For the year ending December 31, 2020, the Matthews Asian Growth and Income Fund returned 16.00% (Investor Class) and 16.18% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned 25.36%. For the fourth quarter of the year, the Fund returned 15.52% (Investor Class) and 15.53% (Institutional Class) versus 18.66% for the Index. 

Market Environment: 

2020 was a remarkable year in many respects, not least of which is the unquestionably surprising strength of the performance of risk assets against a backdrop of a major health crisis that has crippled parts of the global economy. The coronavirus pandemic alongside a disputed U.S. presidential election, rising geopolitical tensions and an equity bull market that is long in the tooth appeared to be sufficient reasons to expect increased volatility, but these factors have been more than offset by a ramping up of aggressive monetary and fiscal support by almost all governmental and central bank regimes globally. This has caused the cost of capital to plummet to levels that most market participants have not witnessed during their careers, and the elevated valuations that follow.

Within Asia, equity market strength is a touch more understandable as the North Asian countries of China, Taiwan and South Korea led the charge. In China’s case, it has done a solid job of dealing with the virus and parts of the country are now functioning relatively normally with activity returning to pre-pandemic levels. For Taiwan and South Korea, both are important players within the technology supply chain that has been one of the few areas of visible and structural growth. Much of the rest of the region suffered a different fate as most markets in Southeast Asia finished the year in negative territory, although India bucked this trend with a late surge on hopes for a significant economic recovery in 2021. 

Performance Contributor and Detractors: 

The Fund underperformed over the course of the year but delivered solid absolute returns. This is a robust outcome given our more conservative, income-oriented investment approach. Style factors played an important role in relative performance during the year in light of the largest divergence between the performance of “growth” and “income” equities witnessed for some time.

In light of this, a key reason for the Fund’s relative performance was due to what we do not hold in the portfolio as a number of stay-at-home and electric vehicle stocks such as JD.Com, Alibaba, Meituan and Nio which delivered exceptionally strong performance. Although some of these are solid businesses, many do not fit our mandate of balancing growth and income. Elsewhere, the financial sector was the largest detractor to returns for the full year, although it contributed significantly over the fourth quarter. The largest of these was HSBC Group, which fell following a worsened outlook for global trade, questions over Hong Kong’s role in international finance and a suspension of its dividend. Thailand’s Kasikornbank also dropped on declining margins and elevated credit costs as the tourist dependent nation struggled to deal with the pandemic. We exited both positions during the year.

Parts of Southeast Asia also detracted from performance despite solid relative stock selection. SingTel dropped as it cut its dividend and delivered poor earnings due to lower roaming fees, rising price competition and weaker enterprise revenues. Genting Malaysia declined as the current health crisis is likely to impact the casino operator for quite some time.

The largest contributors to performance came from the IT sector with TSMC the strongest of these. 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 we believe it is also likely to gain from increasing content value in Apple’s new iPhone as well as potential wins from other customers. 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, as well as benefiting from an improving memory cycle. Elsewhere, the Fund’s holdings in domestic demand-oriented Chinese companies such as Tencent, Netease, Jiangsu Yanghe, Yili Industrial and Midea Group all rose significantly. The commonality here is that these are all leaders in their respective fields, and in strong positions to take advantage of a still growing consumer base. 

Notable Portfolio Changes:

The final quarter to the year was an active one as increased volatility created a number of disconnects in markets. The largest alterations to the portfolio came in both China and convertible bonds as we exited nine positions and established six new holdings.

A number of new issues during 2020 created some attractive opportunities within the convertible bond market, including South Korean internet giant Kakao and Chinese e-commerce platform Pinduoduo. These additions increased the portfolio’s exposure to leading stay-at-home economy stocks, but done so in a way that we believe will continue to prudently manage risk. Both of these companies are strong credits with net cash balance sheets, and offer an attractive risk-reward skew as growth is likely to remain strong in our view.

