Matthews Asia ESG Fund

For the period ending September 30, 2019

For the quarter ending Sept. 30, 2019, the Matthews Asia ESG Fund returned -3.29% (Investor Class), while its benchmark, the MSCI All Country Asia ex-Japan Index, returned -4.39%.

Market Environment:

Most Asian markets were down in the third quarter, following rallies earlier in the year. Political rhetoric about trade relations between the U.S. and China led to frequent and unpredictable shifts, creating short-term noise and volatility in the market.

During the quarter, we generally saw a strong U.S. dollar relative to other currencies. Several Asia currencies depreciated versus the dollar, including the Chinese renminbi (-3.78%), the Indian rupee (-2.60%) and South Korean won (-3.47%). Currencies that appreciated relative to the dollar included the Pakistan rupee (2.19%) and the Vietnam dong (0.45%). Turning to financial markets, only Taiwan and Pakistan experienced equity price gains in the quarter. Many other Asian markets experienced equity price declines in the period, including China, South Korea, Thailand and India.

From a sector perspective, information technology was the top-performing sector in the benchmark in the quarter. In contrast, the real estate and materials sectors were among the weakest in the benchmark during the quarter.

Performance Contributors and Detractors:

The Fund held up slightly better than its benchmark during the quarter. Contributors to relative performance included stock selection in China and our overweight to Japan. Detractors from relative performance included stock selection in South Korea and India.

Turning to individual stocks, CSPC Pharmaceutical was a strong contributor to performance during the quarter. CSPC is a Chinese pharmaceutical company that manufactures both generic and innovative drugs. The company fulfils a critical need in China of providing high-quality yet affordable medicines. With a well-incentivized management team to help drive performance, the company reported good quarterly results with strong growth in cancer drugs in particular. Amid increased government regulation of generic drug prices, market watchers feared a race to the bottom in drug prices. It now seems likely, however, that drug quality, not just price, will remain in focus. Among the largest pharmaceutical companies in China, CSPC will likely benefit from this focus on quality based on its strong portfolio of products. The company also has many new innovative drugs in its pipeline, with several soon entering Phase 3 trials in China.

Meanwhile, a detractor in the quarter was Shriram City Union Finance, an Indian non-banking financial company (NBFC) focusing primarily on small-business lending. Small businesses play a crucial role in sustaining economic growth and providing employment within local communities. The company's share price declined in the quarter amid tighter liquidity conditions, slowing overall economic growth in India and a sharp decline in two-wheeler and four-wheeler demand. We believe the company is well-positioned to grow, however, and may benefit from the industry shakeout that is underway, with the potential to emerge stronger over the coming years. The company has a solid capital position and a well-diversified funding base. We therefore added to our position on share price weakness.

Notable Portfolio Changes:

During the quarter, we exited a number of smaller positions and rotated capital within the portfolio. Among the companies we exited were Samjin Pharmaceutical, Hanon Systems, Contemporary Amperex and Power Grid Corp. of India.


Asian central bankers and policymakers are easing interest rates to support growth in their economies. An accommodative stance from the U.S. Federal Reserve and European Central Bank, along with generally lower crude oil prices, have provided a helpful backdrop for rate cuts. Accordingly, Asian central banks have been able to ease rates without destabilizing their currencies and worsening external balance of accounts. In addition, policymakers are starting to utilize fiscal tools to revitalize growth selectively.

U.S.–China trade tensions remain mostly unresolved. The Chinese government continues to balance the long-term goal of deleveraging the economy and maintaining consumption-related growth. We believe the pattern of selective monetary loosening, ensuring adequate liquidity, and targeted relief aimed at parts of the economy may continue. Importantly, we believe Chinese policymakers have considerable fiscal ability to step in, if necessary. Elsewhere, India's economy wrestles with continued disruption in the financial system (particularly in the non-banking segment), the potential long-term benefits of corporate tax cuts and a gradual ease in the funding cycle. Indian policymakers appear willing to deploy more stimulus, but may be constrained by government's fiscal deficit targets.

Amid short-term headwinds, we remain optimistic about Asia's long-term growth and development. We believe companies that generate better ESG outcomes also have the potential to generate attractive long-term financial returns. As always, we build portfolios from the bottom up, looking for companies with attractive cash flows, strong management teams and a solid track record of being good stewards of capital.

As of 9/30/2019, the securities mentioned comprised the Matthews Asia ESG Fund in the following percentages: CSPC Pharmaceutical Group, Ltd. 3.1%; Shriram City Union Finance, Ltd. 3.4%. The Fund held no positions in Samjin Pharmaceutical Co., Ltd.; Hanon Systems; Contemporary Amperex Technology Co., Ltd.; or Power Grid Corp. of India, Ltd. Current and future portfolio holdings are subject to change and 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.