Matthews Korea Fund

Period ended March 31, 2020

For the quarter ending March 31, 2020, the Matthews Korea Fund returned -22.37% (Investor Class), while its benchmark, the Korea Composite Stock Price Index (KOSPI), returned -24.17%.

Market Environment:

South Korean equities were weak in March but were roughly in line with broader Asian markets. South Korea's response to Covid-19 was prompt and effective resulting in a relatively fast control over the spread of cases. During the reporting period, South Korea's economic slowdown was relatively mild. At the same time, external demand-driven weakness could continue to pressure economic activity. Working in Korea's favor are the country's health care infrastructure and resources. Korea's valuations are attractive and pace of its earnings recovery impacted from China recovery and development in the U.S. and the EU should be the key swing factor in 2020. 

Performance Contributors and Detractors:

From a sector perspective, stock selection in consumer staples and information technology contributed to relative performance. Stock selection among small- and mid-cap stocks was also a contributor. Among individual securities, Confectionary maker Orion Corp. contributed to performance. By expanding its footprint across Asia, Orion has increased its addressable market. Leeno Industrial Inc., which develops and manufactures components used in the semiconductor industry, was also a contributor. This company is a provider of test pins to broad range of technology industries. In addition, Leeno is successfully expanding its exposure to the health care industry with low competition thus the potential for higher profitability.

On the other hand, stock selection in health care and consumer discretionary was a detractor. Stock selection in large caps and mega caps was also a detractor. Among individual securities, household products manufacturer Lock & Lock was a detractor from performance. With its exposure in China and South East Asia, its short-term earnings will be negatively impacted. Hyundai Mobis was also a detractor. Hyundai Mobis is the parts and service arm of the Hyundai Group, which includes Hyundai Motor Company and Kia Motors. 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.

Notable Portfolio Changes:

We initiated a new position in video game developer NCSoft Corp. in the quarter. The company has been in our watch list for a while. It has the strongest gaming IP in Korea and continues to accelerate monetization of its IPs successfully. We also initiated a position in Hanon Systems, a manufacturer of air control and heating systems for automobiles and buildings. In addition, we continue to streamline the portfolio, with the goal of maintaining a concentrated number of securities. We sold e-commerce company Cafe24Corp in the quarter to concentrate our portfolio, as well as insurance provider Samsung Fire & Marine as the market for property and casualty insurance is overly saturated in Korea.


On April 15, South Korea held elections for 300 seats within its National Assembly. The country's left-leaning ruling party, the Democratic party of President Moon Jae-in, won 180 seats of 300 seats. Victory of the ruling party was expected, but the magnitude of the win was a surprise. With full support from the national assembly, Korea is likely to continue to address income equality with less friendly corporate policies. The election outcome is not necessarily positive to the capital market, in our view.

As bottom-up investors, we look for companies that can grow organically without the assistance of strong macroeconomic tailwinds. We continue to look for companies that can benefit from domestic consumption within Korea, as well as those companies headquartered in Korea that are effectively competing and innovating in global markets. In addition, we seek to reduce exposure to businesses negatively impacted by government regulation or from the COVID 19 pandemic. Looking ahead, we continue to focus on the growth potential of Korea's most innovative companies.

As of 3/31/20, the securities mentioned comprised the Matthews Korea Fund in the following percentages: Orion Corp. 6.1%; Leeno Industrial, Inc. 2.0%; Lock & Lock Co. Ltd. 1.6%; Hyundai Mobis Co. Ltd. 4.6%; Hyundai Motor Co., Ltd., Pfd. 2.7%; Hyundai Motor Co., Ltd., 2nd Pfd. 1.2%; Kia Motors Corp. 1.5%; NCSoft Corp. 1.5%; Hanon Systems 1.1%. The Fund held no positions in Cafe24 Corp. or Samsung Fire & Marine Insurance Co., Ltd., Pfd. 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.