N-CSRS 1 d941782dncsrs.htm N-CSRS N-CSRS
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-08510

 

 

Matthews International Funds

(Exact name of registrant as specified in charter)

 

 

Four Embarcadero Center, Suite 550

San Francisco, CA 94111

(Address of principal executive offices) (Zip code)

 

 

William J. Hackett, President

Four Embarcadero Center, Suite 550

San Francisco, CA 94111

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: 415-788-7553

Date of fiscal year end: December 31

Date of reporting period: June 30, 2020

 

 

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

 


Table of Contents
Item 1.

Reports to Stockholders.

The Report to Shareholders is attached herewith.


Table of Contents

Matthews Asia Funds  |  Semi-Annual Report

June 30, 2020  |  matthewsasia.com

 

GLOBAL EMERGING MARKETS STRATEGY

Matthews Emerging Markets Equity Fund

ASIA FIXED INCOME STRATEGIES

Matthews Asia Total Return Bond Fund

Matthews Asia Credit Opportunities Fund

ASIA GROWTH AND INCOME STRATEGIES

Matthews Asian Growth and Income Fund

Matthews Asia Dividend Fund

Matthews China Dividend Fund

ASIA VALUE STRATEGY

Matthews Asia Value Fund

ASIA GROWTH STRATEGIES

Matthews Asia Growth Fund

Matthews Pacific Tiger Fund

Matthews Asia ESG Fund

Matthews Emerging Asia Fund

Matthews Asia Innovators Fund

Matthews China Fund

Matthews India Fund

Matthews Japan Fund

Matthews Korea Fund

ASIA SMALL COMPANY STRATEGIES

Matthews Asia Small Companies Fund

Matthews China Small Companies Fund

 

 

LOGO

 

Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Funds’ annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Funds’ website matthewsasia.com, and you will be notified by mail each time a report is posted and provided with a website link to access the report. If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Funds electronically anytime by contacting your financial intermediary (such as a broker-dealer or bank) or, if you are a direct investor, by calling 800.789.ASIA (2742).

You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. If you invest directly with a Fund, you can call 800.789.ASIA (2742) to let the Fund know you wish to continue receiving paper copies of your shareholder reports. Your election to receive reports in paper will apply to all Funds held in your account if you invest through your financial intermediary or all Funds held directly with Matthews Asia Funds.

 

LOGO


Table of Contents

Investor Class Performance and Expenses (June 30, 2020)

 

Investor Class         Average Annual Total Return    

Inception
Date

    Prospectus
Expense
Ratios*
   

Prospectus
Expense Ratios
after Fee Waiver

and Expense
Reimbursement*

 
  1 year     5 years     10 years     Since
Inception
 

GLOBAL EMERGING MARKETS STRATEGY

             

Emerging Markets Equity Fund (MEGMX)

    n.a.       n.a.       n.a.       16.70%       4/30/20       2.77%       1.15% 1 

ASIA FIXED INCOME STRATEGIES

             

Asia Total Return Bond Fund (MAINX)**

    0.45%       4.26%       n.a.       4.22%       11/30/11       1.08%       1.07% 1 

Asia Credit Opportunities Fund (MCRDX)

    -1.30%       n.a.       n.a.       4.13%       4/29/16       1.24%       1.12% 1 

ASIA GROWTH AND INCOME STRATEGIES

             

Asian Growth and Income Fund (MACSX)

    -3.38%       2.06%       4.74%       8.48%       9/12/94       1.08%       1.08%  

Asia Dividend Fund (MAPIX)

    2.31%       4.09%       6.95%       7.98%       10/31/06       1.03%       1.02% 2 

China Dividend Fund (MCDFX)

    3.56%       6.94%       9.99%       9.76%       11/30/09       1.15%       1.15%  

ASIA VALUE STRATEGY

             

Asia Value Fund (MAVRX)

    -3.33%       n.a.       n.a.       6.40%       11/30/15       1.85%       1.37% 3 

ASIA GROWTH STRATEGIES

             

Asia Growth Fund (MPACX)

    18.17%       9.04%       9.53%       9.49%       10/31/03       1.09%       1.09%  

Pacific Tiger Fund (MAPTX)

    -2.00%       3.64%       7.01%       8.11%       9/12/94       1.08%       1.05% 2 

Asia ESG Fund (MASGX)

    3.32%       4.90%       n.a.       4.42%       4/30/15       1.54%       1.38% 3 

Emerging Asia Fund (MEASX)

    -24.51%       -3.34%       n.a.       -0.25%       4/30/13       1.65%       1.42% 3 

Asia Innovators Fund (MATFX)

    38.22%       12.33%       13.19%       5.24%       12/27/99       1.19%       1.19%  

China Fund (MCHFX)

    23.58%       9.21%       7.30%       10.26%       2/19/98       1.09%       1.09%  

India Fund (MINDX)

    -21.86%       -1.80%       4.06%       8.08%       10/31/05       1.11%       1.11%  

Japan Fund (MJFOX)

    10.88%       5.86%       10.27%       6.07%       12/31/98       0.93%       0.93%  

Korea Fund (MAKOX)

    0.41%       0.73%       6.83%       5.33%       1/3/95       1.15%       1.15%  

ASIA SMALL COMPANY STRATEGIES

             

Asia Small Companies Fund (MSMLX)

    14.74%       3.10%       6.72%       10.29%       9/15/08       1.60%       1.41% 3 

China Small Companies Fund (MCSMX)

    79.85%       18.72%       n.a.       11.40%       5/31/11       1.62%       1.38% 3 

 

 

 

Annualized performance for periods of at least one year, otherwise cumulative.

 

*

These figures are from the Funds’ prospectus dated as of April 29, 2020, and may differ from the actual expense ratios for fiscal year 2020, as shown in the financial highlights section of this report.

 

**

The Fund’s name changed from Matthews Asia Strategic Income Fund to Matthews Asia Total Return Bond Fund on January 31, 2020.

 

1

Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90% first by waiving class specific expenses (i.e., shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses (e.g., custody fees) of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 0.90% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 0.90%. Pursuant to this agreement, any amount waived for prior fiscal years with respect to the Matthews Asia Total Return Bond Fund and the Matthews Asia Credit Opportunities Fund is not subject to recoupment. For the Matthews Emerging Markets Equity Fund, if the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

 

2

Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2021 and may be terminated (i) at any time by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews at the annual expiration date of the agreement upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty.