Within equities, we added a small position in gold miner Saracen Mineral Holdings. The company is on the verge of merging with Northern Star Resources and in our view, the combined entity should be a business with a well-respected management team, solid production growth and room for synergies that could drive double digit earnings growth. It also provides the portfolio with some exposure to the precious metal as a means of tail risk given the scale of unprecedented monetary action that has been taken by central banks globally.

These were funded through the sales of convertible bonds in Anta Sports, Bosideng, Haier and CapitaLand as well as equity positions in Jiangsu Yanghe, Lepu Medical, Zhejiang Supor, and KDDI.

Outlook:

Looking to 2021, the backdrop for emerging market and Asian equities appears reasonable. It is likely that the geopolitical landscape will become less erratic than the last few years with renewed hopes of engagement and diplomacy from the new U.S. administration. Further, the alteration in the U.S. Fed’s approach to monetary policy toward targeting average inflation is anticipated to keep interest rates low for the foreseeable future. This combined with a growing fiscal deficit in the U.S. and calls to undergo yet more stimulus may continue to put downward pressure on the U.S. dollar—often a key driver of relative returns for emerging markets. Adding to this constructive backdrop is that relative growth expectations in much of Asia are greater to Western counterparts and we have begun to witness earnings upgrades as the economic recovery ensues.

There are, of course, some counter arguments. Chief amongst these are valuations and style bifurcation. Headline multiples of 16.5x FY1 earnings are lofty and also do not illustrate the degree to which “value” has underperformed “growth” over 2020. (Value stocks are represented by the MSCI All Country Asia ex Japan Value Index. Growth stocks are represented by the MSCI All Country Asia ex Japan Growth Index). The “value” index trades at only 10.6x FY1 earnings having delivered a relatively weak 9.9% return over 2020 in comparison to the “growth” index return of 40.4% and 25.5x FY1 earnings multiple. (The P/E Ratio is the share price of a stock as of the report date, divided by the forecasted earnings per share for the next 12-month period (FY1)). This is arguably justified to a degree, but it remains our belief that the party in high growth equities will not last in perpetuity. A raft of IPOs, SPACs (special-purpose acquisition companies) and elevated retail participation point to speculative behavior that lacks discipline. As a portfolio that aims to deliver attractive risk-adjusted returns across cycles through buying quality companies that display a blend of both growth and income, this backdrop leaves us fairly optimistic from a macroeconomic and style backdrop. We believe that we can generate attractive future portfolio returns as we aim to avoid value traps as well as overpriced conceptual growth stocks, focusing on long-term compounders that provide some income.

As of December 31, 2020, the securities mentioned comprised the Matthews Asian Growth and Income Fund in the following percentages: Singapore Telecommunications Ltd. (SingTel), 1.2%; Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), 7.1%; Tencent Holdings Ltd., 4.9%; Netease Inc., ADR, 1.8%; Midea Group Co., Ltd. A Shares, 2.4%; Inner Mongolia Yili Industrial Group Co., Ltd. A Shares, 1.8%; Kakao Corp., Cnv., 0.000%, 04/28/2023, 1.3%; Pinduoduo, Inc., Cnv., 0.000%, 12/01/2025, 1.5%; Saracen Mineral Holdings, Ltd., 1.1%.; and Samsung Electronics, Co., Ltd., 4.3%

The Fund did not held no positions in: Alibaba Group Holdings Ltd., Meituan, Nio, HSBC Group, Kasikornbank, JD.Com, Inc., Genting Malaysia, Intel Corp., Huawei Technologies Co. Inc., Northern Star Resources ltd., Anta Sports Products Limted, Bosideng International Holdings Ltd., Haier Group Corp., CapitaLand Limited, Jiangsu Yanghe Brewery, Lepu Medical Technology Company, Zhejiang Supor Co., Ltd., KDDI Corp., or Apple, Inc. Current and future portfolio holdings are subject to change and risk.

Average Annual Total Returns - MACSX as of 03/31/2021