Matthews Asia ESG Fund

Period ending June 30, 2020

For the first half of 2020, the Matthews Asia ESG Fund returned 0.63% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -4.65. For the quarter ending June 30, 2020, the Matthews Asia ESG Fund returned 31.80% (Investor Class), while the benchmark returned 16.79.

Market Environment:

Asia's markets experienced considerable volatility stemming from the global COVID-19 pandemic with significant decline in equity markets in the first quarter followed by a sharp recovery in the second. As the efforts to contain the spread of the virus are starting to take hold, especially in North Asia, the narrative is clearly shifting from survival to the revival in many of these economies. While most country-specific indices and currencies recovered from the sharp drop in the first quarter, there remained noticeable bifurcation between sectoral indices with health care, technology and consumer discretionary being the best performing, with financials and real estate suffering. This dynamic reflects a world of intangible investments, increased use of consumer internet in a pandemic, and low to zero interest rates.

The Taiwan dollar appreciated relative to the U.S. dollar (up 1.60%) in the first half, as did the Hong Kong dollar (up 0.53%). Most other Asian currencies depreciated, including the Chinese renminbi (-1.53%) and the South Korean won (-3.86%). Turning to financial markets, China's equity markets were among the strongest in the region for the first half, despite U.S. — China trade tensions. South Korea's equity markets were slightly negative, but made up considerable ground toward the end of the first half. 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. And smaller government balance sheets may allow for less fiscal and monetary stimulus. 

Performance Contributors and Detractors:

Stock selection in South Korea—particularly among information technology stocks—contributed to relative performance in the first half. Samsung SDI is one of the world's leading small, automotive and energy storage battery suppliers. It also has a minority equity stake in the world's largest display company. In addition, Samsung SDI also has an electronic materials division. The company is one of the global leaders in the large battery chemicals used in electric vehicles (EVs) and utility-grade energy storage systems. Samsung SDI has spent the last decade heavily investing in the large battery R&D and production capacity and the market now expects the company to breakeven in this segment. Given the strong performance of EV vehicle sales in Europe, the main end market for Samsung SDI's automotive battery cells, the market is beginning to recognize its strengths even amid the COVID19 pandemic.

The Fund's Indian financial holdings detracted from performance during the first half of the year. Going into 2020, Indian banking system that was already dealing with the after effects of several years anemic growth and the resultant credit cycle was presented with a new challenge in the form of COVID-19-related lockdown in India. In addition, Yes Bank, a troubled small private Indian bank, was rescued in March by a bank consortium and temporary restrictions were imposed on deposit withdrawals from the bank. This led to worries about a systemic risk in the Indian banking system and some small- and mid-sized banks were sold-off aggressively, as market worried about the possibility of deposit flight. Non-Banking Financial Services Companies (NBFCs) also bore the brunt of worries about a funding crunch, especially, after Franklin Templeton closed six of its Indian bond funds abruptly. A combination of worries about liquidity as well as the as-yet-unknown credit costs emanating from COVID-19 induced lockdowns led to a sharp sell-off. India's central bank, Reserve Bank of India (RBI), stepped in to ease rates, provide liquidity and also offer a moratorium to borrowers on account of COVID-19. India's central government also announced a slew of fiscal measures to support the economy. Our bank holdings recovered well from their first quarter bottoms in the second quarter. We continue to remain vigilant about the liquidity and credit risks. Given the strong capital position of our holdings, attractive asset yields, improving deposit profiles and very attractive valuations, we remain positive on their long-term potential.

Notable Portfolio Changes:

We initiated a position in Legend Biotech in the second quarter. Legend Biotech is a Chinese biopharma company developing breakthrough CAR-T cell therapies, which help patient's T cells combat cancer more effectively. In China, where the incidence of certain cancers such as lung cancer and gastric cancer is higher, there is a strong need for local and relatively affordable drugs and therapies. Legend has a very strong R&D capability and also a strong product pipeline. Its flagship CAR-T therapy's global clinical trials, in partnership with global health care major Johnson & Johnson, have demonstrated promising data so far. Legend has a strong and well-rounded management team.


The pace of recovery from economic lockdowns across Asia varies by geography. In some parts of Asia like China, the worry is about a potential second wave, while in other countries like India, the first wave still continues unabated. These challenges can act as a stimulant for structural reforms. China continues to open up its capital markets to allow for greater flow of capital across borders and ease the constraints for companies to access funding. In India, there has been an effort on the part of the government to deregulate the agricultural market, and some state/local governments have also eased onerous labor provisions.

The pandemic has brought into clear focus ESG issues related to health care services and access, employment opportunities and the climate. Generating sustainable economic growth will require more inclusive economic growth. Asia remains at the epicenter of essential ESG issues globally. Looking ahead, we will continue to engage with our portfolio companies on issues related to sustainability, inclusiveness and profitability.

As of 6/30/2020, the securities mentioned comprised the Matthews Asia ESG Fund in the following percentages: Samsung SDI Co., Ltd., Pfd., 5.0%; Legend Biotech Corp. ADR, 2.4%; Current and future portfolio 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.