Long-term capital appreciation with some current income.
Strategy
Under normal circumstances, the Matthews Asian Growth and Income Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in dividend-paying common stock, preferred stock and other equity securities, and convertible securities as well as fixed-income securities, of any duration or quality, of companies located in Asia. The Fund attempts to offer investors a relatively stable means of participating in a portion of the Asian region’s growth prospects, while providing some downside protection, in comparison to a portfolio that invests purely in common stocks. The strategy of owning convertible bonds and dividend-paying equities is designed to help the Fund to meet its investment objective while helping to reduce the volatility of its portfolio.
Risks
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in emerging and frontier markets involves different and greater risks, as these 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.
Asia - Consists of all countries and markets in Asia, including developed, emerging, and frontier countries and markets in the Asian region
Fees & Expenses
Gross Expense Ratio
1.08%
Performance
Monthly
Quarterly
Calendar Year
As of 12/31/2020
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asian Growth and Income Fund
MACSX
5.99%
15.52%
16.00%
16.00%
6.59%
8.38%
5.37%
9.22%
09/12/1994
MSCI All Country Asia ex Japan Index
6.84%
18.66%
25.36%
25.36%
8.46%
13.90%
6.80%
5.40%
As of 12/31/2020
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Asian Growth and Income Fund
MACSX
5.99%
15.52%
16.00%
16.00%
6.59%
8.38%
5.37%
9.22%
09/12/1994
MSCI All Country Asia ex Japan Index
6.84%
18.66%
25.36%
25.36%
8.46%
13.90%
6.80%
5.40%
For the years ended December 31st
Name
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
Matthews Asian Growth and Income Fund
MACSX
16.00%
17.26%
-10.96%
21.85%
1.34%
-4.50%
-0.65%
4.83%
26.90%
-10.62%
MSCI All Country Asia ex Japan Index
25.36%
18.52%
-14.12%
42.08%
5.76%
-8.90%
5.11%
3.34%
22.70%
-17.07%
MSCI AC Asia ex Japan Index since inception value calculated from 8/31/94.
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
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.
Yield
(as of 12/31/2020)
1.37%30-Day Yield
2.55%Dividend Yield
Dividend Yield (trailing) Source: FactSet Research Systems, Bloomberg, Matthews 30-Day Yield Source: BNY Mellon Investment Servicing (US) Inc.
Past performance is no guarantee of future results. High ratings and rankings does not assure favorable performance.
The Overall Morningstar® Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and (if applicable) ten-year ratings.
Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Lipper Analytical Services, Inc., rankings are based on total return, including reinvestment of dividends and capital gains for the stated periods. Funds are assigned a rank within a universe of funds similar in investment objective as determined by Lipper. For the absolute rankings shown the lower the number rank, the better the Fund performed compared to other funds in the classification group. Lipper also calculates a quartile ranking which divides the peer group into quartiles to identify funds of similar quality. Funds in the 1st or 2nd quartile had outperformed the average fund in the peer group while funds in the 3rd or 4th quartile had underperformed.
Robert Horrocks is Chief Investment Officer and Portfolio Manager at Matthews Asia and has been a Matthews Asia Funds Trustee since 2018. He manages the firm's Asian Growth and Income and co-manages the Asia Dividend and Asia ex Japan Dividend Strategies. As Chief Investment Officer, Robert oversees the firm's investment process and investment professionals and sets the research agenda for the investment team. Before joining Matthews Asia in 2008, Robert was Head of Research at Mirae Asset Management in Hong Kong. From 2003 to 2006, Robert served as Chief Investment Officer for Everbright Pramerica in China, establishing its quantitative investment process. He started his career as a Research Analyst with WI Carr Securities in Hong Kong before moving on to spend eight years working in several different Asian jurisdictions for Schroders, including stints as Country General Manager in Taiwan, Deputy Chief Investment Officer in Korea and Designated Chief Investment Officer in Shanghai. Robert earned his PhD in Chinese Economic History from Leeds University in the United Kingdom, and is fluent in Mandarin.
Kenneth Lowe is a Portfolio Manager at Matthews Asia and manages the firm's Asian Growth and Income Strategy. Prior to joining Matthews Asia in 2010, he was an Investment Manager on the Asia and Global Emerging Market Equities Team at Martin Currie Investment Management in Edinburgh, Scotland. Kenneth received an M.A. in Mathematics and Economics from the University of Glasgow.
