Matthews Asia Growth Fund

Period ended March 31, 2020

For the quarter ending March 31, 2020, the Matthews Asia Growth Fund returned -17.19% (Investor Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -19.21%.

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. Market prices suffered in tandem with the spread of the virus.

Chinese equities were negative in the quarter, but held up notably better than the U.S. and global equity markets. 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.

During the quarter, Japanese equities went through two distinct phases of performance. In January and February, Japanese equities experienced steeper declines than those of other developed economies in anticipation of the global manufacturing cycle reaching a low point. In addition, Japan was an early focal point in coronavirus news coverage, dampening sentiment for Japanese equities. However, Japan's markets held up relatively well in March as Europe and the U.S. faced an acceleration of COVID-19 cases. Valuations for Japanese equities were at the low end of their 10-year historical range and many Japanese corporations had strong balance sheets and significant cash on hand. Reflecting monetary easing efforts of central banks around the globe, Japan's central bank is committed to providing liquidity.

Performance Contributors and Detractors:

During the quarter, the Fund's overweight to consumer discretionary sector detracted from performance, as temporary economic shutdowns dampened sentiment for consumer oriented companies. From a country perspective, the Fund's overweight to Japan and stock selection in Japan also detracted from performance. Among individual securities, HDFC Bank, one of India's largest private banks, was a detractor. India's equity markets experienced some of the steepest price drops globally during the quarter amid weakening investor sentiment, and HDFC's stock price declined roughly in line with India's broader markets. HDFC remains well capitalized and we like its long-term prospects.

On the other hand, the Fund's overweight to health care was a contributor to performance. Demand for health care services rose during the epidemic and we expect demand to remain elevated in the near term. Looking past the epidemic, the Fund's health care focus remains on long-term secular growth opportunities, such as dealing with aging population and chronic diseases. The Fund's overweight to China and strong stock selection in China also contributed to the Fund's performance. Among individual securities, Chinese biopharma company Innovent Biologics contributed to performance. The company's flagship cancer treatment drug is now included on the Chinese government's National Reimbursement Drug List, raising the company's profile and enhancing its revenue streams.

Notable Portfolio Changes:

In March, we initiated a new position in Beijing-based Innocare Pharma by participating in the firm's IPO as a cornerstone investor. The firm is a clinical stage biotech company primarily working in the field of oncology. The firm's leadership team includes many well-regarded scientists, representing a deep bench of talent. The firm is researching and developing a broad range of cancer inhibiting drugs. Based on the firm's strong pipeline of products, we expect attractive growth potential from the company over the long term.

Meanwhile, we exited Chinese hotel operator Huazhu Group earlier in the quarter. The company, formerly known as China Lodging, is one of the largest hotel chains in China, operating several thousand properties. We acquired the stock toward the end of 2010. The stock has been a strong performer since we purchased it nearly a decade ago. However, anticipating a tough time ahead for the travel and leisure sector, we decide to exit the company in January and redeploy the capital elsewhere.


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. In Wuhan, the epicenter of the COVID-19 outbreak, businesses are reopening. China's policy makers have indicated a willingness and ability to deploy fiscal and monetary stimulus as needed to support growth.

Turning to Japan, Japanese equities may be attractively positioned relative to other developed markets. While risks remain, valuations have come down to the low end of their 10-year historical range. In addition, Japanese listed companies have high levels of cash on their balance sheets. This cushion provides security in tumultuous credit markets and an upcoming recessionary environment. Monetary policy in Japan remains supportive.

From a sector perspective, we remain constructive on the long-term secular growth of innovative health care companies. Health care can play both defense and offense in different parts of the market cycle. On the defense side, demand for health care tends to be less cyclical, holding up well in economic downturns. On the offense side, innovative companies in the health care have the potential to grow and compound wealth. Healthcare remains a significant overweight in the portfolio and we remain comfortable with our sector exposures.

Looking ahead, volatility could linger in the near term. At the same time, many quality growth stocks were sold down indiscriminately in the recent quarter, creating opportunities for growth investors with a long-term view. Across a full market cycle, we expect for Asian equities to generate attractive returns for investors from a bottom-up view.

As of 3/31/20, the securities mentioned comprised the Matthews Asia Growth Fund in the following percentages: Innovent Biologics, 3.0%; HDFC Bank, 3.3%; Innocare Pharma, 1.3%. The Fund held no positions in Huazhu Group, formerly known as China Lodging. Current and future 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.