Matthews Asia Growth Fund
Period ended September 30, 2019
For the quarter ending Sept. 30, 2019, the Matthews Asia Growth Fund returned -0.58% (Investor Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -1.24%.
Asian markets generated mixed results in the third quarter, reflecting a split in sentiment toward developed and emerging markets. Japan equities generated positive broad market returns, while equities in most emerging markets countries in Asia, including China and India, were negative. Amid slowing global macroeconomic conditions, Japanese equities may have represented a flight to quality for some regional investors.
Japanese equities climbed a wall of worry toward the end of the third quarter, even as domestic consumption remained sluggish and global manufacturing activity remained in contraction. September saw a sudden rise in 10-year U.S. Treasury yields, even after the U.S. Federal Reserve cut target rates. This pick-up in bond yields briefly gave a false signal of a strong U.S. economy and spurred a market rally in Japan led by value stocks. Japanese growth stocks abruptly declined in mid-September amid broader market gains for Japanese value stocks.
Chinese equities were down in the quarter, succumbing to trade-related pressures and negative sentiment. U.S.-listed Chinese ADRs were especially weak amid trade tensions. Hong Kong protestors also remained active, meanwhile, and tensions between the government and protesters increased following the reporting period.
Performance Contributors and Detractors:
The Fund held up better than its benchmark on a relative basis during the quarter. From a sector perspective, the Fund's health care holdings generated positive absolute returns in the quarter and were the biggest contributors to relative performance. As in previous quarters, health care remains an important growth engine for the portfolio. Detractors from relative performance included the Fund's underweight in consumer technology and stock selection in the consumer discretionary sector.
The Fund's Japan exposure was a positive contributor on an absolute and relative basis. Many of the Fund's holdings in Japan experienced notable volatility over a two-day period (Sept. 10 and 11) during Japan's value rally, but remained contributors for the full quarter. Elsewhere, Chinese stocks in the portfolio in aggregate were relative contributors in the quarter on the back of strong stock selection, even as some of the Fund's U.S.-listed Chinese ADRs experienced sharp declines amid U.S.–China trade tensions. Detractors from relative performance included the Fund's overweight to Bangladesh equities (which are not included in the Fund's benchmark) and its underweight to Taiwanese equities (which rallied on improving business purchasing managers' sentiment toward semiconductors).
Turning to individual stocks, Japanese health care services provider M3 was a strong contributor. The share price of M3 jumped after the Nikkei announced on Sept. 4 that M3 will be incorporated in the Nikkei 225 index. Aside from index news, fundamentals remain solid and the most-recent earnings indicated steady growth for the company's core medical-platform business topline. The company continues to revolutionize the inefficient health care market in Japan and overseas. Japanese telecom and venture capital firm SoftBank, meanwhile, was among the Fund's largest individual detractors in the quarter. SoftBank's share price performed well in the first half of this year, and we took profits during its period of strength. SoftBank's Vision Fund includes ownership positions in Uber and WeWork. The stagnant performance of Uber's IPO and WeWork's canceled IPO weighed on SoftBank's share price.
Notable Portfolio Changes:
We exited several small positions during the quarter, many of which we had trimmed over time, including Chinese internet company and artificial intelligence (AI) developer Baidu. While Baidu has made substantial investments in AI, we did not see attractive revenue growth on the company's horizon and exited the position.
We also exited two of our long-term holdings—Philippines-based Jollibee Foods (known for its fried chicken) and Thailand-based Major Cineplex Group—for similar reasons: they no longer reflected local consumer demand. Jollibee was busy acquiring U.S. companies in the past few years, reducing the company's exposure to local consumer demand. Major Cineplex Group historically had focused on making movies for audiences in Thailand. The company has been increasingly focused, however, on making Hollywood movies with less focus on Thai consumers.
Growth stocks have meaningfully outperformed valued stocks over the past decade, so we could see occasional periods where value stocks outperform growth. At present, global macroeconomic conditions appear somewhat muted. We believe global markets would likely require a major catalyst, such as significant additional rate cuts by the U.S. Federal Reserve or a resolution of U.S.–China trade tensions, to experience a strong shift in investor sentiment. As always, we focus on companies that can grow without or without macro tailwinds. From a bottom-up view, we believe quality growth companies in Asia present compelling opportunities for long-term investors.
As of 09/30/2019, the securities mentioned comprised the Matthews Asia Growth Fund in the following percentages: M3, Inc., 2.3%; SoftBank Group Corp., 1.5%. The Fund held no positions in Uber Technologies, Inc.; We Co. (WeWork); Baidu Inc.; Jollibee Foods Corp.; or Major Cineplex Group Public Co., 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.