Satya Patel is a Portfolio Manager at Matthews Asia and manages the firm's Asia Credit Opportunities Strategy and co-manages the Asia Total Return Bond and Asian Growth and Income Strategies. Prior to joining Matthews Asia in 2011, Satya was an Investment Analyst with Concerto Asset Management. He earned his MBA from the University of Chicago Booth School of Business in 2010. In 2009, Satya worked as an Investment Associate in Private Placements for Metlife Investments and from 2006 to 2008, he was an Associate in Credit Hedge Fund Sales for Deutsche Bank in London. He holds a Master's in Accounting and Finance from the London School of Economics and a B.A. in Business Administration and Public Health from the University of Georgia. Satya is proficient in Gujarati.
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
Asset Type Breakdown
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Information Technology
19.1
23.1
-4.0
Consumer Discretionary
17.1
19.1
-2.0
Financials
16.0
17.9
-1.9
Communication Services
11.4
11.5
-0.1
Industrials
10.8
5.3
5.5
Consumer Staples
8.2
5.0
3.2
Real Estate
6.7
3.9
2.8
Utilities
3.9
2.2
1.7
Health Care
2.3
5.0
-2.7
Materials
1.1
4.3
-3.2
Energy
0.0
2.8
-2.8
Cash and Other Assets, Less Liabilities
3.3
0.0
3.3
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
43.8
51.6
-7.8
South Korea
13.0
15.2
-2.2
Taiwan
10.6
14.2
-3.6
Singapore
7.7
2.4
5.3
India
7.4
10.4
-3.0
France
3.5
0.0
3.5
Indonesia
2.5
1.5
1.0
Australia
2.5
0.0
2.5
United States
2.1
0.0
2.1
Vietnam
1.4
0.0
1.4
Philippines
1.3
0.8
0.5
Thailand
0.9
2.1
-1.2
Malaysia
0.0
1.7
-1.7
Cash and Other Assets, Less Liabilities
3.3
0.0
3.3
Not all countries are included in the benchmark index(es).
Asset Type
Fund
Common Equities and ADRs
85.8
Convertible Bonds
9.1
Preferred Equities
1.8
Cash and Other Assets, Less Liabilities
3.3
Equity market cap of issuer
Fund
Benchmark
Difference
Mega Cap (over $25B)
54.3
64.0
-9.7
Large Cap ($10B-$25B)
11.9
19.7
-7.8
Mid Cap ($3B-$10B)
23.2
14.9
8.3
Small Cap (under $3B)
7.4
1.5
5.9
Cash and Other Assets, Less Liabilities
3.3
0.0
3.3
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.
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.
For the quarter ending September 30, 2020, the Matthews Asian Growth and Income Fund returned 7.91% (Investor Class) and 7.93% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index returned 10.79%.
Market Environment:
Following the tumult of the first quarter, equity markets across much of the globe have not only reversed such drops but are now approaching, and in some instances are above, all-time highs. While the coronavirus related drop may have been too extreme, we believe the pace and strength of the equity market recovery appears to be pricing in an unlikely rapid return to normalcy. Aggressive loosening of monetary policy by central banks, expansive fiscal stimulus and rampant liquidity exacerbated by increased retail investor participation have amalgamated to seemingly drive market prices, in many instances, away from fundamental value. This is particularly true given a backdrop of high unemployment that may prove stickier than anticipated, elevated geopolitical tension and U.S. election risk.
For Asian markets, these issues seem less relevant. The economic recovery in the region’s largest economy, China, has been surprisingly solid with a rebound in the majority of macroeconomic metrics in what is now a predominantly domestic demand driven economy. This could suggest that the rebound in asset prices has more justification than elsewhere. Added to this was a weakening U.S. dollar that likely helped to conspire toward another quarter of double digit returns for Asian markets. This was concentrated predominantly in North Asia with South Korea, Taiwan and China all gaining strongly whereas Southeast Asia struggled given what is likely to be a more sustained downturn due to less fiscal room and weaker health care infrastructure.
