Fund Commentary – February 2019

Fund Commentary – February 2019

Market Environment:

Following January's rally, Chinese equities continued their upward momentum in February. Sentiment may have improved on hopes that trade tensions between the United States and China may have eased slightly. In addition, the Chinese government supported minor but welcome stimulus around the edges, including consumer-friendly tax cuts. A gentler monetary and fiscal posture could help support the Chinese economy in the near term. Meanwhile, on the last day of February, index provider MSCI announced plans to quadruple the weight of China A-shares in its Emerging Market (EM) Index in 2019. The change is expected to bring the weight of A-shares in the MSCI EM Index to 3.3% in November 2019, up from just 0.7% today. The benchmark for the China Fund (“Fund”) is the MSCI China All Shares Index, which already includes A-Shares in the mix, so this announcement is not likely to have much direct impact on the portfolio. However, MSCI's decision to expand A-shares inclusion across more of its indexes shines a global spotlight on China's domestic equity markets, which we see as a positive development over the long term.

Performance, Contributors and Detractors:

For the month ending February 28, 2019, the Fund returned 7.16%, slightly trailing its benchmark, which returned 7.19%. From a sector perspective, the Fund's communications services holdings were the largest contributor to relative performance. In contrast, the Fund's information technology holdings, while generating positive absolute returns, lagged the benchmark and detracted from relative performance.

From a stock perspective, a top contributor in the month of February was liquor producer Wuliangye Yibin. As the second-largest liquor company in China, Wuliangye Yibin specializes in manufacturing “baijiu,” a clear liquor made from grain. Demonstrating high return on invested capital, Wuliangye Yibin also enjoys improving earnings and a solid growth outlook. We believe the company has more room for expanding its profit margins relative to its largest peer. Wuliangye Yibin is introducing premium products into its line-up, which is working in its favor and creating an opportunity to grow its overall market share. Consumer spending is an important theme for our bottom-up research process and we find Wuliangye Yibin to be a compelling long-term growth opportunity within the consumer staples sector.

A detractor during the month of February was semiconductor equipment maker ASM Pacific Technology Limited. The business cycle for semiconductors is highly connected to the outlook for smartphone sales, which is currently weak. However, we believe the firm's business has the potential to pick up toward the latter half of 2019, should semiconductor demand recover. With a stock price that is currently very attractively valued, ASM Pacific has a robust product mix that could benefit from any rebound in the sector. With a focus on creating more sophisticated chips that enable faster processing speeds, ASM Pacific may be well-positioned for future growth.


While Chinese equities have enjoyed a strong start to the year, the potential for additional volatility among global equities remains. However, we focus on the domestic opportunity set in China for the China Fund and seek to take advantage of periodic market volatility as a way to add to quality holdings in the portfolio. From a fundamental, bottom-up perspective, we continue to see both consumer and B2B services as an important theme in capturing China's economic growth. We also see rising consumer spending in lower-tier cities as an important economic driver for China's economy. Connectivity in all forms—transportation infrastructure, internet and mobile access, and greater access of businesses to smaller town customers—is driving expansion in a number of sectors. We remain optimistic about China's long-term growth potential and look for the most appealing long-term investment opportunities. 

Source: State Street Bank and Trust Company. Source for index data: MSCI

Past performance is not a guide to future returns. Investment returns are historical and do not guarantee future results. Investment returns reflect changes in net asset value and market price per share during each period and assumes that dividends and capital gains distributions, if any, were reinvested. The net asset value (NAV) percentages are not an indication of the performance of a shareholder›s investment in the Fund, which is based on market price. NAV performance includes the deduction of management fees and other expenses.

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. Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. This and other information is contained in the Fund's annual and semiannual reports, proxy statement and other Fund information, which may be obtained by contacting your financial advisor or reviewing this website.

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. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information.

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