Under normal circumstances, the Matthews Emerging Markets Sustainable Future 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 of any market capitalization located in emerging market countries that satisfy one or more of the Fund’s environmental, social and governance (“ESG”) standards.
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.
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. Matthews Emerging Markets Sustainable Future Fund’s consideration of ESG factors in making its investment decisions may impact the Fund’s relative investment performance positively or negatively.
These and other risks associated with investing in the Fund can be found in the
prospectus.
MSCI Emerging Markets Index
MSCI All Country Asia ex Japan 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
1.24%
Objective
Long-term capital appreciation
Strategy
Under normal circumstances, the Matthews Emerging Markets Sustainable Future 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 of any market capitalization located in emerging market countries that satisfy one or more of the Fund’s environmental, social and governance (“ESG”) standards.
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.
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. Matthews Emerging Markets Sustainable Future Fund’s consideration of ESG factors in making its investment decisions may impact the Fund’s relative investment performance positively or negatively.
The risks associated with investing in the Fund can be found in the prospectus
Performance
Monthly
Quarterly
Calendar Year
As of 08/31/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Emerging Markets Sustainable Future Fund - MASGX
04/30/2015
MASGX
-7.14%
6.64%
9.19%
7.79%
8.44%
9.07%
n.a.
7.69%
MSCI Emerging Markets Index
-6.13%
3.66%
4.86%
1.69%
-1.01%
1.36%
n.a.
2.08%
MSCI All Country Asia ex Japan Index
-6.39%
2.21%
2.59%
-0.24%
-2.60%
1.15%
n.a.
2.49%
As of 06/30/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Emerging Markets Sustainable Future Fund - MASGX
04/30/2015
MASGX
5.70%
6.87%
8.23%
5.19%
13.71%
8.95%
n.a.
7.74%
MSCI Emerging Markets Index
3.89%
1.04%
5.10%
2.22%
2.72%
1.32%
n.a.
2.15%
MSCI All Country Asia ex Japan Index
2.81%
-1.14%
3.19%
-0.76%
1.49%
1.25%
n.a.
2.61%
For the years ended December 31st
Name
2022
2021
2020
2019
2018
2017
2016
Matthews Emerging Markets Sustainable Future Fund - MASGX
MASGX
-14.38%
11.76%
42.87%
12.55%
-9.73%
33.79%
-1.40%
MSCI Emerging Markets Index
-19.74%
-2.22%
18.69%
18.88%
n.a.
n.a.
n.a.
MSCI All Country Asia ex Japan Index
-19.36%
-4.46%
25.36%
18.52%
-14.12%
42.08%
5.76%
Before July 29, 2022, the Fund was managed with a slightly different investment strategy and may have achieved different performance results under its current investment strategy from the performance shown for periods before that date.
Effective July 29, 2022, in connection with changes to the Fund’s name and principal investment strategies, the primary benchmark changed from the MSCI All Country Asia ex Japan Index to the MSCI Emerging Markets Index.
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 $10,000 Investment Since Inception
(as of 06/30/2023)
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
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.
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.
Vivek Tanneeru is a Portfolio Manager at Matthews and manages the firm’s Emerging Markets Sustainable Future, Emerging Markets Small Companies, Asia Small Companies and Asia Sustainable Future Strategies. Prior to joining Matthews in 2011, Vivek was an Investment Manager on the Global Emerging Markets team of Pictet Asset Management in London. While at Pictet, he also worked on the firm’s Global Equities team, managing Japan and Asia ex-Japan markets. Before earning his MBA from the London Business School in 2006, Vivek was a Business Systems Officer at The World Bank and served as a Consultant at Arthur Andersen Business Consulting and Citicorp Infotech Industries. He interned at Generation Investment Management while studying for his MBA Vivek received his Master’s in Finance from the Birla Institute of Technology & Science in India. He is fluent in Hindi and Telugu.