 

3

Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.20% first by waiving class specific expenses (i.e., shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses (e.g., custody fees) of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 1.20% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 1.20%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

 

   MATTHEWS ASIA FUNDS


Table of Contents

Institutional Class Performance and Expenses (June 30, 2020)

 

Institutional Class         Average Annual Total Return     Inception
Date
    Prospectus
Expense
Ratios*
    Prospectus
Expense Ratios
after Fee Waiver
and Expense
Reimbursement*
 
  1 year     5 years     10 years     Since
Inception
 

GLOBAL EMERGING MARKETS STRATEGY

             

Emerging Markets Equity Fund (MIEFX)

    n.a.       n.a.       n.a.       16.70%       4/30/20       2.57%       0.90% 1 

ASIA FIXED INCOME STRATEGIES

             

Asia Total Return Bond Fund (MINCX)**

    0.51%       4.51%       n.a.       4.44%       11/30/11       0.97%       0.90% 1 

Asia Credit Opportunities Fund (MICPX)

    -1.09%       n.a.       n.a.       4.37%       4/29/16       1.07%       0.90% 1 

ASIA GROWTH AND INCOME STRATEGIES

             

Asian Growth and Income Fund (MICSX)

    -3.17%       2.22%       n.a.       3.60%       10/29/10       0.94%       0.94%  

Asia Dividend Fund (MIPIX)

    2.48%       4.21%       n.a.       5.89%       10/29/10       0.93%       0.92% 2 

China Dividend Fund (MICDX)

    3.72%       7.12%       n.a.       8.85%       10/29/10       1.01%       1.01%  

ASIA VALUE STRATEGY

             

Asia Value Fund (MAVAX)

    -3.21%       n.a.       n.a.       6.65%       11/30/15       1.74%       1.20% 3 

ASIA GROWTH STRATEGIES

             

Asia Growth Fund (MIAPX)

    18.29%       9.23%       n.a.       7.92%       10/29/10       0.94%       0.94%  

Pacific Tiger Fund (MIPTX)

    -1.88%       3.82%       n.a.       5.26%       10/29/10       0.93%       0.91% 2 

Asia ESG Fund (MISFX)

    3.48%       5.15%       n.a.       4.65%       4/30/15       1.41%       1.20% 3 

Emerging Asia Fund (MIASX)

    -24.39%       -3.12%       n.a.       -0.03%       4/30/13       1.51%       1.20% 3 

Asia Innovators Fund (MITEX)

    38.36%       12.53%       n.a.       14.80%       4/30/13       1.05%       1.05%  

China Fund (MICFX)

    23.83%       9.40%       n.a.       5.66%       10/29/10       0.91%       0.91%  

India Fund (MIDNX)

    -21.76%       -1.62%       n.a.       2.31%       10/29/10       0.94%       0.94%  

Japan Fund (MIJFX)

    10.92%       5.94%       n.a.       9.38%       10/29/10       0.88%       0.88%  

Korea Fund (MIKOX)

    0.19%       0.81%       n.a.       5.45%       10/29/10       1.05%       1.05%  

ASIA SMALL COMPANY STRATEGIES

             

Asia Small Companies Fund (MISMX)

    14.99%       3.33%       n.a.       4.77%       4/30/13       1.46%       1.20% 3 

China Small Companies Fund (MICHX)

    79.99%       n.a.       n.a.       27.58%       11/30/17       1.51%       1.20% 3 

 

Annualized performance for periods of at least one year, otherwise cumulative.

 

*

These figures are from the Funds’ prospectus dated as of April 29, 2020, and may differ from the actual expense ratios for fiscal year 2020, as shown in the financial highlights section of this report.

 

**

The Fund’s name changed from Matthews Asia Strategic Income Fund to Matthews Asia Total Return Bond Fund on January 31, 2020.

 

1

Matthews has contractually agreed to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90%. Pursuant to this agreement, any amount waived for prior fiscal years with respect to the Matthews Asia Total Return Bond Fund and the Matthews Asia Credit Opportunities Fund is not subject to recoupment. For the Matthews Emerging Markets Equity Fund, if the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

 

2

Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2021 and may be terminated (i) at any time by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews at the annual expiration date of the agreement upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty.

 

3

Matthews has contractually agreed to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.20%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

Past Performance: All performance quoted in this report is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the returns quoted. If certain of the Funds’ fees and expenses had not been waived, returns would have been lower. For the Funds’ most recent month-end performance, please call 800.789.ASIA (2742) or visit matthewsasia.com.

 

matthewsasia.com  |   800.789.ASIA   


Table of Contents

LOGO

 

Cover photo: Asian Palace

 

 

This report has been prepared for Matthews International Funds (d/b/a Matthews Asia Funds) shareholders. It is not authorized for distribution to prospective investors unless accompanied or preceded by a current Matthews Asia Funds prospectus, which contains more complete information about the Funds’ investment objectives, risks and expenses. Additional copies of the prospectus or summary prospectus may be obtained at matthewsasia.com. Please read the prospectus carefully before you invest or send money.

The views and opinions in this report were current as of June 30, 2020. 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 a Fund’s future investment intent. Current and future portfolio holdings are subject to risk.

Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.


Table of Contents

Contents

 

Message to Shareholders from the Investment Advisor     4  
Manager Commentaries, Fund Characteristics and Schedules of Investments:  
GLOBAL EMERGING MARKETS STRATEGY  

Matthews Emerging Markets Equity Fund

    6  
ASIA FIXED INCOME STRATEGIES  
Matthews Asia Total Return Bond Fund*     11  
Matthews Asia Credit Opportunities Fund     16  
ASIA GROWTH AND INCOME STRATEGIES  
Matthews Asian Growth and Income Fund     20  
Matthews Asia Dividend Fund     25  
Matthews China Dividend Fund     30  
ASIA VALUE STRATEGY  
Matthews Asia Value Fund     35  
ASIA GROWTH STRATEGIES  
Matthews Asia Growth Fund     39  
Matthews Pacific Tiger Fund     43  
Matthews Asia ESG Fund     48  
Matthews Emerging Asia Fund     53  
Matthews Asia Innovators Fund     57  
Matthews China Fund     61  
Matthews India Fund     66  
Matthews Japan Fund     71  
Matthews Korea Fund     76  
ASIA SMALL COMPANY STRATEGIES  
Matthews Asia Small Companies Fund     81  
Matthews China Small Companies Fund     85  
Index Definitions     90  
Disclosures     91  
Disclosure of Fund Expenses     92  
Statements of Assets and Liabilities     95  
Statements of Operations     107  
Statements of Changes in Net Assets     113  
Financial Highlights     122  
Notes to Financial Statements     140  
1. Organization     140  
2. Significant Accounting Policies     140  
3. Derivative Financial Instruments     146  
4. Capital Shares Transactions     148  
5. Investment Advisory Fees and Other Transactions with Affiliates     151  
6. Investments     154  
7. Holdings of 5% Voting Shares of Portfolio Companies     155  
8. Income Tax Information     155  
9. Public Health Emergency Risks     156  
10. Subsequent Events     157  

*The Fund’s name changed from Matthews Asia Strategic Income Fund to Matthews Asia Total Return Bond Fund on January 31, 2020.

