Period ended June 30, 2020
For the first half of 2020, the Matthews Asia Innovators Fund returned 27.01% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -4.65% over the same period. For the quarter ending June 30, 2019, the Fund returned 38.74% (Investor Class), while the benchmark returned 16.79%.
Asia's markets experienced considerable volatility related the global COVID-19 pandemic, but parts of Asia ended the first half with a rebound. Chinese equities generated the strongest returns in the region, as domestic Chinese sentiment gained strength on the back of a quick resumption of economic activity. China, South Korea and Taiwan each made considerable progress in flattening their curves of new virus infections in the reporting period. Stimulus in China remains modest, but supportive of economic growth. Amid strong returns, we also saw some volatility related to the Chinese government's amendment of national security laws in Hong Kong, which attracted international attention and protests from Hong Kong citizens.
South Korean equities were roughly flat on fears slowing global growth. On the plus side, Korea's response to Covid-19 was prompt and effective. The country's health care infrastructure and resources appear well positioned to fend off a second wave of infections. What's more, Korea has plenty of fiscal firepower for stimulus and has begun to use its resources. Korea's valuations are some of the region's most attractive and the prospect of earnings growth from a very low base is a good possibility, especially if its influential neighbor, China, continues to recover. Elsewhere, equity prices in parts of South and Southeast Asia—including India, Indonesia, the Philippines and Thailand—suffered as investors feared a slower recovery from the pandemic for these economies.
Performance Contributors and Detractors:
Stock selection in China made a significant contribution to relative performance in the first half of the year. Among individual securities, contributors included Chinese video content company Bilibili. The company, which caters to young viewers, attracted new users as the pandemic accelerated demand for online entertainment and social media interaction. We see Bilibili emerging as a new, distinct social media platform in its own right. With a growing user base and distinctive value proposition for its users, we find the company to have attractive long-term prospects. Another contributor was Meituan Dianping, China's largest food delivery service. The company enjoys a dominant market share in food delivery, capturing roughly 60% of the market. In addition to its core operations around food delivery, the company also runs a successful business review service, similar to Yelp, as well as a travel booking service for hotels. Forecasts of increased profitability caused the stock to rise in May. Meituan Dianping is also leveraging the benefits of scale to drive down its logistics costs.
The Fund's small allocation to Vietnam, which is not in the Fund's benchmark, was a detractor in the first half. Amid the global COVID-19 pandemic, Vietnam's equity markets suffered steeper drops than more developed parts of Asia. Vietnamese markets rebounded in the second quarter, but had not fully recovered to pre-crisis levels by the end of the reporting period. Jewelry maker Phu Nhuan Jewelry, which we exited during the reporting period, was a detractor. Vietnamese retailer Mobile World Investment Corp. was another detractor. The company's stock price suffered on lower retail sales and weak consumer demand. We continue to monitor the position. A slight overweight in India and stock selection, including HDFC Banks, were also detractors. Financials were weak in the reporting period, but we continue to like the company's long-term prospects. As one of India's oldest private sector banks, HDFC is a high-quality bank primarily serving retail customers.
Notable Portfolio Changes:
Notable additions in the second quarter included South Korean search engine and internet content provider NAVER. As South Korea lacks a dominant e-commerce platform, consumers increasingly are using NAVER's search-engine functions as a primary shopping tool. NAVER also has introduced its own digital-payments service, turning its search engine into an e-commerce platform. We also initiated a position in South Korean pharmaceutical company Hugel, which manufactures botulinum toxin, the main ingredient for Botox. Market volatility created opportunities to buy both companies at attractive valuations. Meanwhile, we exited a position in Chinese appliance maker Midea Group. In addition, we sold Venus Medtech and consolidated the proceeds into another medical device holding in China.
While China's economic recovery is still in very early stages, recent data suggests the pace and progress of the recovery may be sustainable. Containment of COVID-19 has been effective in the second quarter, although small outbreaks still occasionally emerge. CapEx spending among businesses, auto sales among consumers and property sales all began to rebound in April and May. However, unemployment remains high in China, as it does globally, which could create a drag on spending. In addition, a slowing global economy could slow China's rebound. South Korea, another leader in containing the pandemic, continues to roll out considerable fiscal stimulus. Key stimulus efforts include bolstering domestic demand and supporting labor markets. Turning to India, containment of the virus remains a work in progress. New cases rose in the second quarter as lockdowns eased.
Looking ahead, risks remain to the global economy. At the same, we expect companies with strong organic structural growth to remain more resilient. Sectors such as health care, communication services, software and online education continue to perform strongly. Price-to-earnings multiples for innovative companies have risen sharply in the first half. The major players in the market are changing, with innovative companies growing quickly and at very low marginal costs. Intangibles—such as intellectual property, network and data—are the main determinants of future cash flows. These companies now trade higher multiples than other types of businesses. Volatility could linger in the near term. On a long-term view, we believe it is still a good time to invest in innovative companies. Fundamental research and active security selection remain key.
As of 6/30/2020, the securities mentioned comprised the Matthews Asia Innovators Fund in the following percentages: Bilibili, Inc. ADR, 5.3%; Mobile World Investment Corp, 0.4%; HDFC Bank, Ltd., 2.5%; Meituan Dianping Class B, 4.8%; NAVER Corp., 2.5%; Hugel, Inc., 1.2%. The Fund held no positions in Phu Nhuan Jewelry, Midea Group, or Venus Medtech. Current and future portfolio holdings are subject to change and risk.