Matthews Korea Fund

Period ended December 31, 2019

For the year ending December 31, 2019, the Matthews Korea Fund returned 3.80% (Investor Class), while its benchmark, the Korea Composite Stock Price Index, returned 4.46%. For the fourth quarter, the Fund returned 10.81% (Investor Class) versus 10.41% for the Index.

Market Environment:

South Korea's equities generated modest gains in 2019. The strongest sector was information technology, as share prices rose on expectations related to the rollout of 5G and easing U.S.–China trade tensions. Looking back at 2017 and 2018, information technology (IT) company share prices suffered amid weaker-than-expected demand, so they started 2019 with relatively low valuations. Shares of IT companies then rebounded sharply in 2019, outperforming all other sectors globally. While sentiment seems to have improved ahead of the actual recovery, we expect to see a more balanced supply-and-demand environment for semiconductor memory products ahead. The surge in IT stock prices created a notable divergence in equity returns between the sector and the broader market.

Equity prices in other sectors were softer. Consumer-related companies were hard hit, especially in the consumer staples, consumer discretionary and health care sectors. Government policies showed mixed results as corporate earnings and hiring tendencies were negatively affected by stiff hikes in the minimum wage over the past two years and controlling working hours. South Korea continued to experience soft disposable-income growth as tax-related expenses rose. Going into 2020, we remain cautious on domestic stocks that may lack clear catalysts for growth. We believe bottom-up stock selection remains key in South Korea's equity market, particularly in the current environment.

Performance Contributors and Detractors:

For the full year 2019, the Fund underperformed its benchmark. The Fund's underweight to the IT sector was the biggest detractor from relative performance. Close to a third of the benchmark is concentrated in the IT sector, which generated the strongest returns of any sector in the year. While maintaining a meaningful allocation to IT, the Fund was underweight relative to the benchmark. We have a positive view of the IT sector, but also seek to avoid significant sector concentrations and maintain a diversified approach to investing in South Korea. Stock selection in health care and communication services, meanwhile, was a contributor for the year and helped to reduce the impact of our underweight to IT.

Turning to individual securities, household products manufacturer Lock & Lock was a detractor from performance. The company was still going through a restructuring and revamping of its product lineup. We think the restructuring is close to an end and remain optimistic about the company's prospects. The company appears to have a strong vision for its marketing channels and products, so we expect to see healthy revenue growth along with margin improvement.

South Korean search engine and internet content provider NAVER was a strong contributor to performance. As South Korea lacks a dominant e-commerce platform, consumers increasingly are using NAVER's search-engine functions as a primary shopping tool. NAVER also has introduced its own digital-payments service, turning its search engine into an e-commerce platform. The company reported stronger-than-expected results for its core business in the second quarter of 2019, noting that it expected losses at a subsidiary to have peaked. NAVER also announced it would spin off its payments platform to enhance competitiveness and revealed plans to spin off other businesses via public offerings in the next few years.

Notable Portfolio Changes:

In the fourth quarter, we initiated a new position in LEENO Industrial, a South Korea-based company that develops and manufactures components used in the semiconductor industry. The company is a provider of test pins to a broad range of technology industries. Increasingly, its application is used for the health care area. As its pin is used in the research and development (R&D) stage, the company provides a good way to invest in R&D with a favorable valuation. We believe the company's customer base is well-diversified and that the management team is strong. We were able to buy the stock when valuations appeared attractive for technical reasons. We also exited travel and tourism company Modetour. As a package tour operator, Modetour was negatively impacted by weakness in consumer spending and South Korea and Japan issues. The company was also facing increased competition, losing market share to online travel agency platforms.


Information technology plays a big role in South Korea's economy. Looking ahead, we remain positive in our outlook for the sector, mainly due to improving supply-and-demand dynamics in 2020. When the sector is performing well, it can help the entire value chain across South Korea in some way. Apart from the IT sector, we think South Korean automotive companies can enjoy an earnings recovery from improving product cycles in 2020. With a generational change in its management team, Hyundai Motor has been launching better products globally and continues to improve corporate governance. We remain positive on South Korean EV battery manufacturers in 2020, driven by Europe to meet emission-reduction targets in 2020-2021. These trends are positive to potential benchmark returns, as the Korea Composite Stock Price Index is heavily concentrated among a few large weights within the IT sector.

In 2020, consumer spending in South Korea could remain softer over the near term, but the share prices of individual companies may grow attractively, in our view. Bottom-up stock selection becomes even more important, as the number of companies generating growth appears limited to a select group of innovators. As ever, we also look to invest in South Korean companies with exposure to customers across Asia and globally. We continue to look for companies with better growth profiles, whether serving domestic Korean consumers, Asian consumers more broadly or global consumers.

As of 12/31/2019, the securities mentioned comprised the Matthews Korea Fund in the following percentages: Lock & Lock Co., Ltd. 2.0%; NAVER Corp. 4.6%; LEENO Industrial, Inc. 1.7%, Hyundai Motor Co., Ltd., Pfd. 1.0%, and Hyundai Motor Co., Ltd., 2nd Pfd. 2.9%. The Fund held no position in Modetour Network, Inc. Current and future 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.