Investment Risk: Mutual fund shares are not deposits or obligations of, or guaranteed by, any depositary institution. Shares are not insured by the FDIC, Federal Reserve Board or any government agency and are subject to investment risks, including possible loss of principal amount invested. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. In addition, single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of a concentration in a specific industry, sector or geographic location. Investing in small and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than larger companies. Please see the Funds’ Prospectuses and Statement of Additional Information for more risk disclosure.


Table of Contents

LOGO

Message to Shareholders from the

Investment Advisor

Dear Valued Investors,

I feel like saying something like “It’s a funny old world.” That’s the kind of cliché that the editors normally strike out of the first draft. But not this time. For the developments in the fight against COVID-19, the increased tensions between the U.S. and China and the performance of the markets appear to be completely out of step. It is, after all, a funny old world.

The virus seems to be spiking again—the hopes that warm weather would slow its progress appear to be unfounded. The rhetoric between the Trump administration and China has picked up—“The China virus” is a common catchphrase. Changes in visa processing in the U.S. and potentially more stringent moves on both the movement of people and goods, as well as measures that may harm Hong Kong’s special treatment by the U.S. would all seem to argue for caution. And yet the markets have been climbing ever higher—for Asia ex Japan, we are very close to the high point for the year. It has also been gratifying to see the performance of many of the Matthews Asia portfolios outperforming their benchmarks and even in positive territory for the year. The portfolio managers and analysts have been able to keep in close contact with holdings as well as keep up the steady flow of new ideas to which we are accustomed during more normal times.

However, it is undeniably strange to me that markets should have reacted this strongly. Clearly investors believe that governments have done enough to battle the virus and to support the economies for the moment. They also appear to believe that governments stand prepared and able to deliver the necessary economic medicine for a long-term recovery. I can understand this kind of optimism when it comes to the Chinese market—where China’s authorities have the will to close down the economy and its citizens will cooperate with a strict enforcement. The mildness of the second wave also gives some hope; earnings reports and economic data suggest China is functioning quite like normal.

In the U.S., I am less sure of the response to the virus—the second wave seems more acute. And I am troubled by some of the Trump administration’s moves on trade and visas. Although one can concoct short-term arguments for protectionism at times like this, my suspicion is the moves are meant to be for the foreseeable future. However, the Federal Reserve has shown itself capable and willing to do what is necessary not only for the U.S. economy but also for the global financial system. In that sense they are worthy of the market’s optimism. Europe, on the other hand, may be most at odds with the market’s optimism about recovery and the authorities’ willingness and ability to stimulate economies and support business. For the initial European stimulus has been small relative to other parts of the world and the European Central Bank (ECB) has not been as successful as other central banks in creating accelerated growth in monetary aggregates.

Should we worry too much about Europe? In one sense, no. Our portfolios are built around the growth in Asia’s domestic demand and other emerging economies. On the other hand, Europe is a significant part of the world economy, and how successful it is in reflating will have an impact on the world and the attractiveness of various markets. My main concern is that if the U.S. is able to successfully support its own economy while Europe continues to be weak, this may raise U.S. yields relative to Europe. The U.S. long bond would re-emerge as an attractive investment for Europeans trying to shelter from domestic weakness. In so doing, they are likely to prevent the dollar from weakening and may even push it higher—something that is likely to be a headwind for Asia stock markets and particularly for the non-Asia parts of the emerging market asset class. In such an atmosphere, it is likely to be the economies of North Asia, with their

 

 

4    MATTHEWS ASIA FUNDS


Table of Contents

significant current account surpluses that are best placed to perform. However, there is one aspect where Europe does seem increasingly better placed than the U.S.: Europe still seems (for the moment) to be reaching out to Asia, both central and eastern Asia, in terms of building trade routes. This is all part of China’s One Belt One Road initiative, of course, which will have the added benefit of some potential infrastructure and stimulus spending in Europe. In this sense, Europe seems committed to the ideas of global economic cooperation that the U.S. finds so troubling.

It is in this relationship that I see the best prospects for the continued growth in world trade. It would be a realignment of diplomatic influence away from the U.S. and towards China. A world split between two poles. In this scenario, China’s attempts to build trust in its capital markets, and its bond markets in particular, start to play a very significant role. Are we moving to a stage where China enjoys perpetual current account deficits financed by foreign purchases of its government bonds and the increased internationalization of its currency? That seems an increasingly likely scenario and one that is likely to raise the profile of Chinese assets in the minds of international asset allocators. Just as China increases its significance in the global economy and global politics, so, too it is increasing its significance in global benchmarks. But there is one caveat—the Chinese have made some missteps. The new security law in Hong Kong raises questions about their ability to manage an international financial center and creates mistrust between China and Europe and may yet get in the way of improved economic relations. Certainly, there have been increased signs of nervousness towards China in parts of core Europe.

At Matthews Asia, we stand in the middle of this, trying to monitor the developments that seem to be occurring on a daily basis. Yet, we remain mindful of the longer-term trends and committed to helping our shareholders protect and grow their investments in countries that seemed destined to still have the fastest-growing economies and growing domestic markets that will be the breeding ground for their own corporate champions. Ultimately, it is those businesses that we try to identify and to hold for many years.

 

LOGO

Robert Horrocks, PhD

Chief Investment Officer

Matthews International Capital Management, LLC

    

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS*
John Paul Lech  

Lead Manager

 

*   As of August 31, 2020

 
FUND FACTS
    Investor   Institutional

Ticker

  MEGMX   MIEFX

CUSIP

  577130651   577130644

Inception

  4/30/20   4/30/20

NAV

  $11.67   $11.67

Initial Investment

  $2,500   $100,000

Gross Expense Ratio1

  2.77%   2.57%

After fee waiver and Reimbursement2

  1.15%   0.90%

Portfolio Statistics

Total # of Positions

    53

Net Assets

    $9.2 million

Weighted Average Market Cap

  $125.8 billion

Portfolio Turnover3

      N/A

Benchmark

 

MSCI Emerging Markets Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal circumstances, the Matthews Emerging Markets Equity Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in emerging market countries. Emerging market countries generally include every country in the world except the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the countries in Western Europe. Certain emerging market countries may also be classified as “frontier” market countries, which are a subset of emerging market countries with newer or even less developed economies and markets, such as Sri Lanka and Vietnam. The list of emerging market countries and frontier market countries may change from time to time. The Fund may also invest in companies located in developed countries; however, the Fund may not invest in any company located in a developed country if, at the time of purchase, more than 20% of the Fund’s assets are invested in developed market companies.