Inbok Song is a Portfolio Manager at Matthews and manages the firm’s Pacific Tiger Strategy and co-manages the Asia ex Japan Total Return Equity, Emerging Markets Sustainable Future and Asia Innovators Strategies. Prior to rejoining Matthews in 2019, Inbok spent three years at Seafarer Capital Partners as a portfolio manager, the firm’s Director of Research and chief data scientist. Previously she was at Thornburg Investment Management as an associate portfolio manager. From 2007 to 2015, she was at Matthews, most recently as a portfolio manager. From 2005 to 2006, Inbok served as an Analyst and Technology Specialist at T. Stone Corp., a private equity firm in Seoul, South Korea. From 2004 to 2005, she was a research engineer for Samsung SDI in Seoul. Inbok received both a B.A. and Masters in Materials Science and Engineering from Seoul National University. She received a Masters in International Management from the University of London, King’s College, and also an M.A. in Management Science and Engineering, with a concentration in finance from Stanford University. Inbok is fluent in Korean.
Portfolio Characteristics
(as of 06/30/2023)
Fund
Benchmark
Number of Positions
56
1,423
Weighted Average Market Cap
$20.5 billion
$109.9 billion
Active Share
96.6
n.a.
P/E using FY1 estimates
18.1x
12.5x
P/E using FY2 estimates
15.1x
11.0x
Price/Cash Flow
10.9
6.4
Price/Book
2.5
1.6
Return On Equity
11.4
17.7
EPS Growth (3 Yr)
37.4%
22.8%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 06/30/2023)
Category
3YR Return Metric
Alpha
12.39%
Beta
0.92
Upside Capture
116.4%
Downside Capture
69.96%
Sharpe Ratio
0.61
Information Ratio
1.25
Tracking Error
9.77%
R²
77.35
12.39%
Alpha
0.92
Beta
116.40%
Upside Capture
69.96%
Downside Capture
0.61
Sharpe Ratio
1.25
Information Ratio
9.77%
Tracking Error
77.35
R²
Fund Risk Metrics are reflective of Investor share class.
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 06/30/2023)
Sector Allocation
Country Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Information Technology
21.6
21.2
0.4
Financials
20.7
21.9
-1.2
Industrials
19.5
6.3
13.2
Consumer Discretionary
11.8
13.2
-1.4
Health Care
9.6
3.8
5.8
Consumer Staples
7.6
6.4
1.2
Real Estate
3.9
1.7
2.2
Communication Services
3.4
9.8
-6.4
Utilities
1.7
2.6
-0.9
Materials
0.0
8.1
-8.1
Energy
0.0
5.0
-5.0
Cash and Other Assets, Less Liabilities
0.3
0.0
0.3
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
38.9
29.7
9.2
India
18.8
14.6
4.2
South Korea
11.2
12.3
-1.1
Taiwan
8.8
15.5
-6.7
Brazil
7.4
5.5
1.9
Poland
3.2
0.8
2.4
United States
2.7
0.0
2.7
Saudi Arabia
1.7
4.2
-2.5
Vietnam
1.5
0.0
1.5
Jordan
1.2
0.0
1.2
Romania
1.1
0.0
1.1
Indonesia
0.9
2.0
-1.1
Estonia
0.9
0.0
0.9
Chile
0.8
0.5
0.3
Bangladesh
0.7
0.0
0.7
South Africa
0.0
3.2
-3.2
Mexico
0.0
2.8
-2.8
Thailand
0.0
1.9
-1.9
Malaysia
0.0
1.3
-1.3
United Arab Emirates
0.0
1.3
-1.3
Qatar
0.0
0.9
-0.9
Kuwait
0.0
0.8
-0.8
Philippines
0.0
0.6
-0.6
Turkey
0.0
0.6
-0.6
Greece
0.0
0.5
-0.5
Peru
0.0
0.3
-0.3
Czech Republic
0.0
0.2
-0.2
Hungary
0.0
0.2
-0.2
Colombia
0.0
0.1
-0.1
Egypt
0.0
0.1
-0.1
Cash and Other Assets, Less Liabilities
0.3
0.0
0.3
Not all countries are included in the benchmark index(es).
