Matthews Asia Growth Fund

Period ended June 30, 2020

For the first half of 2020, the Matthews Asia Growth Fund returned 8.43% (Investor Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned -6.29% over the same period. For the quarter ending June 30, the Fund returned 30.94% (Investor Class), while the benchmark returned 15.99%.

Market Environment:

Asia's capital markets were volatile in the first half, falling sharply in the first quarter on fears of slowing growth related to the COVID-19 pandemic. Cyclically sensitive sectors such as energy, materials, industrials and financials suffered most in the first quarter, while companies related to communication services and technology performed better. In the second quarter, most Asian markets moved higher as major economies continued to relax shelter-in-place restrictions. Although Covid-19 cases continued to rise significantly in the second quarter, the gradual reopening of businesses helped bolster sentiment. The health care sector outperformed the broader markets by a wide margin in the second quarter and cyclicals such as materials and energy stocks bounced back. Financials continued to lag in the second quarter.

Chinese equities generated strong absolute returns in the first half, as domestic Chinese sentiment gained strength on the back of a quick resumption of economic activity. China, South Korea and Taiwan each made considerable progress in flattening their curves of new virus infections in the reporting period. Stimulus in China remains modest, but supportive of economic growth. Amid strong returns, we also saw some volatility related to the Chinese government's amendment of national security laws in Hong Kong, which attracted international attention and protests from Hong Kong citizens.

Japan's broader equity market was negative in the first half, but recovered quite a bit of lost ground in the second quarter. At the start of 2020, Japanese equities experienced steeper declines than those of other developed economies in anticipation of the global manufacturing cycle deteriorating to a recession territory. However, since March, Japan has been one of the strongest equity markets globally. The country experienced lower COVID-19 cases than other developed countries due to widespread adoption of masks and extensive contact tracing. Japanese corporates had strong cash positions to weather the economic downturn.

Performance Contributors and Detractors:

The Fund outperformed its benchmark in the first half. Contributors included the health care sector, where strong stock selection and an overweight allocation generated attractive returns. Companies such as Innovent Biologics, Wuxi Biologics and M3, Inc. were each contributors. Innovent is one of the leading Chinese biopharmaceutical companies with the recent success of the country's first domestic PD-1 cancer drug. Wuxi Biologics is one the largest CDMOs (Contract Development and Manufacturing Organization) in the world that helps many of large global and smaller regional pharma companies get drugs developed. M3 Inc. is a Japanese med-tech company providing many online medical solutions including clinical trials to doctors and medical practices not only in Japan, but also in China, U.S. and Europe. Stock selection in China, as well as a slight overweight to China, was also a notable contributor. Chinese video content company Bilibili generated significant gains in the reporting period. The company, which caters to young viewers attracted new users as the pandemic accelerated demand for online entertainment and social media interaction.

Detractors included small positions in Bangladesh and Sri Lanka, which are not in the Fund's benchmark. Bangladeshi financials company Brac Bank and Sri Lankan financials company Sampath Bank experienced share price declines amid worries that economies in south and Southeast Asian might face a longer road to recovery from the economic impacts of the pandemic. These are very small positions that we continue to monitor. The Fund's underweight in information technology, as well as stock selection in the sector, also detracted from performance. Shares of Japanese computer software company Kudan Inc. fell in the reporting period. The company specializes in artificial perception, helping computers “see” for tasks such as autonomous driving. This position was small and we exited the position in the second quarter.

Notable Portfolio Changes:

We initiated several new positions in the second quarter, including Burning Rock Biotech and Legend Biotech. Burning Rock Biotech is a leading Chinese molecule diagnostics company focused on cancer detection. Legend Biotech is a Chinese biopharma company developing CAR-T cell therapies, which help patient's T cells combat cancer more effectively. We also initiated a position in Chinese information technology company Silergy Corp, which mainly makes power management analog semiconductors. With high margin products and a strong management team, we believe that Silergy is well positioned to take advantage of growing demand for local tech solutions in China. We also trimmed a handful of stocks to reallocate capital to higher growth names.


While China's economic recovery is still in very early stages, recent data suggests the pace and progress of the recovery may be sustainable. CapEx spending among businesses, auto sales among consumers and property sales all began to rebound in the second quarter of 2020. This is not to suggest that China is out of the woods yet. The potential for a second wave of virus infections remains, particularly as Chinese citizens return home from abroad. Unemployment remains high in China, as it does globally, which could create a drag on spending. And a slowing global economy could slow China's rebound.

Japanese corporates had strong cash positions to weather the economic downturn. Furthermore, while economic conditions remain weak globally, sentiment is improving. In regard to monetary and fiscal policy, recent central bank actions and government spending bills offer ballast for Japan's overall market and economy. The Bank of Japan, Japan's central bank, announced plans to double its purchases of exchange-traded funds (ETFs). Reflecting monetary easing efforts around the globe, Japan's central bank is committed to providing liquidity. The Japanese government has also passed a stimulus package that are one of the largest in terms of percentage of GDP, both headline numbers and direct spending.

Turning to south and Southeast Asia, we've reduced our exposure over the past year as an outcome of our bottom up stock selection process. In terms of broader macroeconomic conditions, the pandemic may have an outsized impact on Asia's less developed economies, which have generally had a harder time flattening their rates of new infections. In addition, smaller government balance sheets may allow for less fiscal and monetary stimulus.

Over the long term, we continue to see attractive opportunities in the health care sector. In our view, the sector is still in the very early stages of its growth potential, particularly in Asia, where rising incomes are naturally leading to a desire for greater quality of life and patient care. We believe health care companies that compete on innovation and improved patient outcomes will continue to expand their role in Asia's economies.

As of 6/30/2020, the securities mentioned comprised the Matthews Asia Growth Fund in the following percentages: Burning Rock Biotech, Ltd. ADR, 1.9%; Legend Biotech Corp. ADR, 1.7%, and Silergy Corp. 1.1%; Innovent Biologics, Inc., 4.0%; Wuxi Biologics Cayman, Inc., 5.2%; M3, Inc. 1.3%; Bilibili, Inc. ADR, 5.1%; Brac Bank Ltd, 0.6%; Sampath Bank, 0.7%. The Fund held no positions in Kudan. 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.