Matthews Emerging Markets Equity Fund

Portfolio Manager Commentary  (unaudited)

The Matthews Emerging Markets Equity Fund was launched on April 30, 2020. Since inception, the Fund returned 16.70% (Investor Class) and 16.70% (Institutional Class), while its benchmark, the MSCI Emerging Markets Index, returned 8.25% over the same period. This is the first commentary for the Matthews Emerging Markets Equity Fund.

Market Environment:

The first half of 2020 has been like no other. The expansion of the COVID-19 around the world led to a dramatic selloff across most asset classes in March and a dash into USD cash. Market volatility exceeded the levels seen during the 2008 Global Financial Crisis. Emerging markets were no different as many currencies, country indices and individual company stock prices moved up over the course of the second quarter. As investors gained confidence that the plumbing would not break, the selloff abated and markets began to recover from their March lows. Within emerging markets, the first part of the year saw very strong relative performance from China, but the rebound since the bottom has been led by other markets that were particularly hard hit. While volatility—as measured by the Chicago Board Options Exchange’s CBOE Volatility Index—has come down, we remain quite cautious as asset prices remain high and the duration and economic damage of the pandemic remain hard to dimension.

Year-to-date, the Shanghai Composite Index led most major emerging market country indices, followed by Taiwan. While the aforementioned were slightly negative year-to-date, the return was roughly in line with the S&P 500 Index. Russia, Mexico, Brazil, India and much of Southeast Asia remain down more than 10% in U.S. dollar terms year-to-date.

Market dislocations allowed us to invest in high conviction companies at what we believe are compelling valuations as we built the portfolio. We believe constructing an emerging markets portfolio designed for sustainable growth requires identifying companies that have higher growth metrics, as well as higher quality metrics, than the broader market. Good companies worldwide share common traits. They require a strong competitive position and the ability to allocate capital well. We tend to focus on companies that can serve the needs of domestic consumer within their markets, although we may invest in commodities and companies that serve a global marketplace. We also tend to look for companies that can withstand economic cycles. In addition, the Fund’s portfolio management team takes an all-cap approach, believing that smaller cap companies may offer attractive potential for generating alpha.

Contributors and Detractors:

The Fund outperformed its benchmark since its inception on April 30, 2020 through June 30, 2020 driven by strong stock selection. During the reporting period, our largest positive attribution came from China/HK, followed by Brazil and Russia.

From a sector standpoint, consumer staples and discretionary sectors were contributors to absolute performance but slight detractors from relative performance.

(continued)

 

 

1

Prospectus expense ratios.

2

Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90% first by waiving class specific expenses (i.e., shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses (e.g., custody fees) of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 0.90% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 0.90%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the lesser of (i) the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or (ii) the expense limitation in effect at the time of recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

3

The Fund commenced operations on April 30, 2020.

 

6    MATTHEWS ASIA FUNDS


Table of Contents
     
PERFORMANCE AS OF JUNE 30, 2020              
 

 

   Actual Return, Not Annualized  
     Since
Inception
     Inception
Date
 
Investor Class (MEGMX)      16.70%        4/30/20  
Institutional Class (MIEFX)      16.70%        4/30/20  
MSCI Emerging Markets Index4      8.25%     

 

  4

It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 90 for index definition.

 

       
TOP TEN HOLDINGS5                     
     Sector      Country      % of Net Assets  
Alibaba Group Holding, Ltd.    Consumer Discretionary      China/Hong Kong        6.8%  
Taiwan Semiconductor Manufacturing Co., Ltd.    Information Technology      Taiwan        4.6%  
Tencent Holdings, Ltd.    Communication Services      China/Hong Kong        4.3%  
Samsung Electronics Co., Ltd., Pfd.    Information Technology      South Korea        3.6%  
AIA Group, Ltd.    Financials      China/Hong Kong        3.3%  
Wuxi Biologics Cayman, Inc.    Health Care      China/Hong Kong        2.2%  
LVMH Moet Hennessy Louis Vuitton SE    Consumer Discretionary      France        2.2%  
NAVER Corp.    Communication Services      South Korea        2.2%  
Kotak Mahindra Bank, Ltd.    Financials      India        2.2%  
Banco BTG Pactual SA    Financials      Brazil        2.2%  
Total                33.6%  

 

  5

Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
 
COUNTRY ALLOCATION (%)6,7  
China/Hong Kong     32.2  
South Korea     9.9  
India     7.7  
Brazil     7.1  
Russia     7.0  
Taiwan     5.9  
Mexico     3.9  
France     3.8  
Singapore     3.1  
Philippines     3.0  
Poland     2.0  
United Kingdom     1.7  
Indonesia     1.6  
Argentina     1.6  
United States     1.3  
Canada     1.1  
Vietnam     1.0  

 

 
SECTOR ALLOCATION (%)7  
Information Technology     17.5  
Consumer Discretionary     15.0  
Financials     13.9  
Communication Services     13.5  
Health Care     9.0  
Consumer Staples     8.8  
Energy     5.9  
Materials     3.7  
Real Estate     3.4  
Industrials     3.2  
Cash and Other Assets, Less Lliabilities     6.1  
Total     100.0  

 

 
MARKET CAP EXPOSURE (%)7  
Mega Cap (over $25B)     49.4  
Large Cap ($10B–$25B)     18.6  
Mid Cap ($3B–$10B)     17.7  
Small Cap (under $3B)     8.2  
Cash and Other Assets, Less Lliabilities     6.1  
Total     100.0  

 

6

Not all countries where the Fund may invest are included in the benchmark index.

 

7

Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.

Matthews Emerging Markets Equity Fund

Portfolio Manager Commentary  (unaudited) (continued)

However, this was more than offset by very strong relative attribution in other consumer facing sectors like communication services, where our holdings tend to be concentrated in media and entertainment. The Fund takes a holistic approach to considering consumer behavior and increasingly digitally driven behavior. Companies that do similar things can often be classified differently. Alibaba and Sea Ltd, for example, are both e-commerce companies yet one is classified as consumer discretionary and the other as communication services. We focus less on classifications and more on how and where companies make money. Our holdings are the natural outcome of our bottom-up stock selection process.