Performance Contributors and Detractors:
The largest contributor to performance during the third quarter came from the information technology sector. TSMC, the world’s largest semiconductor foundry, gained as competitor Intel announced that it may consider outsourcing its own production. This further confirms TSMC’s leading position as it is also likely to gain from increasing content value in Apple’s new iPhone as well as potential wins from other customers such as Advanced Micro Devices. Samsung Electronics rose as it is expected that it can gain smartphone market share from Huawei given U.S. restrictions on the latter’s access to necessary components. Venture Corporation in Singapore was also a solid performer as the contract manufacturing services business delivered better than expected results. Demand appears to be strong in most verticals including life sciences, medical devices, networking and semiconductors.
The portfolio’s Hong Kong holdings were also reasonable performers during the quarter. Power tool leader Techtronic Industries gained as it demonstrated its competitive advantage during the crisis with double digit revenue growth during the first half of the year, taking share from the competition. Auto parts supplier Minth Group rose as it further enters the supply chain for electric vehicles via its battery housing business. Fellow parts supplier Hanon Systems in South Korea also benefited from this as it is a leader in e-compressor technology for climate control systems.
On the other hand, traditional ‘defensive’ businesses struggled during the quarter, with telecom stocks particularly weak. Japanese telecom KDDI sputtered as new Japanese Prime Minister Suga has long held ambitions of reducing wireless pricing. Singapore’s Singtel also fell as lower roaming fees, rising price competition and weaker enterprise revenues all led to weak earnings delivery. Outside of telecoms, China’s Jiangsu Expressway fell as a change in truck pricing methodology for the province has hurt traffic flow and is likely to impact revenues in the near term.
Financial stocks again delivered weak performance. China’s Ping An Insurance dropped on poor first half earnings that witnessed a decline in value of new business for its life insurance arm and a spike in credit guarantee losses within non-life insurance. Bank of China (Hong Kong) fell as earnings were hit by declining money market rates that weighed on the bank’s net interest margins. Similarly, an earnings miss caused Bank of the Philippines Islands to underperform as it aggressively raised credit provisions ahead of asset quality deterioration. We believe this to be prudent management as it seeks to shore up its balance sheet for the long term.
Notable Portfolio Changes:
The portfolio has continued to see significant activity as market price action creates opportunities to upgrade our holdings. We added three new equity holdings and one convertible bond during the quarter with all of these residing in Mainland China.
We established an equity position in Zhongsheng Group—an entity within which we had previously held its convertible bonds. The company is a leading auto dealership in China with over 300 branches offering brands such as Mercedes-Benz, Lexus, Honda and Toyota. Management has done an impressive job in scaling the company and it now has over 50% of its gross profit coming from the less cyclical after-sales services. We believe that it will have continued growth through a rising number of dealerships, car volume growth and ramping up its after-sales services further. The stock trades at a relatively attractive valuations.
Elsewhere in China we added Ping An Insurance. Trading at attractive valuations, we believe the leading financial conglomerate in the country is well placed. Its renewed focus on improving life insurance agent productivity as well as its impressive technology suite stand the company in good stead in our view to take advantage of the vast opportunity in providing social infrastructure for the country. We also added property developer China Resources Land as we believe it has delivered well in diversifying into more recurring revenue streams including its 42 shopping malls. A top 10 developer, it is well positioned to grow through this and its newer businesses such as rentals and senior housing.
We also added convertible bonds issued by e-commerce service provider Baozun. The firm offers store operations, logistics and marketing to brand partners and will likely grow along with e-commerce trends and new customer acquisition.
These ideas were funded through the sale of lower conviction holdings including Prudential, Shanghai Airport, CK Asset, China Mobile and Jardine Matheson.
Outlook:
Despite a challenging backdrop, the third quarter of the year surprised us with the strength of global equity markets. We believe that this march upward is unlikely to be as smooth going forward as continued wrangling over the next somewhat unaffordable fiscal stimulus bill, a potentially contested U.S. election, rising geopolitical tensions, broad based unemployment challenges and high valuations are all prospective volatility generators.
However, Asia seems to look relatively better positioned than many. China appears to be the most ‘normal’ major economy, with levels of activity in certain areas already returning to those seen in 2019. And much of North Asia has a similarly solid outlook.
