Matthews Asia Dividend Fund
Period ended March 31, 2018
For the quarter ending March 31, 2018, the Matthews Asia Dividend Fund returned -0.74% (Investor Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned 0.04%.
Asia's equity markets were significantly more volatile during the first quarter of 2018, breaking the upward trend of the strong bull market rally we saw in 2017. Uncertainties surrounding the U.S. interest rate hike cycle and the specter of a full-blown trade war between the U.S. and China became the two main sources of the sharp market volatility. Both factors negatively impacted the share performance of Asia equities, despite their improving fundamentals and strong earnings delivery.
Performance Contributors and Detractors:
During the quarter, the Fund's holdings in Nitori Group, a Japanese furniture retail chain operator, was among the top performance contributors. Nitori operates a fully integrated retailing business model, and stands out against its competition by offering innovative household products at affordable price points. Due to its strong management execution, the company has steadily gained market share within Japan. More recently, it also began accelerating its overseas business expansion, including in new key markets such as mainland China. Because Nitori sources most of its products from overseas production bases, it is a “net importer” from a currency exposure perspective. During the quarter, the yen's strength benefited importers like Nitori, and its share price did well accordingly.
Conversely, Chinese auto parts manufacturer Minth Group was among the top Fund performance detractors during the quarter. After a very strong share performance in 2017, market expectations were high for the firm to deliver further earnings upside surprises. While Minth did deliver—showing 21% revenue growth and 18% net profit growth—it actually missed the market consensus and the stock was sold off. While the near-term sentiment over the stock could remain weak, we still favor Minth's long-term growth potential, anchored by its successful product range expansion and its deepening penetration into global auto original equipment manufacturer (OEM) customers. We view the current valuation on the stock as attractive, and it remains a top portfolio holding.
Notable Portfolio Changes:
During the quarter, we initiated a position in Chinese insurance brokerage firm Fanhua. Over the last two years Fanhua's management successfully restructured its insurance distribution business mix, and moved away from low-margin, auto insurance to focus more on growing its life insurance distribution business. It has especially concentrated on protection-type products which carry higher margin and for which the underlying commission income is more frequently recurring. With these changes Fanhua's profitability has begun improving significantly. Since the insurance distribution business is one that is capital-light and does not bear underwriting risk, Fanhua's ability to pay higher dividends is also enhanced with improving profitability. It recently announced a new dividend policy that raised its minimum dividend payout from 30% to 50% and instituted a quarterly dividend payment schedule. At the current valuation, the stock offers an attractive dividend yield pickup with a strong underlying profit growth.
During the quarter, we exited a few positions, including two Chinese domestic A-share firms, namely Kweichow Moutai and Midea Group. While we continue to like the business fundamentals of both, which saw strong share performance in 2017, current valuation multiples no longer offer as attractive a risk/reward profile as before. We decided to redeploy capital elsewhere.
Currently, the strong fundamentals and attractive valuations for companies in Asia are being overshadowed by market concerns over a potential trade war between the U.S. and China. If not averted, this trade tussle could have broader economic and geopolitical implications. In terms of our strategy, we think it is prudent to increase the portfolio's defensiveness by introducing additional high dividend-yield stocks with stable underlying cash flow, to balance the portfolio's exposure to dividend growth names. While the near-term market conditions could remain volatile, from a dividend perspective the sustained earnings growth and improved cash flow profile of many firms in the region have provided a solid foundation for the accelerating growth of underlying dividends.
As of 3/31/2018, the securities mentioned comprised the Matthews Asia Dividend Fund in the following percentages: Nitori Holdings Co., Ltd. 2.7%; Minth Group, Ltd. 4.0% and Fanhua, Inc. 1.0%. The Fund held no positions in Midea Group Co., Ltd. or Kweichow Moutai Co., Ltd. Current and future portfolio holdings are subject to risk.
There is no guarantee that a company will pay or continue to increase dividends.
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.