Matthews Asia Small Companies Fund

Period ended March 31, 2020

For the quarter ending March 31, 2020, the Matthews Asia Small Companies Fund returned -19.78% (Investor Class) while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index, returned -25.92%. 

Market Environment:

The COVID-19 coronavirus pandemic rocked global communities during the first three months of 2020. The outbreak was believed to have originated in December of 2019 in city of Wuhan in China. The Chinese administration quickly locked down the Hubei province in order to contain the spread in January. The outbreak first shook Chinese equity markets but subsequently sharp sell offs extended to the global equity markets as the infectious disease had shown to be highly contagious and threatening. 

Governments around the world scrambled to address the unprecedented challenges and economic disruptions as daily new cases and fatalities surfaced. Many countries around the world have since set in place various degrees of containment measures as they gained better understanding of responses necessary for crisis management. The pandemic presented severe social disruptions and economic impact as many service-oriented business activities were halted. Various big-scale monetary and fiscal policies to stimulate economies were unleashed to buffer the short-term economic contraction; however, the effectiveness of these measures will take time to transmit through the economies over time. Consumers and businesses around the world are likely to suffer from hampered visibility to the path of normalcy. 

Performance Contributors and Detractors:

The portfolio's holdings in North Asia such as China, Taiwan and South Korea generally fared better than Southeast Asia holdings during market sell-offs due to the coronavirus crisis. Investors perceived that governments in North Asian countries have been more effective in handling the COVID-19 outbreak, as well as being more equipped in dealing with financial impacts with fiscal and monetary policies. Correspondingly, holdings that generated positive year-to-date returns were mostly concentrated in China/Hong Kong. 

The portfolio's overweight in China/Hong Kong, combined with favorable stock selections contributed to the portfolio's relative outperformance over the benchmark during the quarter. For examples, Jiajiayue Group, a Chinese fresh grocery retailer and Kingdee International, a Chinese enterprise software provider registered strong positive performance. On the other hand a number of holdings in Thailand, Indonesia and India were the main performance detractors. Two Thailand based companies AP Thailand Public, a residential housing developer and Rich Sport, a branded sportswear distributor performed poorly and were the main detractors to performance during the quarter. 

From a sector perspective, holdings in industrials, consumer discretionary and materials sectors that are sensitive to economic shocks were primary sources of negative returns. Indonesia pizza restaurant chain Sarimelati Kencana saw its share price contract as social activities curtailed. On the other hand, the Fund's exposure to defensive sectors such as communications services, consumer staples and health care were not sold off as severely as the broader market. The share price performance of Chinese health care holding Innovent Biologics was resilient as the company's drug pipelines continued to progress well.

Notable Portfolio Changes:

We have made changes to rotate capital within the portfolio during the period. We exited a number of holdings in India earlier in the quarter due to valuations merits and initiated a number of new positions across various industries toward the end of the quarter. We exited our positions in Procter and Gamble Health and Syngene in India as we believe that the scope of valuation multiple expansion to be limited. The portfolio's exposure in Southeast Asia was also reduced due to concerns over earnings contraction. 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 IT services providers such as Hexaware Technologies and NIIT Technologies. We believe that while business environment will be hampered by the COVID-19 crisis over the next few quarters, the contraction on valuations had somewhat reflected the negative outlook. The long-term attraction on continuous digitization IT spending remain a growth driver within the industry. Another area that we continue to increase exposure to is innovation-driven areas such as health care products and services. For example, we added to our existing positions in Venus Medtech in China during the market correction. We remain constructive on the company's long-term positioning in transcatheter heart valve medical devices industry. 


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 and believe that the recent equity market corrections somewhat reflect the new reality. 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 businesses. 

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 and large ticket spending would be subdued as consumption power erodes. 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 3/31/2020, the securities mentioned comprised the Matthews Asia Small Companies Fund in the following percentages: Jiajiayue Group Co., Ltd. A Shares 2.4%; Kingdee International Software Group Co., Ltd. 2.1%; AP Thailand Public Co., Ltd. 1.0%; Rich Sport Public Co., Ltd. 0.5%;  PT Sarimelati Kencana  0.2%; Innovent Biologics, Inc. 2.0%; Hexaware Technologies, Ltd. 0.6%; and NIIT Technologies, Ltd. 0.4%; and Venus MedTech Hangzhou, Inc. 1.6%. The Fund held no positions in Procter & Gamble Health, Ltd.; or Syngene International, Ltd.

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.

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.