At a fundamental level, Asian markets have priced in a return to expansion with expectations for 23% earnings growth in 2021, and the MSCI Asia ex Japan Index trading at a relatively high 14.7x those estimates. It should also be noted that certain sectors such as technology and health care, in our view, appear to be the most extreme in disconnects between company fundamentals, valuations and the economic outlook. This leads us to remain broadly cautious in these areas.
For the Matthews Asian Growth and Income Fund, we remain constructive. Asia’s relative economic standing is solid and, in our estimation, volatility in asset prices may return to elevated levels. Backdrops such as this are typically environments where the Fund’s focus on quality companies that we believe are built to last bears fruit. In choppy waters, our aim to mitigate volatility and produce reasonable total returns through the steadier means of balancing growth and income should be well placed to deliver for clients.
As of September 30, 2020, the securities mentioned comprised the Matthews Asian Growth and Income Fund in the following percentages: Taiwan Semiconductor Manufacturing Co., Ltd., 6.5%; Samsung Electronics Co., Ltd., 3.2%;. Venture Corp., Ltd., 1.6%; Techtronic Industries Co., Ltd., 2.6%; Minth Group, Ltd., 1.7%; Hanon Systems, 1.2%; KDDI Corp., 1.2%; Singapore Telecommunications, Ltd., 1.2%; Jiangsu Expressway Co., Ltd. H Shares, 1.3%; Ping An Insurance Group Co. of China, Ltd. H Shares, 1.2% Bank of the Philippines Islands, 1.2%; Zhongsheng Group Holdings, Ltd., 1.4%; China Resources Land Ltd., 1.5%; Baozun, Inc., Cnv., 1.625%, 05/01/2024, 1.4%.
Average Annual Total Returns - MACSX as of 12/31/2020
1YR
3YR
5YR
10YR
Since Inception
Inception Date
16.00%
6.59%
8.38%
5.37%
9.22%
09/12/1994
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
1.08%
Yields as of 12/31/2020
30-Day Yield
1.37%
Dividend Yield
2.55%
The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 12/31/2020, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate. Source: BNY Mellon Investment Servicing (US) Inc.
Dividend Yield (trailing) is the weighted average sum of the dividends paid by each equity security held by the Fund over the last 12 months divided by the current price as of report date. The annualised dividend yield is for the equity-only portion of the Fund and does not reflect the actual yield an investor in the Fund would receive. There can be no guarantee that companies that the Fund invests in, and which have historically paid dividends, will continue to pay them or to pay them at the current rates in the future. A positive distribution yield does not imply positive return, and past yields are no guarantee of future yields.
The Markit iBoxx Asian Local Bond Index tracks the total return performance of a bond portfolio consisting of local-currency denominated, high quality and liquid bonds in Asia ex-Japan. The Markit iBoxx Asian Local Bond Index includes bonds from the following countries: China (on- and offshore markets), Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.
The J.P. Morgan Asia Credit Index (JACI) tracks the total return performance of the Asia fixed-rate dollar bond market. JACI is a market cap-weighted index comprising sovereign, quasi-sovereign and corporate bonds and is partitioned by country, sector and credit rating. JACI includes bonds from the following countries: China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea and Thailand.
The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI All Country Asia Pacific Index is a free float–adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Index is a free float-adjusted market capitalization-weighted index of Chinese equities that includes H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges, Hong Kong-listed securities known as Red chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China) and foreign listings (e.g. ADRs).
The MSCI China All Shares Index captures large and mid-cap representation across China A shares, B shares, H shares, Red chips (issued by entities owned by national or local governments in China), P chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g. ADRs). The index aims to reflect the opportunity set of China share classes listed in Hong Kong,Shanghai, Shenzhen and outside of China.
The MSCI Emerging Markets (EM) Asia Index is a free float-adjusted market capitalization weighted index of the stock markets of China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan and Thailand. The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The S&P Bombay Stock Exchange 100 (S&P BSE 100) Index is a free float–adjusted market capitalization–weighted index of 100 stocks listed on the Bombay Stock Exchange.
The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan.
The Korea Composite Stock Price Index (KOSPI) is a market capitalization–weighted index of all common stocks listed on the Korea Stock Exchange.
