In constructing the portfolio, the manager looks to diversify the portfolio between core and cyclical growth holdings. The core holdings are businesses that are viewed as long-term positions and generally make up approximately 80% of the portfolio. They have long-term cash flow predictability and tend to be domestically oriented businesses in sectors such as internet/e-Commerce, health care, life insurance, media and travel. However, as not all compelling opportunities have long-term cash flow predictability, approximately 20% of the portfolio's assets are generally in shares of companies that have less-predictable cash flows. These cyclical growth holdings often represent investments in more cyclical industries such as transportation, property, wealth management, energy and commodities.
The Fund's core philosophy is to capture growth-at-a-reasonable price. It is driven by a fundamental, bottom-up stock selection process with a focus on governance, management quality, capital efficiency and the long-term sustainability and repeatability of cash flows.
Our portfolio manager seeks to identify companies with comparative advantages and superior operational metrics priced below long-term intrinsic value. He seeks businesses that are best positioned to grow over time by capitalizing on China's economic transformation and expanding middle class consumption.
The Fund focuses on a multi-cap universe, which includes approximately 5,000 publicly held companies in Hong Kong and Mainland China, including domestic A-Shares. This universe is screened for companies with a market cap of greater than US$1 billion and with a Return on Assets above 5%.
The research process is designed to provide a 360-degree view of each company under consideration. This deep due diligence work allows us to hold a broad and thorough understanding of China's individual companies, its economy and its markets.
On-the-ground visits are key to our process, including over 700 meetings per year with Chinese companies by the broader Matthews Asia investment team, ranging from China's financial centers to remote island outposts. With a keen eye on risk management, the team probes company management's thinking on business models, capital allocation, future growth initiatives, governance and other sensitive factors. The team builds a viewpoint on management's integrity and ability to effectively lead the business through cycles. Additionally, they look at fundamental factors, with a focus on the drivers of long-term trends.
Analysis is then conducted on competitive positioning, including each potential holding's competitive advantage, market position and the ability to extract a higher margin than peers or maintain pricing power. Finally, the team examines balance sheet strength with a focus on how a company funds its business, eliminating those that may not be sufficiently reinvesting in their core business activities.
Once all of the open questions are answered, the team builds forward-looking models to assess the valuation of a stock to determine whether a pricing discrepancy exists between internal and market pricing. These valuations are compared to multiple measures including, P/E, P/B, FCF, EVA and private market comparables. If a business is attractive but the stock price is excessive, it will remain on the watch list until a reasonable valuation entry point presents itself.