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Matthews China Small Companies Fund
MCSMX

Snapshot
  • Seeks alpha in China’s lesser known small entrepreneurial companies
  • Invests in industries that are leveraged to China’s increasingly innovative and dynamic economy driven by fast growing domestic consumer demand
  • Tilt towards higher value-added growth sectors benefiting from innovation and capital efficiency

05/31/2011

Inception Date

-1.68%

YTD Return

(as of 02/27/2024)

$8.80

NAV

(as of 02/27/2024)

+0.12

1 Day NAV Change

(as of 02/27/2024)

Objective

Long-term capital appreciation.

Strategy

Under normal circumstances, the 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 Small Companies located in China. China includes its administrative and other districts, such as Hong Kong. The Fund seeks to invest in smaller companies capable of sustainable growth based on the fundamental characteristics of those companies, including balance sheet information; number of employees; size and stability of cash flow; management’s depth, adaptability and integrity; product lines; marketing strategies; corporate governance; and financial health. The Fund defines Small Companies as companies with market capitalization no higher than the greater of US $5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI China Small Cap Index.

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 markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. The Fund is non-diversified as it concentrates its investments in small sized companies. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies.

These and other risks associated with investing in the Fund can be found in the prospectus.

Fund Facts
Inception Date 05/31/2011
Fund Assets $76.55 million (01/31/2024)
Currency USD
Ticker MCSMX
Cusip 577-125-404
Portfolio Turnover 59.0%
Benchmark MSCI China Small Cap Index
Geographic Focus China - China includes its administrative and other districts, such as Hong Kong
Fees & Expenses
Gross Expense Ratio 1.55%
Net Expense Ratio 1.41%

Performance

  • Monthly
  • Quarterly
  • Calendar Year
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As of 01/31/2024
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews China Small Companies Fund - MCSMX
05/31/2011
MCSMX
-12.18% -12.42% -12.18% -34.83% -23.43% 2.60% 4.36% 3.16%
MSCI China Small Cap Index
-15.25% -15.73% -15.25% -42.87% -25.89% -10.55% -5.16% -4.44%
As of 12/31/2023
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews China Small Companies Fund - MCSMX
05/31/2011
MCSMX
-0.60% -6.96% -17.51% -17.51% -18.23% 6.21% 5.34% 4.25%
MSCI China Small Cap Index
-1.31% -2.93% -24.82% -24.82% -19.06% -6.38% -3.51% -3.21%
For the years ended December 31st
Name 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014
Matthews China Small Companies Fund - MCSMX
MCSMX
-17.51% -31.26% -3.59% 82.52% 35.41% -17.68% 53.88% -2.35% 4.07% -3.33%
MSCI China Small Cap Index
-24.82% -24.77% -6.26% 27.21% 6.63% -19.53% 24.62% -5.95% 3.48% -0.34%
 

Unusually high returns may not be sustainable. 

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 12/31/2023)

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.

Ratings

  • OVERALL
  • out of 103 funds
  • 3 YEAR
  • out of 103 funds
  • 5 YEAR
  • out of 84 funds
  • 10 YEAR
  • out of 54 funds
  • 1 YEAR
  • 3rd
  • 60 out of 105 funds
  • 3 YEAR
  • 3rd
  • 56 out of 92 funds
  • 5 YEAR
  • 1st
  • 7 out of 75 funds
  • 10 YEAR
  • 1st
  • 2 out of 49 funds
  • SINCE INCEPTION
  • 1st
  • 6 out of 42 funds

Ratings agency calculation methodology

Portfolio Managers

Andrew  Mattock, CFA photo
Andrew Mattock, CFA

Lead Manager

Winnie  Chwang photo
Winnie Chwang

Lead Manager

Portfolio Characteristics

(as of 12/31/2023)
Fund Benchmark
Number of Positions 44 226
Weighted Average Market Cap $4.5 billion $1.3 billion
Active Share 94.0 n.a.
P/E using FY1 estimates 15.1x 8.2x
P/E using FY2 estimates 12.9x 7.1x
Price/Cash Flow 11.4 4.6
Price/Book 2.4 0.7
Return On Equity 12.8 2.2
EPS Growth (3 Yr) 26.3% 10.1%

Sources: Factset Research Systems, Inc.

Risk Metrics (3 Yr Return)

(as of 12/31/2023)
-2.86%
Alpha
0.82
Beta
75.98%
Upside Capture
91.44%
Downside Capture
-0.77
Sharpe Ratio
0.06
Information Ratio
14.38%
Tracking Error
74.56

Fund Risk Metrics are reflective of Investor share class.

