Matthews Asian Growth and Income Fund
Period ended March 31, 2020
For the quarter ending March 31, 2020, the Matthews Asian Growth and
Income Fund returned -18.88% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned
Despite only being at the end of the first quarter, 2019 seems a distant memory as the coronavirus crisis has gripped almost every part of the globe. What originated in China swiftly migrated, and various countries have become “hot spots” as complacency turned into panic and a global pandemic.
What is most important in times like these is not the economic impact but the human one. Thankfully, governments across the globe have taken action to encourage or mandate a combination of testing, social distancing and quarantine in order to “flatten the curve.” This has created a demand shock of a scale that no market participant has witnessed in their professional career. Economies in the U.S., Europe and elsewhere have essentially been placed in an induced coma. Major concerns over corporate liquidity and rapidly rising unemployment levels have presented themselves. This caused all risk assets to decline, with equities demonstrating deep drops, extreme levels of volatility and high correlations.
The fiscal and monetary reaction across the globe has been, broadly, surprisingly strong. Interest rates have generally been slashed to zero in the Western world and G20 leaders believe the size of their combined stimulus packages will total over US$5 trillion. It is expected that this will help to prevent forced bankruptcies of otherwise viable businesses.
Against this backdrop, Asian equity markets finished the quarter down significantly. Weak returns were compounded by currencies falling amidst the dash for U.S. dollars as the depth of this crisis and impact of the policy response remains unknown.
Performance Contributors and Detractors:
portfolio's downside capture during such an extreme environment is frustrating.
Our focus on quality companies that have what we believe are conservative
balance sheets, strong economic moats, and that provide some income run by
those managements with proven track records appears to have done little to help
the Fund during this vicious pullback. To a degree, this can be explained by
style factors as high growth continues to outperform value.
allocations have also played a role for relative performance as the Fund's
underweight to domestic China hurt, whilst the overweight to companies in
developed markets also proved challenging. At a sector level, financials was a major
detractor to performance. Indian mortgage financier Housing Development Finance
Corp. fell on concerns around the
financial system for the country with rising wholesale funding costs after
another bank scandal, and asset quality challenges. Similarly in Indonesia and
Thailand, tightening U.S. dollar liquidity alongside the ongoing demand shock
may expose these economies to significant credit risks. This caused our
commercial bank holdings Bank Rakyat Indonesia and Thailand's Kasikornbank to
drop. Elsewhere, Australian investment bank and funds provider Macquarie Group
fell on worries asset value drops will impact management and performance fees
for its lucrative infrastructure funds as well as its principal investment and
financials, widely held Taiwanese foundry Taiwan Semiconductor Manufacturing dropped
as it entered the year at relatively lofty valuations. It is now expected that
there will be some destocking alongside order cuts within smartphones for its
chips. South Korean water purifier company Coway plummeted as its door-to-door
sales model is likely to be heavily impacted by the coronavirus in the near
term and its owners decided to cut its dividend policy.
The largest contributor to performance over the
quarter was China-based Tencent as the market rewarded the relative visibility
of the social network and gaming player's earnings. Netease, another Chinese
gaming business, also delivered gains on a similar premise. Elsewhere, a couple
of the portfolio's convertible bonds gained. Malaysia's Top Glove rose as the
world's largest glove manufacturer witnessed high demand amidst the ongoing COVID-19
crisis and its underlying equity rallied. LG Chem, a South Korean petrochemical
company gained on hopes to spin off its now profitable battery business. We
used that strength to exit our position.
Notable Portfolio Changes:
The Fund was expectedly active during the quarter, adding four new positions and exiting six.
Three of these additions were in China. After a significant drop in March, we added water utility and infrastructure company Guangdong Investment. We believe that it provides a blend of visible earnings through its long standing water supply agreement with Hong Kong, income through a 5% dividend yield at time of purchase and growth through new water projects in China that will continue to come on-stream over the next few years. We also added convertible bonds in Bosideng International, an apparel leader in China, and China Education Group, a consolidator of private higher education institutions. Both offered solid credits with reasonable yields and delta at the time of purchase. Elsewhere, we added South Korean auto parts supplier Hanon System. Although the near-term environment will be challenging for the auto industry, we believe that Hanon is well placed over the medium term. It is a leader in climate control technology that we believe will grow through increasing its customer base and rising dollar content cost per vehicle with the move to hybrid and electric cars. We also believe it is undervalued at only 7.5x EV/EBITDA and a 3.7% dividend yield.
To fund these new positions, we exited a large swathe of our Australia holdings after that market rose significantly during 2019 and valuations had become unjustified. These included CSL Limited, Domino's Pizza Enterprises and Orora Limited. We also exited Genting Malaysia, a casino operator, amidst the crisis forcing its properties to close, as well as South Korean company Orange Life Insurance, and our convertible bond in LG Chem.
As we look to the remainder of 2020 and beyond, it is important to acknowledge that these are unprecedented times. There are many unknowns that prevail; the depth and duration of this crisis, the efficacy of the monetary and fiscal policy response, the speed of recovery in demand, whether consumer behavior is likely to change, whether supply chains will be altered to reduce concentration risk, and the state of relationships between various political powers, to name but a few.
With such uncertainty muddying the waters, it is crucial for investors to attempt to stay both humble and objective. We will not take undue risks with our Fund shareholders' capital to ”play” a recovery and attempt to time the market. Specifically for Asia, however, it is pleasing to note that China appears to be further through the COVID-19 crisis than many other countries. That gives us some confidence that we will gain clarity over the economic damage more quickly than elsewhere.
For the strategy, we have fixated upon the knowns. We have spent our time analyzing the liquidity positions and debt profiles of the companies that we own. This helps to inform us about what we believe to be the most important element of investing in this moment—survivability. We believe that we can add value in understanding which companies have the ability to weather this storm and, hopefully, improve their medium term earnings power if they continue to make thoughtful strategic decisions. It remains our belief that this analysis will allow us to produce a portfolio of long term winners that are able to balance both growth and income.
As of 3/31/2020, the securities mentioned comprised the Matthews Asian Growth and Income Fund in the following percentages: Housing Development Finance Corp., Ltd. 1.8%; PT Bank Rakyat Indonesia Persero 1.2%; Kasikornbank Public Co., Ltd. 0.9%; Macquarie Group 1.1%; Taiwan Semiconductor Manufacturing Co., Ltd. 4.6%; Coway Co., Ltd. 1.6%; Tencent Holdings, Ltd. 4.5%; NetEase, Inc. 1.9%; Top Glove Labuan, Ltd., Cnv., 2.000%, 03/01/2024, 1.2%; Guangdong Investment, Ltd. 1.4%; Bosideng International Holdings, Ltd., Cnv., 1.000%, 12/17/2024, 1.5%; China Education Group Holdings Ltd., Cnv., 2.000%, 03/28/2024, 1.2%; Hanon System 1.1%
The Fund held no positions in LG Chem, Ltd., CSL Limited, Domino's Pizza Enterprises, Orora Limited, Genting Malaysia, Orange Life Insurance. There are no guarantees that any company will increase or continue to pay a dividend. Current and future portfolio holdings are subject to change and risk.
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The views and opinions in this 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.
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.