Equity market cap of issuer
Fund
Benchmark
Difference
Mega Cap (over $25B)
18.7
53.7
-35.0
Large Cap ($10B-$25B)
22.3
22.5
-0.2
Mid Cap ($3B-$10B)
34.5
21.8
12.7
Small Cap (under $3B)
24.2
2.1
22.1
Cash and Other Assets, Less Liabilities
0.3
0.0
0.3
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.
Portfolio Breakdown benchmark reflects the MSCI Emerging Markets Index as of 6/30/23.
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 first half of 2023, the Matthews Emerging Markets Sustainable Future Fund returned 8.23% (Investor Class) and 8.39% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 5.10% over the same period. For the quarter ending June 30, 2023, the Fund returned 6.87% (Investor Class) and 6.94% (Institutional Class), while the benchmark returned 1.04%.
Market Environment:
There were two key developments during the first six months of the year. Firstly, the market has been surprised by the persistence of higher inflation and, as a result, peak interest rate expectations in the western world have been steadily revised up. Secondly, there was the market’s excitement about the potential of artificial intelligence (AI), with the release of very successful, large language and stable diffusion models and blowout quarterly results and guidance from Nvidia, a key player in the space, which together triggered a reassessment of the growth prospects of large tech companies. This led to a very top-heavy performance of equity markets, in the U.S. in particular.
During the period, the relative attractiveness of large emerging markets also came into focus as they were relatively well positioned from an inflation perspective, with either low inflation or high real interest rates. Latin American currencies like the Columbian peso, Mexican peso, Brazilian real, Chilean peso and Peruvian sol performed well against the U.S. dollar while currencies in inflation-hit countries like Turkey and Argentina performed poorly.
Brazil, after aggressively raising interest rates to fight inflation starting in early 2021, has seemingly reached the top of the rate cycle. With the potential moderation in inflation in sight, the market has taken a positive view on the trajectory of rates from here and the potential boost lower rates could provide the economy.
Poland, Hungary and Greece, alongside Brazil, were among the best-performing emerging markets in the MSCI Emerging Markets Index in the first half, while China, Turkey, Thailand and Malaysia were the worst performers. From a sector perspective, energy, IT and financials were the best performers while real estate and health care were among the weakest in emerging markets.
Performance Contributors and Detractors:
From a country perspective, stock selection in South Korea, Brazil and India were the biggest contributors to the Fund’s relative performance in the first half. On the other hand, an overweight and stock selection in China was the biggest detractor amid negative sentiment over the country’s uneven recovery and geopolitical tensions with the U.S.
From a sector perspective, our underweight and stock selection in consumer discretionary was the biggest contributor. Stock selection in financials was also a top contributor. On the other hand, stock selection in consumer staples and communication services were the biggest detractors.
From a stock perspective, two Brazilian holdings, YDUQS and B3, were among top contributors. YDUQS, a leading on-campus and distance-learning education company, navigated the COVID-19 related-slowdown successfully and has positioned itself to benefit from improvements in household finances on account of expected lower interest rates, which will enable more low-mid income families to enroll students in their programs. The company could also see reduced interest payment burdens and potentially benefit from any increase in government-sponsored tuition support programs. B3, a stock market operator, is also seen as a beneficiary of potentially lower rates as the relative investment appeal of equities might go up in relation to fixed income in an easing environment, boosting its trading volumes.
On the flip side, our Chinese or China-exposed holdings such as Full Truck Alliance, a Chinese freight marketplace operator, and JD Health, a leading Chinese online pharmacy company, detracted as the market worried about the slow pace of the Chinese economic recovery. We remain positive about the long-term prospects of these companies and our base case remains a steady, not spectacular, recovery of China’s economy over the coming quarters.