The MSCI All Country Asia ex Japan Small Cap Index is a free float–adjusted market capitalization–weighted small cap index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Small Cap Index is a free float-adjusted market capitalization-weighted small cap index of the Chinese equity securities markets, including H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges,Hong Kong-listed securities known as Red Chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g., ADRs).
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.
Commentary
Period ended September 30, 2020
For the quarter ending September 30, 2020, the Matthews Asian Growth and Income Fund returned 7.91% (Investor Class) and 7.93% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index returned 10.79%.
Market Environment:
Following the tumult of the first quarter, equity markets across much of the globe have not only reversed such drops but are now approaching, and in some instances are above, all-time highs. While the coronavirus related drop may have been too extreme, we believe the pace and strength of the equity market recovery appears to be pricing in an unlikely rapid return to normalcy. Aggressive loosening of monetary policy by central banks, expansive fiscal stimulus and rampant liquidity exacerbated by increased retail investor participation have amalgamated to seemingly drive market prices, in many instances, away from fundamental value. This is particularly true given a backdrop of high unemployment that may prove stickier than anticipated, elevated geopolitical tension and U.S. election risk.
For Asian markets, these issues seem less relevant. The economic recovery in the region’s largest economy, China, has been surprisingly solid with a rebound in the majority of macroeconomic metrics in what is now a predominantly domestic demand driven economy. This could suggest that the rebound in asset prices has more justification than elsewhere. Added to this was a weakening U.S. dollar that likely helped to conspire toward another quarter of double digit returns for Asian markets. This was concentrated predominantly in North Asia with South Korea, Taiwan and China all gaining strongly whereas Southeast Asia struggled given what is likely to be a more sustained downturn due to less fiscal room and weaker health care infrastructure.
Performance Contributors and Detractors:
The largest contributor to performance during the third quarter came from the information technology sector. TSMC, the world’s largest semiconductor foundry, gained as competitor Intel announced that it may consider outsourcing its own production. This further confirms TSMC’s leading position as it is also likely to gain from increasing content value in Apple’s new iPhone as well as potential wins from other customers such as Advanced Micro Devices. Samsung Electronics rose as it is expected that it can gain smartphone market share from Huawei given U.S. restrictions on the latter’s access to necessary components. Venture Corporation in Singapore was also a solid performer as the contract manufacturing services business delivered better than expected results. Demand appears to be strong in most verticals including life sciences, medical devices, networking and semiconductors.
The portfolio’s Hong Kong holdings were also reasonable performers during the quarter. Power tool leader Techtronic Industries gained as it demonstrated its competitive advantage during the crisis with double digit revenue growth during the first half of the year, taking share from the competition. Auto parts supplier Minth Group rose as it further enters the supply chain for electric vehicles via its battery housing business. Fellow parts supplier Hanon Systems in South Korea also benefited from this as it is a leader in e-compressor technology for climate control systems.
On the other hand, traditional ‘defensive’ businesses struggled during the quarter, with telecom stocks particularly weak. Japanese telecom KDDI sputtered as new Japanese Prime Minister Suga has long held ambitions of reducing wireless pricing. Singapore’s Singtel also fell as lower roaming fees, rising price competition and weaker enterprise revenues all led to weak earnings delivery. Outside of telecoms, China’s Jiangsu Expressway fell as a change in truck pricing methodology for the province has hurt traffic flow and is likely to impact revenues in the near term.
Financial stocks again delivered weak performance. China’s Ping An Insurance dropped on poor first half earnings that witnessed a decline in value of new business for its life insurance arm and a spike in credit guarantee losses within non-life insurance. Bank of China (Hong Kong) fell as earnings were hit by declining money market rates that weighed on the bank’s net interest margins. Similarly, an earnings miss caused Bank of the Philippines Islands to underperform as it aggressively raised credit provisions ahead of asset quality deterioration. We believe this to be prudent management as it seeks to shore up its balance sheet for the long term.
Notable Portfolio Changes:
The portfolio has continued to see significant activity as market price action creates opportunities to upgrade our holdings. We added three new equity holdings and one convertible bond during the quarter with all of these residing in Mainland China.
