Matthews Asia Innovators Fund

Period ended March 31, 2020

For the quarter ending March 31, 2020, the Matthews Asia Innovators Fund returned -8.45% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -18.36%.

Market Environment:

Asian equities, along with global markets, were down sharply in the first quarter. Investor sentiment declined as worries surrounding the spread of the coronavirus (Covid-19) moved from North Asia to Europe and the U.S. The virus then continued its journey to South Asia, including India. Market prices suffered in tandem with the spread of the virus.

Chinese equities were negative in the quarter, but held up notably better than the U.S. and global equity markets. Chinese equities experienced significant volatility in January as investors feared fallout from the coronavirus. Chinese authorities limited internal travel, controlling its borders while working with world health organizations to control the outbreak. Chinese equities were flat in February, as the numbers in new virus cases slowed, and comprehensive policy action helped stabilize sentiment within Chinese markets, especially A-shares. By March, further slowdown of new coronavirus cases in China helped stabilize investor sentiment within Chinese markets.

South Korean equities were weak in March but were roughly in line with broader Asian markets. South Korea's response to Covid-19 was prompt and effective resulting in a relatively fast control over the spread of cases. During the reporting period, South Korea's economic slowdown was relatively mild. However, external demand driven weakness could continue to pressure economic activity. Working in Korea's favor are the country's health care infrastructure and resources. The country's external vulnerability and financing risks are, in our view, low. In addition, South Korea has plenty of fiscal firepower to stimulate and has begun to utilize its resources.

Elsewhere in the region, India's broader markets fell sharply in the month of March amid fears about the potential impact of coronavirus on India's economy. Notably, the market decline in India preceded any actual health care crisis. Market participants feared that India's dense cities and sparse health care infrastructure might be particularly vulnerable to the epidemic. While these concerns are genuine, they had not come to fruition in the reporting period. On a positive note, India's government instituted nationwide shelter-in-place orders on March 25 to reduce the speed of transmission in the country. In addition, India's policy makers announced fiscal and monetary stimulus.

Performance Contributors and Detractors:

The Fund's overweight to China and positive stock selection in China contributed to relative performance. From a sector perspective, health care, communication services and consumer staples sectors were also relative contributors. Overall, we believe this pandemic is likely to benefit the health care sector and high-quality online service providers in the region. Notably, we observe an acceleration of consumer behavior changes in China and developing parts of Asia. On the health care front, we expect to see the build out of better health care infrastructure continue. In our view, this build out could benefit medical equipment makers, as well as innovative drug makers. Turning to communication services, social distancing is pulling more consumers into using online services. Even consumers who weren't as likely to use online services before (such as older people) have now embraced online services, leading to potentially higher penetration of various online services.
On the other hand, the Fund's holdings in India detracted from performance. India experienced weaker market performance than North Asia on negative investor sentiment. The effects of the coronavirus epidemic were largely unknown during the reporting period. Price declines among Indian equities in March reflected fear and uncertainty, rather than any measurable, on-the-ground health care crisis in the country. The financials sectors holding detracted from performance. Financials are a cyclical sector that tends to decline as economic activity contracts. Our approach to investing in financials is to take a long-term view and invest in companies that we believe have the potential to generate attractive returns over a full market cycle. Turning to other sectors, our underweight in materials and lack of holdings in utilities were also slight detractors in the quarter.

Notable Portfolio Changes:

During the quarter, we initiated a new position in Chinese liquor maker Wuliangeye Yibin. As the second-largest liquor company in China, Wuliangye Yibin specializes in manufacturing baijiu, a clear liquor made from grain. Wuliangye Yibin is introducing premium products into its line-up, which is working in its favor and creating an opportunity to grow its overall market share. Consumer spending is an important theme for our bottom-up research process and we find Wuliangye Yibin to be a compelling long-term growth opportunity within the consumer staples sector. We were able to purchase the security at an attractive entry price when the Chinese market was correcting. To Fund the position, we exited Chinese liquor maker Jiangsu Yanghe Brewery.

We also initiated a new position in Beijing-based Innocare Pharma by participating in the firm's IPO as a cornerstone investor. The firm is a clinical stage biotech company primarily working in the field of oncology. The firm's leadership team includes many well-regarded scientists, representing a deep bench of talent. The firm is researching and developing a broad range of cancer inhibiting drugs. Based on the firm's strong pipeline of products, we expect attractive growth potential from the company over the long term.


While recognizing the significant health care and economic impacts of the crisis on China's citizens and businesses, daily life and economic activity are slowly resuming in China. As of this writing, most workers in China are back to work. In Wuhan, the epicenter of the COVID-19 outbreak, businesses are reopening. China's policy makers have indicated a willingness and ability to deploy fiscal and monetary stimulus as needed to support growth.

Elsewhere, much uncertainty remains in terms of the potential impact of the coronavirus on the India's economy. We continue to watch how the situation evolves. However, stock prices already reflect a good deal of uncertainty. The dramatic decline in stock prices in the first quarter may have been overly pessimistic in our view.

From a regional perspective, we expect consumption in North Asia, such as China and Korea, to recover faster than South Asia, such as India. Overseas travel demand will likely take more time to recover, bringing more attention to domestic travel demands, in our view. Over the long term, we believe the structural growth trends we are currently following remain intact. Looking ahead, we continue to focus on the growth potential of what we believe are Asia's most innovative companies.

As of 3/31/20, the securities mentioned comprised the Matthews Asia Innovators Fund in the following percentages: Wuliangeye Yibin Co., 2.8%; Innocare Pharma, Ltd. 1.9%. The Fund held no positions in Jiangsu Yanghe Brewery. Current and future 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.