Notable Portfolio Changes:
We initiated a position in Aguas Andinas, a leading water utilities company in Chile, which provides services for water collection, and the production, transportation and distribution of drinking water as well as sewage collection, treatment and disposal. It operates under a unique regulatory environment in Chile that uses a model greenfield company method to set tariffs. This has incentivized strong investments into the water and sewage infrastructure and has enabled Chile to achieve drinking and sewage water treatment standards that are among the highest in the world. The company also offers steady growth and an attractive dividend yield. During the period, we exited a small residual position in Xinyi Glass, a China glass manufacturer.
Outlook:
The U.S. Fed’s interest rate-strategy and the market’s expectation of its evolution have been the most important variables impacting the performance of emerging markets over the last few quarters. With the Fed seemingly coming close to the end of its rate-hiking cycle, the focus will now shift to assessing the cumulate impact of all the hikes on economic growth prospects over the coming quarters.
Like during the first half, our focus in the second half of 2023 will be on assessing how China’s economic recovery and growth prospects play out and how they might affect the dynamics of other emerging markets. Russia’s invasion of Ukraine and its effect on energy prices—alongside OPEC’s (Organization of the Petroleum Exporting Countries) persistent efforts to keep prices high—will also need ongoing, careful monitoring although to a lesser extent than in 2022.
Over the coming years, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This development, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
Finally, since our inception over eight years ago, we have viewed sustainability investing as a synonym for long-term investing. Our approach focuses on investing in companies that are well-positioned to embrace global, multidecadal trends, including addressing critical challenges like climate change and inclusive development. These companies also often tend to be good in identifying and proactively addressing long-terms risk to their businesses. Emerging markets, we believe, are key destination for sustainable investment themes that offer attractive opportunities for alpha generation.
Top 10 holdings as of June 30, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MASGX as of 06/30/2023
1YR
3YR
5YR
10YR
Since Inception
Inception Date
5.19%
13.71%
8.95%
N.A.
7.74%
04/30/2015
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
1.24%
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. Matthews Emerging Markets Sustainable Future Fund’s consideration of ESG factors in making its investment decisions may impact the Fund’s relative investment performance positively or negatively.
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 MSCI Emerging Markets ex China Index is a free float-adjusted market capitalization-weighted index that captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries excluding China: Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Small Cap Index is a free float-adjusted market capitalization weighted small cap index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungry, India, Indonesia, Kuwait, 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 MSCI India Index is a free float-adjusted market capitalization-weighted index of Indian equities listed in India.
The MSCI Korea Index is a free float-adjusted market capitalization-weighted index of Korean equities listed in Korea.
Indexes are for comparative purposes only and it is not possible to invest directly in an index.
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 June 30, 2023
For the first half of 2023, the Matthews Emerging Markets Sustainable Future Fund returned 8.23% (Investor Class) and 8.39% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 5.10% over the same period. For the quarter ending June 30, 2023, the Fund returned 6.87% (Investor Class) and 6.94% (Institutional Class), while the benchmark returned 1.04%.
Market Environment:
There were two key developments during the first six months of the year. Firstly, the market has been surprised by the persistence of higher inflation and, as a result, peak interest rate expectations in the western world have been steadily revised up. Secondly, there was the market’s excitement about the potential of artificial intelligence (AI), with the release of very successful, large language and stable diffusion models and blowout quarterly results and guidance from Nvidia, a key player in the space, which together triggered a reassessment of the growth prospects of large tech companies. This led to a very top-heavy performance of equity markets, in the U.S. in particular.
During the period, the relative attractiveness of large emerging markets also came into focus as they were relatively well positioned from an inflation perspective, with either low inflation or high real interest rates. Latin American currencies like the Columbian peso, Mexican peso, Brazilian real, Chilean peso and Peruvian sol performed well against the U.S. dollar while currencies in inflation-hit countries like Turkey and Argentina performed poorly.
