Matthews Asia Small Companies Fund
Period ended June 30, 2020
For the first half of 2020, the
Matthews Asia Small Companies Fund returned 10.11% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Small
Cap Index, returned -6.45%. For the quarter ending June 30, 2020, the Fund
returned 37.26% (Investor Class), outperforming
its benchmark, which returned 26.28%.
The COVID-19 coronavirus pandemic continued
to deeply affect global communities during the second quarter of 2020. Asian
countries acted swiftly to contain the virus with varying degrees of success. The
impact on Asia has been twofold: the impact on local economic activity due to lock-downs
and social distancing and the impact on exports to non-Asian countries, where
demands for goods have dropped as well due to the virus. We see the impact on
the company earnings across the region with China, South Korea and Taiwan being
the most resilient while harder hit economies suffered, such as Indonesia, the Philippines
China has been a resilient market year
to date due to its strong measures to contain the virus and its domestic
consumption engine that is nimble enough to shift from physical to virtual
within months. Taiwan and South Korea continued to benefit from a supply chain
reshuffling in Asia driven by ongoing trade tensions between the U.S. and
China. During the first quarter, harsher impact on Southeast Asian and Indian equity
markets have been more pronounced as these economies could no longer rely on
tourism as global travel comes to a halt and worries about currency volatility.
However, these markets recovered partially into the second quarter from the
first quarter's oversold levels due to central bank interventions to maintain
Performance Contributors and Detractors:
Stock selections in China/Hong Kong
contributed to the portfolio's relative outperformance over the benchmark
during the second quarter. Among individual securities, Silergy Corp., one of
China's largest analog semiconductor companies and Kingdee International, a
Chinese enterprise software provider registered strong positive performance. On
the other hand, DCB Bank in India was a detractor, where the financial sector
was particularly hard hit after COVID-19 lockdowns. From a sector perspective, there
were no detractors during the quarter. The top sector performers were in
information technology, health care and real estate. As earnings in these
sectors have been more resilient overall, their share prices have performed
better as well.
Notable Portfolio Changes:
In the second quarter, we rotated
capital within the portfolio. We exited DCB Bank in India in the quarter due to
lack of visibility on the asset quality post the COVID pandemic and social
platform JOYY Inc., a Chinese social media platform operator, due to
valuations. We initiated a few new positions in China and South Korea during the
quarter to capture next generation innovators. The portfolio's exposure in
Southeast Asia was also reduced due to concerns over prolonged earnings
contraction and better risk reward in North Asia. We trimmed our positions in
several companies in Thailand, Indonesia, and Malaysia that we believe would
fare unfavorably for the remainder of 2020.
We initiated new positions in Korean
health care company, Hugel, which manufactures
botulinum toxin, the main ingredient in Botox. We also added Hong Kong-listed
structural heart device company, Peijia Medical, and A-share listed power relay
company, Hongfa Technology. Hugel has demonstrated strong execution in product
development and marketing. We expect its entry into the China market as the
next significant catalyst. Peijia is an IPO during the second quarter with
products that help patients with stroke management and avoid open-heart
surgery. Hongfa as reasonable valuations and a broad exposure to electric
vehicles, power grid investments and automation.
The COVID-19 coronavirus outbreak
has brought severe impacts on human lives and unprecedented challenges to
society. The near-term economic weakness globally is unavoidable due to sudden
demand shock and supply chain disruptions. We are mindful of the challenges
under the current macroeconomic environment. Meanwhile many Asian countries
have established various containment and stimulus policies in respond to
counter economic shocks. Small companies in Asia are not immune to these
challenges; however, the degree of impact on company fundamentals vary from
industry to industry, as well as the financial strengths of their underlying
We believe companies that are in
cyclical industries may have to be conservative with their use of cash and cost
management as demand shock could be prolonged. Corporate managers may need to
adjust their policies in adapting to the new normal as various stakeholders are
affected, which might affect profitability in the short term. Businesses that
are leveraged to virtual or digital economy will, in our view, likely be
beneficiaries in the short to medium term while travel spending would be
subdued but home improvement spending may pick up. We believe that domestically
oriented companies in Asia that deliver innovative and differentiated products
and services continue present attractive long-term investment opportunities as
domestic demands continue to evolve and when normalcy is gradually restored.
As of 6/30/2020, the securities
mentioned comprised the Matthews Asia Small Companies Fund in the following
percentages: Silergy Corp., 6.5%; Kingdee International Software Group Co.,
Ltd., 3.5%; Hugel Inc., 1.1%; Peijia Medical, Ltd., 2.6%; Hongfa Technology
Co., Ltd. A Shares, 1.0%. The Fund held no positions in DCB Bank and Joyy Inc. Current
and future portfolio holdings are subject to change and risk.
Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than larger companies.
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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.