Matthews Asia Innovators Fund

Period ended March 31, 2019

For the quarter ending March 31, 2019, the Matthews Asia Innovators Fund returned 17.14% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned 11.45%.

Market Environment:

Asian equities rebounded during the quarter as some headwinds faded. The U.S. Federal Reserve paused from making further rate hikes, supporting global liquidity and allowing other central banks to take a more flexible approach with their own monetary policies. In addition, Asian currencies rallied slightly against the U.S. dollar and reduced trade friction between the U.S. and China further supported Asian equities.

Chinese equity markets posted some of the strongest results in the region. Local sentiment improved on hopes of a future U.S.-China trade agreement. Sentiment was also lifted by a gentle shift in Chinese monetary and fiscal policies toward a more accommodative stance. Corporate earnings remained healthy and valuations looked attractive. Even though the Chinese economy is slowing slightly, the government's easing posture could mitigate some near-term economic risks.

Meanwhile, South Korean equities were also positive in the quarter but lagged broader emerging markets as fears of a slowdown in global growth, especially in terms of global trade, weighed on sentiment. Generally weaker export results in South Korea also worried investors. In addition, the Korean won fell toward the weaker end of its 12-month range as sentiment toward the currency declined on weaker exports.

Performance Contributors and Detractors:

The portfolio generated strong performance during the quarter, outpacing the broader market rally. Stock selection played the largest role, particularly in China, where the Fund's holdings outperformed the benchmark's Chinese constituents by a wide margin. The Fund also remained overweight China relative to the benchmark, further helping performance.

Momo, a Chinese social media and instant messaging platform commonly used on mobile devices, was among our top-performing securities during the quarter. The platform also includes online gaming and dating apps, making it popular across several consumer segments. We purchased the security in 2018 at an extremely attractive price amid last year's volatility. In 2019, the stock enjoyed significant gains during the first-quarter rally.

Another top performer was LG Household & Heath Care, a South Korean cosmetics and skin care company. More than half of the company's customers are Chinese tourists who buy LG Household & Health Care's products at duty free stores in the region. The company has a strong brand story, connecting its products to royal traditions in Korea. The company's most recent earnings were better than expected and valuations remained attractive.

Meanwhile, South Korean food producer Orion Corp. detracted from performance. The company's stock price declined on slowing sales growth, but we remain constructive on the company's business model. In addition to selling its products in Korea, it also sells in Vietnam and China, while expanding its presence in Indonesia. With a favorable view on the company's long-term prospects, we added to the position while its stock was available at a lower price.

Notable Portfolio Changes:

During the quarter, we took advantage of attractive valuations to add several new positions, including China Resources Land. This innovative company is introducing a new concept to the Chinese real estate market in the form of mixed-use properties. Many of its properties feature condos on the top floors and malls at street level. It sells the condos upon completion of construction to recoup some of its upfront investment costs, and then leases the adjacent mall space to create a recurring revenue stream. We expect a larger portion of the firm's revenues to come from rental income, which we see supporting the potential for its stock price to appreciate.

We also sold several positions in the quarter, including global e-commerce platform Cafe24 and Chinese battery maker Contemporary Amperex. Both businesses remained healthy, but we felt valuations were too high relative to each company's growth potential. Finding it a good time to exit, we decided to lock in profits while these particular stock prices were at the high ends of their ranges.


The U.S. Federal Reserve's recent pause in rate hikes seems to have improved sentiment. In addition, Chinese policymakers, who were in a monetary tightening cycle last year, have shifted toward a relatively accommodative stance. While macroeconomic conditions remain somewhat muted, we retain a positive outlook overall. If a trade deal between the U.S. and China can be achieved, the focus of market participants will likely return to fundamentals, which remain sound, with underlying earnings growth stable and in some cases robust. We are particularly interested in services-oriented companies, including travel, entertainment and internet services—industries and sectors where we continue to see decent growth. As always, we seek to invest in innovative companies that are benefiting from rising consumer income in Asia.

As of 3/31/2019, the securities mentioned comprised the Matthews Asia Innovators Fund in the following percentages: Momo Inc., 2.0%; LG Household & Heath Care, 3.4%; Orion Corp., 2.4% and China Resources Land, Ltd. 2.8%. The Fund held no positions in Cafe24 Corp. or Contemporary Amperex Technology Co., Ltd. Current and future portfolio holdings are subject to 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.