Notable Portfolio Changes:

The Fund added to its overweight in software over the reporting period by increasing position sizes in existing holdings and starting a position in Livechat, a Polish software company. Health care has been an increasing focus for the Fund, and we currently maintain seven positions in the sector—three in China/HK, one in South Korea, one in India, one in Brazil and a company listed in the U.S. whose largest market is China. While we are (or have been) cautious in the financials sector, we have increased our exposure during the reporting period.

Outlook:

Media coverage of the ongoing health pandemic of COVID-19 has been intense. Very few people alive have lived through something similar, and the scope of every economy being impacted is without recent precedent. All companies, too, have been impacted. For some, this has been an acceleration of trends that were in place and the pandemic appears to have improved their long term business prospects. For others, the pandemic has decreased line of sight on strategy or end demand. It is far too early to predict with certainty the near-term or long term impacts of a global event like the one we’re all living through.

Experiences both at the company and country level have been highly heterodox. In China, the disease hit before the economic lockdown and we’re seeing some green shoots. In much of emerging markets, the lockdown hit before the disease. Some, like South Korea, appear to have managed the pandemic well. Others, like Brazil, are still seeing increases in cases. Similarly, fiscal budgets and monetary responses have varying amounts of firepower across emerging markets. Many of the EM geographies are quite constrained versus the G3 (U.S., Europe, and Japan) in terms of the fiscal or monetary expansions that they can proffer without detrimental impact to currencies or local market conditions. Political tensions, too, remain elevated. China’s relationship with the U.S. is a focus for many investors, as is China’s engagement with other emerging markets geographies like India.

We do not pretend to have more clarity on such macro events. For the Matthews Emerging Markets Equity Fund, our philosophy starts at the company level and we believe the attributes of great companies are similar across geographies. The heightened uncertainty of the pandemic has accentuated our focus on quality balance sheets and business model. We remain cautious on banks in a world of low rates and loose government balance sheets. History has often shown that the best time to pick up great assets may be in times of great stress. While we are very concerned about the global pandemic and its social and economic impacts, we are optimistic about the long-term prospects of our holdings.

 

 

8    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Emerging Markets Equity Fund

June 30, 2020

Schedule of Investmentsa (unaudited)

COMMON EQUITIES: 90.3%

 

     Shares     Value  
   
CHINA/HONG KONG: 32.2%    

Alibaba Group Holding, Ltd. ADRb

    2,900       $625,530  

Tencent Holdings, Ltd.

    6,200       397,283  

AIA Group, Ltd.

    32,600       305,058  

Wuxi Biologics Cayman, Inc.b,c,d

    11,000       201,912  

Midea Group Co., Ltd. A Shares

    21,400       181,421  

Bilibili, Inc. ADRb

    3,600       166,752  

Wuliangye Yibin Co., Ltd. A Shares

    6,100       148,284  

Yum China Holdings, Inc.

    3,000       144,210  

Techtronic Industries Co., Ltd.

    13,500       133,576  

Ping An Insurance Group Co. of China, Ltd. A Shares

    12,800       129,612  

Anhui Conch Cement Co., Ltd. A Shares

    16,500       124,172  

China East Education Holdings, Ltd.c,d

    62,500       113,613  

Shandong Weigao Group Medical Polymer Co., Ltd. H Shares

    44,000       98,245  

Lepu Medical Technology Beijing Co., Ltd. A Shares

    18,500       95,630  

China International Capital Corp., Ltd. H Sharesb,c,d

    46,800       92,596  
   

 

 

 

Total China/Hong Kong

      2,957,894  
   

 

 

 
   
     
INDIA: 7.7%    

Kotak Mahindra Bank, Ltd.

    11,004       198,622  

Reliance Industries, Ltd.

    7,368       167,596  

Colgate-Palmolive India, Ltd.

    6,830       127,407  

HDFC Bank, Ltd. ADR

    2,400       109,104  

Dr. Reddy’s Laboratories, Ltd. ADR

    2,000       106,020  
   

 

 

 

Total India

      708,749  
   

 

 

 
   
     
BRAZIL: 7.1%    

Banco BTG Pactual SA

    11,400       160,368  

Pagseguro Digital, Ltd. Class Ab

    4,200       148,428  

Vale SA ADR

    11,200       115,472  

Hapvida Participacoes e Investimentos SAc,d

    8,500       98,316  

Raia Drogasil SA

    4,600       94,451  

Banco BTG Pactual SAb

    2,700       37,982  
   

 

 

 

Total Brazil

      655,017  
   

 

 

 
   
     
RUSSIA: 7.0%    

LUKOIL PJSC ADR

    2,556       189,998  

Novatek PJSC GDRd

    1,310       185,683  

Yandex N.V. Class Ab

    3,100       155,062  

Mail.Ru Group, Ltd. GDRb,d

    5,058       114,091  
   

 

 

 

Total Russia

      644,834  
   

 

 

 
   
     
SOUTH KOREA: 6.2%    

NAVER Corp.

    888       199,785  

LG Household & Health Care, Ltd.

    150       168,122  

Hugel, Inc.b

    271       106,668  

Macquarie Korea Infrastructure Fund

    10,283       97,774  
   

 

 

 

Total South Korea

      572,349  
   

 

 

 
   
     
TAIWAN: 5.9%    

Taiwan Semiconductor Manufacturing Co., Ltd. ADR

    7,400       420,098  

Advantech Co., Ltd.

    12,000       120,765  
   

 

 

 

Total Taiwan

      540,863  
   

 

 

 
   
     Shares     Value  
   
MEXICO: 3.9%    

Prologis Property Mexico SA de CV, REIT

    77,300       $138,259  

Fomento Economico Mexicano SAB de CV ADR

    1,900       117,819  

America Movil SAB de CV ADR

    7,900       100,251  
   

 

 

 

Total Mexico

      356,329  
   

 

 

 
   
     
FRANCE: 3.8%    

LVMH Moet Hennessy Louis Vuitton SE

    455       200,880  

Pernod Ricard SA

    956       150,537  
   

 

 

 

Total France

      351,417  
   

 

 

 
   
     
SINGAPORE: 3.1%    

CapitaLand, Ltd.b

    82,300       173,871  

Sea, Ltd. ADRb

    1,000       107,240  
   

 

 

 

Total Singapore

      281,111  
   

 

 

 
   
     
PHILIPPINES: 3.0%    

Ayala Corp.

    10,070       158,064  

Wilcon Depot, Inc.

