For the year ending December 31, 2022, the Matthews Pacific Tiger Fund returned -20.73% (Investor Class) and -20.62% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -19.36% over the same period. For the fourth quarter, the Fund returned 9.48% (Investor Class) and 9.48% (Institutional Class), while the benchmark returned 11.43%.

Market Environment:

2022 was a tough year for Asian equities, although the year ended on a positive note as the prospects of a post-COVID recovery in China started to gain traction. Chinese equities posted some of the strongest results within global markets with a rebound in sentiment stemming from the government’s statements and actions which support the easing of COVID-related restrictions in favor of ‘living with Covid’ policies. In addition, the Chinese authorities seem to be shifting their stance from risk-management (in areas like property) to reviving growth.  In general, South Asia proved to be more resilient during the year given the domestic orientation of many of these economies, and an outlook for gradual recovery in economic activity.  Meanwhile, the more export-oriented countries such as Korea and Taiwan struggled in the first nine months but finished the year on a slightly positive as investors seem to be anticipating a peak in U.S. interest rates. An expectation of a moderation in U.S. interest rates may also have been a driver of a partial recovery in Asian currencies in the fourth quarter. 

Performance Contributors and Detractors:

From the country perspective, stock selection within Taiwan, India and the Philippines contributed the most to the Fund’s relative performance for the year as domestic economic activities continued to recover in India and the Philippines and supply chain constraints have eased in the case of Taiwan. On the other hand, stock selection in South Korea and Singapore as well as our zero exposure to Malaysia detracted from performance. Delays in the operational milestones in some of the portfolio’s South Korean holdings caused weaker earning results and accelerated derating of those companies. From a sector perspective, our allocation and stock selection within real estate and consumer discretionary contributed the most while our stock selection within materials and communication services detracted the most from relative performance.

Turning to individual securities, Central Pattana Public, Thailand's largest retail property development and investment company, contributed the most to the portfolio’s absolute and relative performance during the year. While the company is classified under the real estate sector, the stock performed well as its underlying operations were driven by consumption recovery in the Southeast Asia region. YUM China, one of the leading restaurant chains in China was another notable contributor. Amid challenging external environment, the company was quick to adjust their operation towards delivery business, and as a result unit economics of their stores remained healthy. The company was able to continue on the path towards its annual store expansion goal. In contrast, Hybe was one of the detractors. Hybe’s efforts to achieve operational leverage with a platform approach has been delayed while one of its key intellectual property assets expected to contribute lower in the foreseeable future. Given the uncertainty combined with still heightened valuation level, we exited our position during the fourth quarter.  On the other hand, HL Mando, a growing auto components company in South Korea had negative performance contribution even though its earnings were resilient. Sentiment around the uncertain auto demand and lingering impact on the supply chain constraints and subsequent cost pressure derated the company’s valuation. 

Notable Portfolio Changes:

We took advantage of market volatility throughout the year to rotate capital and make adjustments to the portfolio, finding opportunities in China given the potential for the country’s domestic consumption recovery. Platform-driven consumer discretionary companies such as Meituan showed strong cost control with decent revenue growth amid macroeconomic uncertainty. Additionally, valuations of these companies were at the compelling level in absolute and historical perspective with strong cash flow generation. These additions were funded by trimming positions in India as valuations became demanding given past strong performance. We also trimmed a couple of our information technology positions, Samsung Electronics in South Korea and Taiwan Semiconductor Manufacturing in Taiwan. Although these companies have strong fundamentals, near-term earnings uncertainty risk has increases as both names are exposed to the slowing global demand environment.

Outlook:

All eyes are squarely focused on economic recovery in China as the government has pared back all COVID-related constraints in an accelerated manner since November 2022. The surge in Chinese household deposits during the past two years may support a recovery in consumption which is emerging as the most important driver of economic activity in 2023. With the prospects for global growth in 2023 looking less inspiring, we believe the domestically oriented economies in Asia may be better positioned to deliver growth. Furthermore, the competitive landscape has altered—somewhat dramatically in certain industries—in the post-COVID world and that is creating opportunities for growth through market share gains, new growth areas, and acceleration of certain trends that were slowly developing across the region. Examples include consolidation across many parts of retail sector in Asia, new and emerging sectors like solar/renewables, and a thrust in the augmentation of manufacturing supply chains outside of China. All of these are areas that continue to be attractive.

Top 10 holdings as of December 31, 2022. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MAPTX as of 12/31/2022