Period ended June 30, 2020
For the first half of 2020, the Matthews Emerging Asia Fund returned -25.02% (Investor Class), while its benchmark, the MSCI Emerging Markets Asia Index, returned -3.39% over the same period. For the quarter ending June 30, 2020, the Matthews Emerging Asia Fund returned 19.55% (Investor Class), while the benchmark returned 17.91%.
Asia's markets experienced considerable volatility stemming from the global COVID-19 pandemic. 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, in spite of a partial recovery in the second quarter. Less developed parts of Asia have had a harder time flattening their rates of new infections. In addition, smaller government balance sheets may allow for less fiscal and monetary stimulus. However, we continue to see these economies playing a vital role in Asia's growth over the long term.
Stock exchanges in Sri Lanka and Bangladesh periodically halted trading temporarily in the first half, in response to the COVID-19 pandemic. These stock exchanges are not yet running on fully electronic trading systems, making it challenging for traders to work remotely during lockdown periods. Market closures meant that liquidity was temporarily frozen for any securities trading on those exchanges.
Foreign investor sentiment remained weak toward less developed markets in Asia in the first half, creating further downward pressure on these equity markets. Chinese equities, representing a more developed economy, generated the strongest returns in the region on the back of expectations around a quicker return to normalcy in economic activity. The continued recovery is drawing investors into China's equity markets, albeit the participation is still narrowly focused on a select group of sectors. China's equity returns tend to drive the benchmark's overall returns. As before, we invest in manner that is benchmark-agnostic, maintaining a sharp focus remains on less developed economies.
Performance Contributors and Detractors:
In first half, the Fund's absolute and relative returns were disappointing. In the second quarter, absolute and relative returns were much improved. Amid the second quarter market rally, the Fund's focus on well managed, high-quality companies with strong cash flows bore fruit. Stock selection in financials and consumer staples sectors contributed to Fund performance.
Among individual securities, Bank Mandiri, large bank in Indonesia, was a contributor. The company corrected more than the benchmark in the first quarter and bounced back in the second quarter. Bank Mandiri has a large book of loans for small and medium-sized enterprises. Investors worried about the strength of small businesses in Indonesia sold the stock early in the pandemic. The stock price later began to rise as investors realized the bank was in better shape than the market expected. The company benefits from a good management team, large balance sheet and strong market position.
In contrast, stock selection in health care and communication services sectors was a detractor. While the Fund is overweight the health care in aggregate versus its benchmark, Chinese health care stocks led the charge in the second quarter. We are underweight both China and Chinese health care because we view China as a more developed market. Stock selection in the Philippines was also a detractor in the second quarter. Among individual securities, STI Education Systems Holdings, which owns and operates college campuses in the Philippines, was a detractor. The stock price suffered amid disruptions in classroom education.
Notable Portfolio Changes:
During the second quarter, we initiated new positions in Thai Beverage Public Co., Ltd., Jollibee Foods Corp. and Central Retail Corp. Thai Beverage PCL is a large beer and spirits producer and distributor in Thailand. Jollibee Foods Corp. runs hamburger and other food franchises in the Philippines, as well as globally. Central Retail Corp. runs general merchandise stores in Thailand. We exited Shakey's Pizza Asia Ventures, a restaurant chain serving fast food in the Philippines, as well as Expolanka Holdings, a diversified conglomerate in Sri Lanka.
While the COVID-19 pandemic remains a challenge for economies globally, we remain optimistic about the growth potential of Asia's less developed economies and markets. The path forward may not be easy. However, we expect many lesser-developed economies will find ways to continue essential economic activities during the ongoing health care crisis. Our investment universe includes many countries with attractive demographics in terms of young workforces. We also see many of these economies having favorable geographic locations in terms of trade routes within and across Asia. In addition, we see very low current valuations for equities with attractive earnings growth. All of these provide the ingredients for attracting future investment and generating long-term growth.
As of 6/30/2020, the securities mentioned comprised the Matthews Emerging Asia Fund in the following percentages: Bank Mandiri Persero, 2.5%; STI Education Systems Holdings, Inc., 0.5%; Thai Beverage Public Co., Ltd., 2.4%; Jollibee Foods Corp., 2.9%; Central Retail Corp. Public Co., Ltd., 2.5%. The Fund held no positions in Shakey's Pizza Asia Ventures or Expolanka Holdings. Current and future portfolio holdings are subject to change and risk.