Period ended June 30, 2020
For the first half of 2020, the Matthews Korea Fund returned -4.11% (Investor Class), while its benchmark, the Korea Composite Stock Price Index, returned -7.33% over the same period. For the quarter ending June 30, 2020, the Matthews Korea Fund returned 23.53% (Investor Class), while the benchmark returned 21.95%.
Following a drop in the first quarter, South Korean equities began to recover in the second quarter. Looking back to the beginning of 2020, early optimism surrounding the U.S. — China trade resolution faded quickly as investors weighed potential negative spillover of the coronavirus into slower trade, tourism and global demand. So far, the economic slowdown has been relatively mild, and external demand-driven weakness seems to be fading. Countries which are thought to be linked to the global economy, like South Korea, are beginning to recover as major economies gradually reopen.
Performance Contributors and Detractors:
The Fund outperformed its benchmark in the first half, primarily due to strong selection in the information technology (IT) and communication services sectors. Among individual securities, Leeno Industrial Inc., which develops and manufactures testing socket and pin used in the semiconductor industry, was a contributor in the first half. In addition, Leeno is successfully expanding its exposure to the health care industry with higher profitability. In the communication services sector, Kakao, which operates a dominant mobile messaging app, was also a contributor. With COVID-19, Kakao's presence has been growing even bigger in daily life of users. Kakao's profitability is improving meaningfully as the company starts monetizing its advertising capabilities and moving into e-commerce. In addition, it is expanding its fintech arm, Kakao Pay, more aggressively.
Detractors in the first half included stock selection in health care and a slight overweight to consumer discretionary. Share prices of Interojo, a vision care manufacturer and wholesaler, declined in the first half. We exited the position as we saw higher-than-expected competition environment globally. Hyundai Mobis was also a detractor. Hyundai Mobis is the core parts and after service arm of the Hyundai Group. As the global automotive industry is seeing not only demand disruption, but also production and supply chain disruption, automotive stocks share prices were weak. While we are closely monitoring the Group's cash flow and liquidity, we believe our automotive holdings have the potential to emerge stronger than global peers over the long term with improving product cycles and its stronger position in new energy vehicle opportunity.
Notable Portfolio Changes:
During the second quarter, we initiated a position in drug maker SK Biopharmaceuticals Co Ltd, which develops treatments for epilepsy and central nervous system disorders with superior efficacy vs. existing players. It received both FDA and marketing approval in U.S. for a new product. In addition, we exited Interojo Co Ltd.
South Korea has a few potential tailwinds going into the second half of 2020. The country's health care infrastructure and resources are adequate to reduce the impact of a potential second wave of COVID-19. In addition, the country's external vulnerability and financing risks are low. Korea's valuations are one of the regions' most attractive and the prospect of earnings growth from a very low base is a good possibility, especially if its influential neighbor, China, continues to recover.
We continue to look for companies with strong structural growth potential—those that can grow organically without the assistance of strong macroeconomic tailwinds. Our portfolio includes companies that can drive and benefit from structural changes in consumption within Korea, as well as those companies headquartered in Korea that are effectively competing and innovating in global markets. Over the longer term, we expect innovative companies to continue to provide attractive growth opportunities.
As of 6/30/2020, the securities mentioned comprised the Matthews Korea Fund in the following percentages: Leeno Industrial Inc., 1.9%; Kakao Corp., 5.0%; Hyundai Mobis Co., Ltd., 4.5%; SK Biopharmaceuticals Co., Ltd., 0.2%. The Fund held no positions in Interojo. Current and future portfolio holdings are subject to change and risk.