Matthews Pacific Tiger Fund
Period ended March 31, 2020
For the quarter ending March 31, 2020, the Matthews Pacific Tiger Fund returned -20.84% (Investor Class), while its benchmark, the MSCI All Country Asia ex Japan Index, returned -18.36%.
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 China 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.
Early signs of containment appeared in North Asia led by China but many other parts of the world have struggled with containment, including the U.S., parts of Europe and South Asia. Chinese equities suffered early in the quarter, but held up better than South Korea and Japan. India and Indonesia suffered steeper equity price declines than countries with higher fiscal stimulus abilities. Earnings revisions have been slow to react but analysts are expected to meaningfully cut expectations beginning in Q2. We believe capital markets are in the process of digesting the uncertainty that arises from the spread of COVID-19 before moving to an understanding of the risks that arise for businesses across the region.
China has the fiscal and monetary tools—and ability—to stimulate its economy. China's finance ministry and central bank have taken actions to bridge economic gap and policymakers have communicated that they are willing to do more. South Korea has also initiated significant fiscal spending. India and Indonesia's policy makers may have more fiscal constraints than their North Asia counterparts but we are seeing some steps being undertaken to provide relief to households, and support a recovery for the small-medium enterprises.
Performance Contributors and Detractors:
The Fund's overweight to India and ASEAN and underweight to China were the primary detractors from performance. China's domestic market has held up much better than the rest of the region. Elsewhere, equity markets in South Asia have experienced significant weakness, somewhat exacerbated by depreciating currencies. Some ASEAN economies such as Indonesia and the Philippines are much more consumption oriented, and are being impacted by interruptions to the local economy. On the other hand, the Fund's underweight to Singapore and Taiwan contributed to relative performance. From a sector perspective, the Fund's underweight to energy and materials contributed to relative performance, while stock selection in financials and communication services detracted from performance.
Among individual securities, a contributor to relative performance was DKSH Holding, a provider of market expansion services across Asia. Following a period of reorganization, the company is slowly getting back to growing again with a more optimal cost structure. A detractor was China Resources Land Ltd (CRL), an operator of shopping malls and developer of residential properties, as investors grappled with the prospect of weaker cash flows and earnings in the aftermath of COVID-19. The price remained volatile in the quarter, but we continue to believe that the CRL is well positioned to gain market share as recovery starts to unfold.
Notable Portfolio Changes:
We continue to stay focused on domestically oriented growth in Asia. To that extent, the weakness in Asian equities created an opportunity to add to a couple of stocks in the consumer discretionary sector that were on our watch list, especially in China. The team is broadly upgrading the quality of the portfolio on valuation opportunities, swapping some exposures in South Korea and has also rotated some capital away from countries such as Thailand and Malaysia.
During the quarter, we initiated a new position in Jiangsu Hengrui Medicine Co. Ltd., one of the leaders in the field of oncological drugs and innovative medicine in China. The company's efforts in developing PD-1 drugs combined with an effective salesforce put them in a unique position to establish leadership in healthcare industry. To fund the position, we exited Hansoh Pharmaceutical Group Co. Ltd. primarily on account of better risk-reward trade-off.
Turning to the ongoing health care crisis, the prospect of a second wave of infections in North Asia is real. The good news is that many parts of Asia have dealt with these types of health care crises before and perhaps have a better understanding of how to mobilize to limit new transmissions. While there is always a possibility of imported cases, Asia's consumer and the health care machinery appear better prepared than other parts of the global economy Toward the end of the quarter, we already saw China's economy starting to reopen for business, while exercising sensible precautions, such as wearing facemasks and continuing to observe social distancing. Across other parts of Asia, authorities are still in the process of limiting the spread of the virus. This will have a near-term impact on economic activity but there are learnings from other countries that are likely to prove helpful in dealing with the outbreak.
The unprecedented nature of the economic impact of COVID-19 means that near-term forecasts will be less than useful in calibrating valuations. However, in uncertain times, there is an even greater tendency to dwell on near-term outcomes. Our approach has been to assess the survivability of the portfolio holdings with the belief that these companies should be able to emerge in a stronger position to participate in a recovery.
Even as the near-term outlook appears uncertain, the long-term backdrop for Asia has become quite favorable—in particular, lower cost of capital globally will mean better availability in coming years. Furthermore, the lower price of oil acts as a significant tax cut for consumers and companies in the region. We continue to believe that these factors along with inherent productivity gains will provide support to Asian earnings in coming periods.
As of 3/31/20, the securities mentioned comprised the Matthews Pacific Tiger Fund in the following percentages: DKSH Holding, 2.3%; China Resources Land Ltd, 4.8%; Jiangsu Hengrui Medicine Co. Ltd., 0.9%. The Fund held no positions in Hansoh Pharmaceutical Group Co. Ltd. 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.