Brazil, after aggressively raising interest rates to fight inflation starting in early 2021, has seemingly reached the top of the rate cycle. With the potential moderation in inflation in sight, the market has taken a positive view on the trajectory of rates from here and the potential boost lower rates could provide the economy.
Poland, Hungary and Greece, alongside Brazil, were among the best-performing emerging markets in the MSCI Emerging Markets Index in the first half, while China, Turkey, Thailand and Malaysia were the worst performers. From a sector perspective, energy, IT and financials were the best performers while real estate and health care were among the weakest in emerging markets.
Performance Contributors and Detractors:
From a country perspective, stock selection in South Korea, Brazil and India were the biggest contributors to the Fund’s relative performance in the first half. On the other hand, an overweight and stock selection in China was the biggest detractor amid negative sentiment over the country’s uneven recovery and geopolitical tensions with the U.S.
From a sector perspective, our underweight and stock selection in consumer discretionary was the biggest contributor. Stock selection in financials was also a top contributor. On the other hand, stock selection in consumer staples and communication services were the biggest detractors.
From a stock perspective, two Brazilian holdings, YDUQS and B3, were among top contributors. YDUQS, a leading on-campus and distance-learning education company, navigated the COVID-19 related-slowdown successfully and has positioned itself to benefit from improvements in household finances on account of expected lower interest rates, which will enable more low-mid income families to enroll students in their programs. The company could also see reduced interest payment burdens and potentially benefit from any increase in government-sponsored tuition support programs. B3, a stock market operator, is also seen as a beneficiary of potentially lower rates as the relative investment appeal of equities might go up in relation to fixed income in an easing environment, boosting its trading volumes.
On the flip side, our Chinese or China-exposed holdings such as Full Truck Alliance, a Chinese freight marketplace operator, and JD Health, a leading Chinese online pharmacy company, detracted as the market worried about the slow pace of the Chinese economic recovery. We remain positive about the long-term prospects of these companies and our base case remains a steady, not spectacular, recovery of China’s economy over the coming quarters.
Notable Portfolio Changes:
We initiated a position in Aguas Andinas, a leading water utilities company in Chile, which provides services for water collection, and the production, transportation and distribution of drinking water as well as sewage collection, treatment and disposal. It operates under a unique regulatory environment in Chile that uses a model greenfield company method to set tariffs. This has incentivized strong investments into the water and sewage infrastructure and has enabled Chile to achieve drinking and sewage water treatment standards that are among the highest in the world. The company also offers steady growth and an attractive dividend yield. During the period, we exited a small residual position in Xinyi Glass, a China glass manufacturer.
Outlook:
The U.S. Fed’s interest rate-strategy and the market’s expectation of its evolution have been the most important variables impacting the performance of emerging markets over the last few quarters. With the Fed seemingly coming close to the end of its rate-hiking cycle, the focus will now shift to assessing the cumulate impact of all the hikes on economic growth prospects over the coming quarters.
Like during the first half, our focus in the second half of 2023 will be on assessing how China’s economic recovery and growth prospects play out and how they might affect the dynamics of other emerging markets. Russia’s invasion of Ukraine and its effect on energy prices—alongside OPEC’s (Organization of the Petroleum Exporting Countries) persistent efforts to keep prices high—will also need ongoing, careful monitoring although to a lesser extent than in 2022.
Over the coming years, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This development, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
Finally, since our inception over eight years ago, we have viewed sustainability investing as a synonym for long-term investing. Our approach focuses on investing in companies that are well-positioned to embrace global, multidecadal trends, including addressing critical challenges like climate change and inclusive development. These companies also often tend to be good in identifying and proactively addressing long-terms risk to their businesses. Emerging markets, we believe, are key destination for sustainable investment themes that offer attractive opportunities for alpha generation.
Top 10 holdings as of June 30, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MASGX as of 06/30/2023
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
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. Matthews Emerging Markets Sustainable Future Fund’s consideration of ESG factors in making its investment decisions may impact the Fund’s relative investment performance positively or negatively.