Sources: Zephyr StyleADVISOR

Top 10 Holdings

(as of 01/31/2024)
Name Sector % Net Assets
Alchip Technologies, Ltd. Information Technology 5.8
Yangzijiang Shipbuilding Holdings, Ltd. Industrials 5.8
Samsonite International SA Consumer Discretionary 3.7
China Overseas Property Holdings, Ltd. Real Estate 3.4
Tongcheng Travel Holdings, Ltd. Consumer Discretionary 3.4
Elite Material Co., Ltd. Information Technology 3.4
ENN Natural Gas Co., Ltd. Utilities 3.3
ACM Research, Inc. Information Technology 3.2
Jason Furniture Hangzhou Co., Ltd. Consumer Discretionary 3.1
KE Holdings, Inc. Real Estate 2.8
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 12/31/2023)
  • Sector Allocation
  • Market Cap Exposure
  • China Exposure
Sector Fund Benchmark Difference
Consumer Discretionary 21.9 12.0 9.9
Industrials 20.4 13.5 6.9
Information Technology 18.7 7.4 11.3
Health Care 11.3 23.8 -12.5
Consumer Staples 9.1 5.1 4.0
Communication Services 6.7 7.7 -1.0
Real Estate 6.6 9.7 -3.1
Utilities 2.8 3.9 -1.1
Financials 2.7 4.9 -2.2
Materials 0.0 10.5 -10.5
Energy 0.0 1.6 -1.6
Liabilities in Excess of Cash and Other Assets -0.3 0.0 -0.3

Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.

Equity market cap of issuer Fund Benchmark Difference
Mega Cap (over $25B) 0.0 0.0 0.0
Large Cap ($10B-$25B) 8.0 0.0 8.0
Mid Cap ($3B-$10B) 55.5 2.7 52.8
Small Cap (under $3B) 36.7 97.3 -60.6
Liabilities in Excess of Cash and Other Assets -0.3 0.0 -0.3

The Portfolio’s market cap exposure breakdown presented is used for comparison purposes and the definition of the capitalization breakdown is from MSCI.

The Fund defines Small Companies as companies with market capitalization no higher than the greater of US$5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI China Small Cap Index.

China Exposure Portfolio Weight
Hong Kong Listed Companies 42.8
Mainland China Listed Companies 23.9
Other 21.8
ADR/GDR 11.6
Liabilities in Excess of Cash and Other Assets -0.3

Mainland China listed companies includes A Share and B Shares. A Shares are Mainland Chinese companies incorporated in China and listed on the Shanghai or Shenzhen exchanges, available mostly to local Chinese investors and qualified institutional investors. B Shares are mainland Chinese companies listed on the Shanghai and Shenzhen stock exchanges, available to both Chinese and non-Chinese investors. ADRs are American Depositary Receipts and GDRs are Global Depositary Receipts. Hong Kong Listed Companies include SAR (Hong Kong) companies, China-affiliated corporations, and H Shares. SAR companies are companies that conduct business in Hong Kong and/or mainland China. China-affiliated corporations [CAC], also known as "Red Chips," are mainland China companies with partial state ownership listed in Hong Kong, and incorporated in Hong Kong. H Shares are mainland Chinese companies listed on the Hong Kong exchange but incorporated in mainland China. Other represents Chinese companies listed in other countries or non-China companies with a majority of revenue coming from China such as Japan, Singapore, Taiwan and the United States or other non-China companies.

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)
12/13/2023 12/14/2023 $0.21127 $0.00000 $0.00000 $0.21127 2.4% N.A.
12/13/2022 12/14/2022 $0.19767 $0.00000 $0.00000 $0.19767 1.7% N.A.
View History

 

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 December 31, 2023

For the year ending December 31, 2023, the Matthews China Small Companies Fund returned -17.51% (Investor Class) and -17.37% (Institutional Class), while its benchmark, the MSCI China Small Cap Index, returned -24.82% over the same period. For the fourth quarter, the Fund returned -6.96% (Investor Class) and -6.91% (Institutional Class), while the benchmark returned -2.93%.

Market Environment

2023 was a disappointing year for Chinese equities and the Chinese economy overall. It’s disappointing, in our view, not just in the sense of the underwhelming recovery of Chinese consumer spending post-COVID lockdowns, but also due to the lack of any significant stimulus measures by the government. While the government started to gradually loosen nearly all property purchase-restrictions across most cities in China, the expectations of potential home buyers regarding future house prices and their own income levels have changed. As a result, these policy changes have barely helped to arrest the slump in the real estate market. As the year progressed, investors gradually gave up on the idea that the Chinese central government would step in to engineer a stronger consumption rebound. 