    373,600       116,083  
   

 

 

 

Total Philippines

      274,147  
   

 

 

 
   
     
POLAND: 2.0%    

LiveChat Software SA

    11,545       186,318  
   

 

 

 

Total Poland

      186,318  
   

 

 

 
   
     
UNITED KINGDOM: 1.8%    

Avast PLCc,d

    24,354       159,174  
   

 

 

 

Total United Kingdom

      159,174  
   

 

 

 
   
     
ARGENTINA: 1.6%    

Globant SAb

    1,000       149,850  
   

 

 

 

Total Argentina

      149,850  
   

 

 

 
   
     
INDONESIA: 1.6%    

PT Bank Rakyat Indonesia Persero

    690,600       147,404  
   

 

 

 

Total Indonesia

      147,404  
   

 

 

 
   
     
UNITED STATES: 1.3%    

STAAR Surgical Co.b

    1,900       116,926  
   

 

 

 

Total United States

      116,926  
   

 

 

 
   
     
ZAMBIA: 1.1%    

First Quantum Minerals, Ltd.

    12,500       99,624  
   

 

 

 

Total Zambia

      99,624  
   

 

 

 
   
     
VIETNAM: 1.0%    

FPT Corp.

    46,044       91,213  
   

 

 

 

Total Vietnam

      91,213  
   

 

 

 
   
     
TOTAL COMMON EQUITIES       8,293,219  
   

 

 

 

(Cost $7,327,711)

   
 

 

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Table of Contents

Matthews Emerging Markets Equity Fund

June 30, 2020

Schedule of Investmentsa (unaudited) (continued)

PREFERRED EQUITIES: 3.6%

 

     Shares     Value  
   
SOUTH KOREA: 3.6%

 

 

Samsung Electronics Co., Ltd., Pfd.

    8,594       $334,773  
   

 

 

 

Total South Korea

 

    334,773  
   

 

 

 
   
   
TOTAL PREFERRED EQUITIES

 

    334,773  
   

 

 

 

(Cost $306,070)

 

 
   
   
TOTAL INVESTMENTS: 93.9%

 

    8,627,992  

(Cost $7,633,781)

 

 
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 6.1%

 

    556,390  
   

 

 

 

NET ASSETS: 100.0%

 

    $9,184,382  
   

 

 

 

 

a

Certain securities were fair valued under the valuation policies approved by the Board of Trustees (Note 2-A).

 

b

Non-income producing security.

 

c

Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. The security may be resold in transactions exempt from registration normally to qualified institutional buyers. The security has been determined to be liquid in accordance with procedures adopted by the Funds’ Board of Trustees. At June 30, 2020, the aggregate value is $665,611, which is 7.25% of net assets.

 

d

The securities may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the Securities Act of 1933.

 

ADR

American Depositary Receipt

 

GDR

Global Depositary Receipt

 

Pfd.

Preferred

 

REIT

Real Estate Investment Trust

See accompanying notes to financial statements.

    

 

 

10    MATTHEWS ASIA FUNDS


Table of Contents

 

LOGO

 

PORTFOLIO MANAGERS
Teresa Kong, CFA  

Lead Manager

 
Satya Patel   Wei Zhang

Co-Manager

 

Co-Manager

FUND FACTS
    Investor   Institutional

Ticker

  MAINX   MINCX

CUSIP

  577125503   577125602

Inception

  11/30/11   11/30/11

NAV

  $10.54   $10.54

Initial Investment

  $2,500   $100,000

Gross Expense Ratio1

  1.08%   0.97%

After Fee Waiver and Reimbursement2

  1.07%   0.90%

Portfolio Statistics

   

Total # of Positions

  41           

Net Assets

  $102.1
million
 
                

Modified Duration3

  5.0           

Portfolio Turnover4

  84.38%                   

Benchmark

 
50% Markit iBoxx Asian Local Bond Index, 50% J.P. Morgan Asia Credit Index*

OBJECTIVE

 

 

Total return over the long term with an emphasis on income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in debt and debt-related instruments issued by governments, quasi-governmental entities, supra-national institutions, and companies in Asia. Asia consists of all countries and markets in Asia, such as China and India, and includes developed, emerging, and frontier countries and markets in the Asian region. The Fund’s investments in debt securities may be denominated in any currency, may be of any quality or may be unrated, and may have no stated maturity or duration target.

Matthews Asia Total Return Bond Fund

Portfolio Manager Commentary  (unaudited)

For the first half of 2020, the Matthews Asia Total Return Bond Fund returned –3.65% (Investor Class) and –3.55% (Institutional Class) while its benchmark, the 50% Markit iBoxx Asian Local Bond Index/50% J.P. Morgan Asia Credit Index (JACI), returned 1.87%. For the quarter ending June 30, 2020, the Fund returned 10.32% (Investor Class) and 10.39% (Institutional Class) compared to the benchmark return of 5.75%.

Market Environment:

Just as the recovery from Covid-19 has been uneven globally, the recovery in markets has also been uneven. For some asset classes, it’s as if the virus never happened, posting positive gains for the year. These are generally the less risky parts of the market, such as developed market government bonds, investment grade corporates and gold. The riskier parts of the market have also rebounded from March lows but given the lingering uncertainty to economic activity and corporate fundamentals due to the coronavirus, these markets still faced losses year to date.

For Asia fixed income, this means that investment-grade corporates and rates performed the best in the first half of the year, followed by high yield. Within credit, issuers from more developed countries such as China have outperformed issuers from emerging countries such as Indonesia and India. Within Asian currencies, the most punished in the first quarter rebounded the most in the second quarter, including the Indonesian rupiah and the Thai baht.

Global central banks continue to provide ample liquidity, which we believe undergirds a lot of the markets’ return to normalcy. The U.S. Federal Reserve continues to signal it will do “whatever it takes” to remain accommodative and to support the smooth functioning of financial markets. Meanwhile, the European Central Bank increased the size of its bond buying program by 600 billion euros in June. Many Asian countries are also in the enviable position of having ample fiscal flexibility to boost spending. For instance, Thailand and Singapore have already started disbursing fiscal stimulus packages.

We also see increased experimentation with support from emerging markets central banks. For instance, the Indonesian central bank has announced a program to buy government bonds in both the primary and secondary markets. For now, it looks like the Indonesian central bank’s goal is to act as a buyer of last resort and cap government bond yields, rather than monetizing the debt. As such, this alleviates pressure on the government without debasing the currency. However, we are watching carefully as emerging market countries tread the narrow path between fiscal prudence to provide the needed social support for a health crisis and fiscal largess that could lead to a financial crisis.

