Fund Commentary – September 2019

Fund Commentary – September 2019


Chinese equities were mostly flat in September, with domestic A-shares posting slight gains. U.S.-listed Chinese ADRs were particularly weak amid U.S—China trade tensions. Although the near-term outcome of trade negotiations remains unpredictable, a slowing U.S. economy could put pressure on U.S. President Donald Trump to negotiate as U.S. elections draw closer.

Meanwhile, Hong Kong protests remain ongoing and tensions continued following the reporting period. Looking back to an earlier protest, the umbrella movement of 2014 lasted for several months, so current protests could take time to subside. Notably, the portfolio has limited exposure to companies directly impacted by the protests. Hong Kong protests continue to be prominent in global headlines, contributing to negative sentiment among foreign investors.

On a positive note, domestically listed Chinese stocks, known as A-shares, generated attractive gains year to date, even as returns for Chinese stocks listed in Hong Kong were essentially flat for the same period. The notable divergence in returns indicates a more positive mindset among mainland Chinese investors toward local economic conditions, where domestic consumption remains healthy and continues apace.


For the month ending Sept. 30, 2019, the Fund returned -1.01%, underperforming its benchmark, the MSCI China All Shares Index, which returned 0.14%. From a sector perspective, the Fund›s holdings in the communication services and health care sectors detracted from relative performance. In contrast, the Fund›s holdings in the financials and consumer staples sectors contributed to relative performance.

A contributor among individual stocks was Ping An Bank, a subsidiary of Ping An Group. Asset quality for the bank is stable and improving, while the company›s management team is working toward expanding the bank›s retail franchise. Ping An Group has a strong insurance arm, with a large group of agents who can cross-sell banking products. Ping An insurance agents can now market traditional banking products, such as loans, credit cards and mortgages, to a large base of existing customers. Ping An Bank also has recently acquired a sizeable private-banking business, improving its position in the personal trust and retail banking arena.

A detractor in the month was, a provider of online classified ads. One of its major business lines is help-wanted ads for blue-collar workers, such as restaurant dishwashers and house cleaners. Another business line is ads for residential rental properties, such as rooms for rent and entire apartments. The stock suffered on declining short-term macroeconomic sentiment, but we continue to like the company›s long-term prospects. The company is a dominant player in the classified-ad industry and we believe it stands to benefit from a trend of increased classified listings, both for jobs and real estate, via online platforms.


Following the reporting period, sales figures during China›s semiannual holiday of Golden Week looked resilient as consumers made upgrades in purchases. Domestic tourism remained robust and hotel bookings were up among travelers visiting family members within mainland China. Restaurant revenues also were up during the holidays, another sign of healthy consumer spending.

Meanwhile, U.S.—China trade tensions remain unresolved. The Chinese government continues to balance the long-term goal of deleveraging the economy and maintaining consumption-related growth. Thus far, the government has refrained from launching broad-based measures aimed at boosting growth within the economy. While we believe the pattern of targeted relief aimed at parts of the economy may continue, we also note that policymakers have considerable fiscal ability to step in, if necessary.

Domestic consumption and the growing services sector within China remain the primary drivers of China›s growth. We see significant consumption growth coming from China›s less-developed urban centers, which often are home to millions of inhabitants per city who have rising incomes and a strong interest to upgrade their quality of life. Our portfolio construction process, designed to identify the most compelling opportunities from the bottom up, will continue to look for quality growth companies with attractive, long-term secular growth potential.

Source: Brown Brothers Harriman & Co. 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. Back to Fund Commentaries