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%.
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.
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.
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.
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.
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.