Performance Contributors and Detractors:

A key driver of positive performance was the Fund’s exposure to U.S. dollar high yield issuers, which recouped much of their first quarter losses. In general, lower-rated bonds outperformed higher-rated bonds. The top contributors were our positions in Chinese property developer Dalian Wanda, Tata Steel, a top three global steel producer, and Bharti Airtel, one the three largest wireless companies in India. These large blue chip companies recovered most quickly as their probability of survival, even in a protracted economic downturn, is materially higher than their peers. Top detractors were Modernland Reality, Franshion Brilliant and Sino-Ocean. As a real estate developer in Indonesia, Modernland faced both a revenue shortfall as well as potential liquidity issues due to the economic lockdown in response to Covid-19. Both Franshion Brilliant and Sino-Ocean are fundamentally sound, with their long-dated perpetual bonds slower to recover than their shorter dated ones.

(continued)

 

The Fund’s name changed from Matthews Asia Strategic Income Fund to Matthews Asia Total Return Bond Fund on January 31, 2020.

*

Effective January 31, 2020, the Fund changed its benchmark to a blended benchmark comprised of 50% Markit iBoxx Asian Local Bond Index and 50% J.P. Morgan Asia Credit Index. Prior to January 31, 2020, the Fund’s benchmark was the Markit iBoxx Asian Local Bond Index. Matthews believes that the blended benchmark is more appropriate in light of the Fund’s current investment strategy. The Markit iBoxx Local Bond Index performance reflects the returns of the discontinued predecessor HSBC Asia Local Bond Index up to December 31, 2012 and the returns of the successor Markit iBoxx Local Bond Index thereafter.

1

Prospectus expense ratios.

2

Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90% first by waiving class specific expenses (i.e., shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses (e.g. custody fees) of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 0.90% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 0.90%. Pursuant to this agreement, any amount waived for prior fiscal years with respect to the Fund is not subject to recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

3

Modified duration measures the percent change in value of the fixed income portion of the portfolio in response to a 1% change in interest rates. In a multi-currency denominated portfolio with sensitivities to different interest rate regimes, modified duration will not accurately reflect the change in value of the overall portfolio from a change in any one interest rate regime.

4

The lesser of fiscal year 2019 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

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Table of Contents
               
PERFORMANCE AS OF JUNE 30, 2020                                               
 

 

   

 

     

 

     Average Annual Total Returns       

 

 
    3 Months     YTD      1 Year      3 Years      5 Years      Since
Inception
     Inception
Date
 
Investor Class (MAINX)     10.32%       -3.65%        0.45%        2.64%        4.26%        4.22%        11/30/11  
Institutional Class (MINCX)     10.39%       -3.55%        0.51%        2.88%        4.51%        4.44%        11/30/11  
50% Markit iBoxx Asian Local Bond Index, 50% J.P. Morgan Asia Credit Index5     5.75%       1.87%        5.22%        4.79%        4.77%        4.36%     

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived. For the Fund’s most recent month-end performance visit matthewsasia.com.

 

 
INCOME DISTRIBUTION HISTORY  
    2020

 

          2019

 

 
 

Jan.

   

Feb.

    Mar.     Apr.     May     June     July     Aug.     Sept.     Oct.    

Nov.

   

Dec.

   

Total

          Q1     Q2     Q3     Q4     Total  
Investor (MAINX)     n.a.     $ 0.06     $ 0.04     $ 0.00     $ 0.03     $ 0.04       n.a.       n.a.       n.a.       n.a.       n.a.       n.a.     $ 0.17       $ 0.08     $ 0.10     $ 0.14     $ 0.12     $ 0.44  
Inst’l (MINCX)     n.a.     $ 0.07     $ 0.04     $ 0.01     $ 0.03     $ 0.04       n.a.       n.a.       n.a.       n.a.       n.a.       n.a.     $ 0.19       $ 0.09     $ 0.11     $ 0.14     $ 0.12     $ 0.46  

Note: This table does not include capital gains distributions. Totals may differ by $0.02 due to rounding. For income distribution history, visit matthewsasia.com.

 

   

30-DAY YIELD:

 

Investor Class: 5.65% (5.63% excluding waivers)

Institutional Class: 5.89% (5.80% excluding waivers)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 6/30/20, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

YIELD TO WORST: 6.24%

 

Yield to worst is the lowest yield that can be received on a bond assuming that the issuer does not default. It is calculated by utilizing the worst case assumptions for a bond with respect to certain income-reducing factors, including prepayment, call or sinking fund provisions. It does not represent the yield that an investor should expect to receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems

 

 

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  5

It is not possible to invest directly in an index. Source: Index data from HSBC, Markit iBoxx and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 90 for index definitions. Effective January 31, 2020, the Fund changed its benchmark to a blended benchmark comprised of 50% Markit iBoxx Asian Local Bond Index and 50% J.P. Morgan Asia Credit Index. Prior to January 31, 2020, the Fund’s benchmark was the Markit iBoxx Asian Local Bond Index. Matthews believes that the blended benchmark is more appropriate in light of the Fund’s current investment strategy. The Markit iBoxx Asian Local Bond Index performance reflects the returns of the discontinued predecessor HSBC Asian Local Bond Index up to December 31, 2012 and the returns of the successor Markit iBoxx Asian Local Bond Index thereafter.

 

       
TOP TEN HOLDINGS                     
     Sector      Currency      % of Net Assets  
Wanda Properties International Co., Ltd., 7.250%, 01/29/2024    Real Estate      U.S. Dollar        4.9%  
Network i2i, Ltd., 5.650%, 04/15/2068    Communication Services      U.S. Dollar        4.7%  
Viet Nam Debt & Asset Trading Corp., 1.000%, 10/10/2025    Financials      U.S. Dollar        4.6%  
CIFI Holdings Group Co., Ltd., 6.550%, 03/28/2024    Real Estate      U.S. Dollar        4.5%  
Luye Pharma Group, Ltd., Cnv., 1.500%, 07/09/2024    Health Care      U.S. Dollar        4.4%  
PB International BV, 7.625%, 01/26/2022    Consumer Discretionary      U.S. Dollar        4.4%  
Bosideng International Holdings, Ltd., Cnv., 1.000%, 12/17/2024    Consumer Discretionary      U.S. Dollar        4.1%  
ABJA Investment Co. Pte, Ltd., 5.450%, 01/24/2028    Materials      U.S. Dollar        4.0%  
Logan Group Co., Ltd., 5.250%, 02/23/2023    Real Estate      U.S. Dollar        3.8%  
Malaysia Government Bond, 4.642%, 11/07/2033    Foreign Government Bonds      Malaysian Ringgit        3.4%  
% OF ASSETS IN TOP TEN                42.8%  

 

12    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Total Return Bond Fund

Portfolio Manager Commentary  (unaudited) (continued)

Local currency bond exposures also added to performance as most Asian currencies appreciated relative to the U.S. dollar, and interest rates across Asia fell in the quarter. Relative to our benchmark, overweights to Indonesia, Malaysia and Thailand were the top rate contributors while underweights to the Philippines and Singapore detracted, even though these positions still posted positive total returns. Our exposure to local currency-denominated bonds of Indonesia contributed most in our local currency positions as the rupiah was one of the best performing currencies globally, appreciating 14% in the second quarter.