We established an equity position in Zhongsheng Group—an entity within which we had previously held its convertible bonds. The company is a leading auto dealership in China with over 300 branches offering brands such as Mercedes-Benz, Lexus, Honda and Toyota. Management has done an impressive job in scaling the company and it now has over 50% of its gross profit coming from the less cyclical after-sales services. We believe that it will have continued growth through a rising number of dealerships, car volume growth and ramping up its after-sales services further. The stock trades at a relatively attractive valuations.
Elsewhere in China we added Ping An Insurance. Trading at attractive valuations, we believe the leading financial conglomerate in the country is well placed. Its renewed focus on improving life insurance agent productivity as well as its impressive technology suite stand the company in good stead in our view to take advantage of the vast opportunity in providing social infrastructure for the country. We also added property developer China Resources Land as we believe it has delivered well in diversifying into more recurring revenue streams including its 42 shopping malls. A top 10 developer, it is well positioned to grow through this and its newer businesses such as rentals and senior housing.
We also added convertible bonds issued by e-commerce service provider Baozun. The firm offers store operations, logistics and marketing to brand partners and will likely grow along with e-commerce trends and new customer acquisition.
These ideas were funded through the sale of lower conviction holdings including Prudential, Shanghai Airport, CK Asset, China Mobile and Jardine Matheson.
Outlook:
Despite a challenging backdrop, the third quarter of the year surprised us with the strength of global equity markets. We believe that this march upward is unlikely to be as smooth going forward as continued wrangling over the next somewhat unaffordable fiscal stimulus bill, a potentially contested U.S. election, rising geopolitical tensions, broad based unemployment challenges and high valuations are all prospective volatility generators.
However, Asia seems to look relatively better positioned than many. China appears to be the most ‘normal’ major economy, with levels of activity in certain areas already returning to those seen in 2019. And much of North Asia has a similarly solid outlook.
At a fundamental level, Asian markets have priced in a return to expansion with expectations for 23% earnings growth in 2021, and the MSCI Asia ex Japan Index trading at a relatively high 14.7x those estimates. It should also be noted that certain sectors such as technology and health care, in our view, appear to be the most extreme in disconnects between company fundamentals, valuations and the economic outlook. This leads us to remain broadly cautious in these areas.
For the Matthews Asian Growth and Income Fund, we remain constructive. Asia’s relative economic standing is solid and, in our estimation, volatility in asset prices may return to elevated levels. Backdrops such as this are typically environments where the Fund’s focus on quality companies that we believe are built to last bears fruit. In choppy waters, our aim to mitigate volatility and produce reasonable total returns through the steadier means of balancing growth and income should be well placed to deliver for clients.
As of September 30, 2020, the securities mentioned comprised the Matthews Asian Growth and Income Fund in the following percentages: Taiwan Semiconductor Manufacturing Co., Ltd., 6.5%; Samsung Electronics Co., Ltd., 3.2%;. Venture Corp., Ltd., 1.6%; Techtronic Industries Co., Ltd., 2.6%; Minth Group, Ltd., 1.7%; Hanon Systems, 1.2%; KDDI Corp., 1.2%; Singapore Telecommunications, Ltd., 1.2%; Jiangsu Expressway Co., Ltd. H Shares, 1.3%; Ping An Insurance Group Co. of China, Ltd. H Shares, 1.2% Bank of the Philippines Islands, 1.2%; Zhongsheng Group Holdings, Ltd., 1.4%; China Resources Land Ltd., 1.5%; Baozun, Inc., Cnv., 1.625%, 05/01/2024, 1.4%.
Average Annual Total Returns - MACSX as of 12/31/2020
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
Yields as of 12/31/2020
The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 12/31/2020, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate. Source: BNY Mellon Investment Servicing (US) Inc.
Dividend Yield (trailing) is the weighted average sum of the dividends paid by each equity security held by the Fund over the last 12 months divided by the current price as of report date. The annualised dividend yield is for the equity-only portion of the Fund and does not reflect the actual yield an investor in the Fund would receive. There can be no guarantee that companies that the Fund invests in, and which have historically paid dividends, will continue to pay them or to pay them at the current rates in the future. A positive distribution yield does not imply positive return, and past yields are no guarantee of future yields.