The challenging real estate market and the soft consumption environment create a potential formula for deflation, in our view. From what we can see, many entrepreneurs, whose animal spirits were curbed during the COVID period, are now hesitating to start any new investments in this environment. From a geopolitical standpoint, the highly anticipated Biden-Xi summit in San Francsico in November have not curbed the ongoing concerns of the market.  

In terms of markets, quarterly results of leading Chinese companies, especially large cap technology firms seem to be hinting towards upward surprises in terms of top line revenue and earnings. During the last quarter of the year, information technology and utilities were the only positive sectors while real estate was weakest followed by consumer staples and communication services. Chinese small and mid caps ended lower but outperformed weak large and mega caps during the quarter.

Performance Contributors and Detractors

From a sector perspective, our allocation to health care and stock selection within industrials detracted the most from relative performance in the year. We have been underweight health care relative to the index given its larger exposure in biotech where we have been more selective this year. Industrials have underperformed given our exposure in renewables which is going through a slower growth period amid capacity expansions and increased worries that oversupply might lead to weaker pricing. Turning to individual holdings, Xtep International Holdings, a consumer discretionary company engaged in the development and manufacturing of sportswear detracted the most from the portfolio’s absolute and relative performance. Xtep has been impacted by  weaker-than-expected consumption environment which has led to slower-than-expected growth in the sportswear industry. BOE Varitronix, an auto parts manufacturer, was another detractor. The company has been experiencing some pricing pressures given a slowdown in the growth of both China’s traditional ICE (Internal combustion engine) and EV (electric vehicle) auto industry. We believe these two names sold down more relative to their weaker outlook, and that their current valuations have more than compensated for a lower growth outlook ahead.

On the other hand, stock selection within information technology and real estate sectors contributed the most to the Fund’s relative performance. Two Taiwan-listed information technology names including Alchip Technologies contributed the most to the Fund’s absolute and relative performance as beneficiaries from the secular trends of AI (artificial intelligence). Alchip designs application-specific integrated circuits (ASIC) and the company continues to see growing penetration and development from customized AI chip designs. Anhui Yingjia Distrillery, a mass market white liquor manufacturer, was another top contributor. Anhui Yingjia has done well given the company’s positive efforts in distribution and branding restructuring in its hometown of Anhui province. 

Notable Portfolio Changes

We streamlined the number of positions in the portfolio from 64 to 44 over the course of the year. Overall exposure in mainland-listed companies has been reduced from around 39% in Dec 2022 to 24% at the end of the year. Many smaller A-shares positions that were more expensive were exited from the portfolio as cheaper valuations given the pull back enabled us to build more into better quality holdings. In the more recent quarters, we have incrementally added to our positions in certain communication services names such as Cloud Music (driven by low valuations as well as increased willingness of consumers to spend and pay for online services). We’ve also added to consumer names such as Melco Resorts & Entertainment and Tongcheng Travel Holdings (driven by the pull back of these names leading to attractive valuations for what are still renowned brands in China) and to health-care names such as HUTCHMED and Kangji Medical Holdings. 

Outlook

2023 has been generally a challenging year for China. Despite the lifting of COVID restrictions in the country, the government’s lack of stimulus generally led to weakening economic support. At the same time, property market woes continued, impacting sentiment and business confidence in the country. While more supportive measures have been rolled out later in the year to address property market concerns, a meaningful inflection remains to be seen. 

Looking ahead, we are cautiously looking for a stabilization of the deterioration in property markets. While we do not expect a significant warming of geo-politics, the ongoing current status quo of a more constructive post-APEC posturing would be welcomed by the market. Valuations continued to trend down in 2023, and the broader China market hovers around similar levels as 2009 despite better quality businesses and earnings profile. We continue to believe that patience is needed in these market environments and, that it could ultimately pay off if the market turns. 

View the Fund’s Top 10 holdings as of December 31, 2023. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MCSMX as of 12/31/2023
1YR 3YR 5YR 10YR Since Inception Inception Date
-17.51% -18.23% 6.21% 5.34% 4.25% 05/31/2011

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 1.55%
Net Expense Ratio 1.41%

Matthews has contractually agreed to waive fees and reimburse expenses to limit the Total Annual Fund Operating Expenses until April 30, 2024. Please see the Fund’s prospectus for additional details.

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 markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. The Fund is non-diversified as it concentrates its investments in small sized companies. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies.

 

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.