Period ended December 31, 2019
For the year ending December 31, 2019, the Matthews Asia Small Companies Fund returned 17.38% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index, returned 7.58%. For the fourth quarter, the Fund returned 4.08% (Investor Class), while its benchmark returned 7.64%.
For most of 2019, the anticipation of U.S Federal Reserve rate cuts and uncertainty around the U.S–China trade war dominated market sentiment. China implemented accommodative economic polices such as value-added tax cuts and payroll-tax reductions that helped drive consumer spending. The targeted stimulus for helping small to medium-sized enterprises announced near the end of the second quarter also helped business sentiment in the second half of the year. In the fourth quarter, the two countries agreed to a partial trade deal, which the market embraced with enthusiasm.
Meanwhile in India, macroeconomic data pointed toward lackluster economic activity after India's GDP growth slowed to a 26-quarter low in the third quarter of 2019. Despite Prime Minister Narendra Modi being re-elected and winning a strong mandate, India's economy continued to struggle given the weak capital position of public-sector banks and challenges of poor credit quality in the shadow-banking system.
Several Southeast Asian countries concluded national-level elections in the first half of the year, which helped relieve uncertainty on the public policy front. Southeast Asian countries generally missed out on the global rally in the fourth quarter, however, as they were not major beneficiaries of a U.S.–China trade conflict resolution.
Performance Contributors and Detractors:
The Fund outperformed its benchmark for the full-year 2019. The portfolio's overweights in the information technology, health care and industrials sectors were primary sources of absolute performance. Our long-term holding Silergy was the largest contributor to absolute performance. Silergy is one of China's largest fabless analog semiconductor companies. It has a strong, diverse product portfolio that we believe can meet its clients' various needs. As China tries to become less reliant on foreign-sourced technology, we believe Silergy is poised to gain market share, due in part to import substitution.
The portfolio's outperformance over the benchmark was attributed to favorable stock selection across multiple sectors where the portfolio's holdings exhibited resilience and an improving earnings trajectory. A handful of holdings in the communication services and consumer discretionary sectors performed poorly due to negative company-specific reasons, however, and hence detracted from performance. For example, Wise Talent Information Technology, an online recruitment platform in China, and Yeah1 Group, a multi-channel digital media network operator in Vietnam, both struggled to execute their business plans in 2019. Hence, the share prices of both companies fell sharply.
By country, holdings in China/Hong Kong, Taiwan and India registered healthy gains, generating the bulk of the absolute performance for the year. Yihai International, a dominant hot-pot soup company based in China, performed strongly on the back of strong revenue and profit growth. Some holdings in Vietnam and Singapore performed below expectations, however, detracting from absolute performance. Delfi in Singapore, a leading chocolate-confectionary maker with a meaningful market presence in Indonesia, delivered lackluster performance as consumption activities in Indonesia remained soft.
Notable Portfolio Changes:
In 2019, the portfolio accumulated a number of new holdings in India as the sell-off among India's small caps presented attractive opportunities. The portfolio gained new exposure to India's rural economy through companies that we believe are well-positioned to benefit from improving demand. In China/Hong Kong, we focused on companies that are competitive and adaptive to the high value-adding segments of the economy by initiating positions in companies in biopharmaceuticals, software and tech hardware-related industries. The portfolio also increased its positions in a number of A-share companies that are poised to grow nicely as their businesses are primed to address rising domestic consumption and corporate demand.
We also were mindful of valuations. As a result, we trimmed positions in some consumer staples high-flyers and exited positions that we believed had an unattractive risk/reward profile after a share price run-up. The portfolio also exited holdings in companies that failed to show earnings improvement after several quarters. The proceeds were deployed in initiating positions in a handful of South Korean and Taiwanese companies. Toward the second half of 2019, the team increased weightings in a number of companies that are positioned to participate in the recovery of the semiconductor supply chain.
2019 concluded with cheery market sentiment thanks to a partial resolution of the U.S–China trade war. There still could be bumps along the way as the two countries work out their differences. The upcoming U.S. presidential election and recent geopolitical tensions could contribute to more investor uncertainty.
To be sure, large Asian economies such as China and India are in transition as well. China is experiencing short-term pains in deleveraging its economy while India's economy is hampered by the immediate negative impact of continued disruption in the non-banking financial sector. We recognize that global macroeconomic events can be unpredictable. We continue to focus on identifying structural drivers of Asia's evolving economy, especially in areas such as consumption upgrades, productivity improvements and innovations.
We seek to identify companies that possess competitive moats and financial strengths to execute their business plans. Entrepreneurial and nimble companies in Asia present some of the world's most exciting growth opportunities for long-term investors. We are optimistic that there will be an expanding opportunity set in the small-cap universe in Asia, where many long-term winners may emerge.
As of 12/31/2019, the securities mentioned comprised the Matthews Asia Small Companies Fund in the following percentages: Silergy Corp. 3.0%; Yihai International Holding, Ltd. 0.7%; Delfi, Ltd. 1.2%. The Fund held no positions in Wise Talent Information Technology Co., Ltd.; or Yeah1 Group Corp. Current and future portfolio holdings are subject to change and risk.