Matthews Asia ESG Fund

For the period ending March 31, 2020

For the quarter ending March 31, 2020, the Matthews Asia ESG Fund returned -23.65% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -18.36%.

Market Environment:

Asian equities, along with global markets, were down sharply in the first quarter. Investor sentiment declined as worries surrounding the spread of the coronavirus (Covid-19) moved from North Asia to Europe and the U.S. The virus then continued its journey to South Asia, including India. Equity market prices suffered in tandem with the spread of the virus. Most Asian currencies depreciated versus the U.S. dollar, with the exceptions of the Japanese yen (up 0.99%) and the Hong Kong dollar (up 0.52%). The Chinese renminbi depreciated (down -1.68%), as did the South Korean won (-5.11%) and the Indian rupee (-5.51%).

Chinese equities experienced significant volatility in January as investors feared fallout from the coronavirus. Chinese authorities limited internal travel, controlling its borders while working with world health organizations to control the outbreak. Chinese equities were flat in February, as the numbers in new virus cases slowed, and comprehensive policy action helped stabilize sentiment within Chinese markets, especially A-shares. By March, further slowdown of new coronavirus cases in China helped stabilize investor sentiment within Chinese markets.

Elsewhere in the region, India's broader markets fell sharply in the month of March amid fears about the potential impact of coronavirus on India's economy. Notably, the market decline in India preceded any actual health care crisis. Market participants feared that India's dense cities and sparse health care infrastructure might be particularly vulnerable to the epidemic. While these concerns are genuine, they had not come to fruition in the reporting period. On a positive note, India's government instituted nationwide shelter-in-place orders on March 25 to reduce the speed of transmission in the country. In addition, India's policy makers announced fiscal and monetary stimulus.

Performance Contributors and Detractors:

Our financial holdings in South Asia in general and in India detracted from performance during the quarter. Over time we have shared our enthusiasm for companies focused on financial inclusion and on microfinance and micro-small enterprise financing in particular. These lending models are high touch models requiring very frequent interactions with the borrowers. For instance in microfinance, the money is often collected in person on a weekly basis in group meetings among borrowers. When COVID19 rolled into India, the government put a national ban on movement to reduce community spread.

The banking models of portfolio holdings such as Bandhan Bank Ltd, Indusind Bank Ltd. and Shriram City Union Finance Ltd. that depended on high-touch lending to areas such as microfinance, commercial vehicle financing, micro and small enterprise lending were negatively impacted. India's central bank stepped in to stabilize the situation by providing additional lines of liquidity and by providing a moratorium on late payment recognition. We continue to monitor the situation closely and believe that our holdings have the wherewithal to withstand this crisis given their strong capital and liquidity positions and in most business lines come out stronger as smaller players are forced to exit the market.

On the other hand, stock selection in China particularly our holdings in consumer staples contributed to performance as consumers focused on food quality and food safety during the pandemic. Yonghui Superstores Co. Ltd., a leading Chinese supermarket operator, illustrated this trend. Yonghui is well known for its ability to directly source, distribute and retail fresh food nationally and has the highest share of fresh food as a percentage of sales among national players. Its direct sourcing and supply chain capabilities enable it to sell low-priced fresh produce to price-sensitive clients while having one of the lowest food wastage rates in the industry. The company also has a differentiated profit-sharing and partnership plan for most of its purchasing and retail store-based staff. The company truly shone during the coronavirus epidemic in China given its strong national footprint, its ability to do online deliveries and its ability to keep its supply chain humming through the worst of the crisis.

Notable Portfolio Changes:

During the quarter, we initiated a position LG Chem Ltd., a large South Korean chemicals company that that is a leading manufacturer of auto batteries. As the auto industry looks to electrify its powertrains over the coming decades, we believe auto batteries will see a tremendous growth opportunity. LG Chem has a highly diversified group of automotive and energy storage system customers across Asia, Europe and the U.S.

From an ESG perspective, we believe LG Chem has good environmental practices in place. When it comes to governance, however, we note that the company does not have any female board members. We have written a letter to the company's board and management, encouraging them to actively consider a female board member at the earliest available opportunity. LG Chem is one of the 12 companies in our portfolio without a female board representative and we have engaged with all of them on the issue.

We exited SATS, a Singaporean company with gate handling, airline catering and cargo handling operations throughout Asia. We took a view that air travel will be somewhat slow to recover in the post-COVID-19 world so exited our position. We also feared that there might be secondary and tertiary breakouts of COVID-19 that will continue to impact travel. We are partly seeing a second outbreak of COVID-19 in Singapore, after the initial wave had subsided.


The global coronavirus pandemic continues to highlight several prominent ESG themes, including the importance of access to affordable health care for developing economies and the importance of financial inclusion for small- and medium-size enterprises. We continue to see opportunities for both themes making positive impacts in the communities where we invest, and generating long-term growth over a full market cycle.

While recognizing the significant health care and economic impacts of the crisis on China's citizens and businesses, daily life and economic activity are slowly resuming in China. As of this writing, most workers in China are back to work. Elsewhere, much uncertainty remains in terms of the potential impact of the coronavirus on the India's economy. We continue to watch how the situation evolves. However, stock prices already reflect a good deal of uncertainty. The dramatic decline in stock prices in the first quarter may have been overly pessimistic in our view.

From a regional perspective, we expect consumption in North Asia, such as China and South Korea, to recover faster than South Asia, such as India. Overseas travel demand will likely take more time to recover, bringing more attention to domestic travel demands. Over the long term, we believe the structural growth trends we are currently following remain intact. For example, quality of life concerns are becoming increasingly important for Asia's middle class. We see continued demand for consumer products and services that address issues such as air and water pollution, financial inclusion, access to affordable health care and product safety. We believe these developments may create attractive long-term investment opportunities.

As of 3/31/20, the securities mentioned comprised the Matthews Asia ESG Fund in the following percentages: Bandhan Bank Ltd. 3.8%; Indusind Bank Ltd. 3.4%; and Shriram City Union Finance, Ltd. 2.5%; Yonghui Superstores Co., Ltd. A Shares 5.4%, LG Chem, Ltd., Pfd 2.1%. The Fund held no positions in SATS, Ltd. Current and future 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.