy on our portfolio companies and markets.

 

 

As of September 30, 2021, the securities mentioned comprised the Matthews Emerging Markets Equity Fund in the following percentages: Capitaland Investment, Ltd., 2.8%; Wilcon Depot, Inc., 1.7%; Novatek PJSC GDR, 2.5%; Tencent Holdings, Ltd., 5.4%; Alibaba Group Holding, Ltd., 1.6%; Vale SA ADR, 1.8%; Grupo Financiero Banorte SAB de CV Class O, 1.1%; LG Chem Ltd., 2.1%; Avenue Supermarts, Ltd., 1.5%; and Centre Testing International Group Co., Ltd. A Shares, 1.2%. The Fund held no positions in LiveChat Software SA; Bilibili, Inc. ADR; and China Evergrande Group.

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

Average Annual Total Returns - MEGMX as of 09/30/2021
1YR 3YR 5YR 10YR Since Inception Inception Date
22.30% N.A. N.A. N.A. 40.14% 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.