Notable Portfolio Changes:

During the second quarter, we exited our position in Sri Lanka sovereign bonds. We believe these bonds have limited upside after the pandemic-driven sell-off. We expect developing countries across the world to seek external assistance in the coming quarters and think that will weigh on performance in Sri Lanka. We also exited Chinese auto manufacture Geely perpetual bonds, and Huaneng, a state owned Chinese utility company. Both of these bonds carry investment-grade level risk and had reached our price targets after the pandemic-induced sell-off. We decided to take profit and re-deploy into bonds with more upside. Finally, we exited the bonds of Modernland Realty as the company seemed less willing and able to refinance its maturities.

In the second quarter, we initiated new positions in a handful of high-quality bonds where we see the potential for upside. These include the bonds of JD.com, a Chinese e-commerce company, and Sygenta, a global chemicals company headquartered in Switzerland and wholly owned by ChemChina, a state owned enterprise.

In terms of currencies, we slightly reduced our overweight to the Indonesian rupiah after its strong performance in the quarter via a currency hedge.

Outlook:

We expect the Asia credit, currency and interest rate markets to continue to be driven by policy makers’ response to the coronavirus in the coming quarters. Countries that have been the most effective in stopping the spread of the coronavirus have also had the fastest economic rebounds. Given this view, we remain most concerned about the spread of coronavirus in the U.S. and emerging market countries. While the U.S. remains behind the curve in terms of curtailing the spread of the coronavirus, it has been ahead of the curve in terms of stimulus, which has been supportive for its asset prices. Emerging markets are in a tough spot since many countries lack the resources to control the virus as well as the monetary and fiscal space to stimulate their markets.

Our strategy is to hold issuers that we believe have the best fundamentals to survive the coronavirus and its related economic challenges. Taken altogether, we believe Asia to be well positioned in this crisis, given their early control of the virus and space for economic stimulus. We continue to be overweight to Asia high yield, especially to credits which have a positive skew in price. In terms of Asia currencies, we have positioned the portfolio to be slightly long U.S. dollar given our expectations of continued volatility which still favors safe haven currencies such as the U.S. dollar. Among rates, we continue to be overweight countries like Thailand, Malaysia and Indonesia where we think rates are stable and provide attractive carry. Our biggest overweight in interest rates remains in the U.S., where the U.S. Fed has effectively signaled structurally lower rates for the coming quarters to buoy the markets. As the market recovers, we expect the credit spread compression to more than compensate for a mild rise and steepening of the U.S. yield curve.

 
CURRENCY ALLOCATION (%)6,7  
US Dollar     53.5  

South Korean Won

    9.7  

China Renminbi

    7.0  

Thailand Baht

    5.9  

Malaysian Ringgit

    5.8  

Singapore Dollar

    5.7  

Indonesian Rupiah

    5.5  
Philippines Peso     4.2  

China Renminbi Offshore

    2.7  

Total

    100.0  

 

 
COUNTRY ALLOCATION (%)6,7,8  
China/Hong Kong     48.8  
Indonesia     13.8  
India     11.1  
Philippines     6.7  
Malaysia     5.6  
Vietnam     4.6  
Switzerland     3.1  
Thailand     2.4  
Cash and Other Assets, Less Liabilities     4.0  
Total     100.1  

 

 
SECTOR ALLOCATION (%)6,7  
Real Estate     24.1  
Foreign Government Bonds     18.7  

Consumer Discretionary

    14.2  

Financials

    14.0  

Communication Services

    8.7  
Materials     7.1  

Health Care

    4.4  

Energy

    3.9  
Industrials     1.0  
Cash and Other Assets, Less Liabilities     4.0  
Total     100.1  

Please note: Foreign Government Bonds category includes Supranationals.

 

 
ASSET TYPE BREAKDOWN (%)6,7  
Non-Convertible Corporate Bonds     61.3  

Government Bonds

    23.3  

Convertible Corporate Bonds

    11.5  

Cash and Other Assets, Less Liabilities

    4.0  

 

6

Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.

 

7

Cash and other assets may include forward currency exchange contracts and certain derivative instruments that have been marked-to-market.

 

8

Not all countries where the Fund may invest are included in the benchmark index.

 

 

matthewsasia.com  |   800.789.ASIA      13  


Table of Contents

Matthews Asia Total Return Bond Fund

June 30, 2020

Schedule of Investmentsa (unaudited)

NON-CONVERTIBLE CORPORATE BONDS: 61.3%

 

     Face Amount*     Value  
   
CHINA/HONG KONG: 37.2%

 

Wanda Properties International Co., Ltd.
7.250%, 01/29/24b

    5,300,000       $4,975,375  

CIFI Holdings Group Co., Ltd.
6.550%, 03/28/24b

    4,500,000       4,611,977  

Logan Group Co., Ltd.
5.250%, 02/23/23b

    3,900,000       3,870,521  

KWG Group Holdings, Ltd.
5.875%, 11/10/24b

    3,400,000       3,238,003  

King Talent Management, Ltd.
5.600%c, 12/04/22b,d

    3,500,000       3,011,641  

Franshion Brilliant, Ltd.
5.750%c, 01/17/22b,d

    3,400,000       2,928,420  

JD.com, Inc.
4.125%, 01/14/50

    2,200,000       2,327,291  

KWG Group Holdings, Ltd.
7.875%, 09/01/23b

    2,050,000       2,121,724  

HSBC Holdings PLC
6.375%c, 03/30/25d

    2,000,000       2,053,760  

CIFI Holdings Group Co., Ltd.
7.750%, 09/20/20b

    CNY 12,000,000       1,715,963  

CITIC Telecom International Finance, Ltd.
6.100%, 03/05/25b

    1,631,000       1,687,784  

China Cinda Asset Management Co., Ltd.
5.500%, 03/14/28

    CNY 10,000,000       1,555,585  

Agricultural Bank of China, Ltd.
4.300%, 04/11/29b

    CNY 10,000,000       1,445,405  

Sino-Ocean Land Treasure III, Ltd.
4.900%c, 09/21/22b,d

    1,400,000       1,162,658  

Honghua Group, Ltd.
6.375%, 08/01/22b

    1,100,000       1,075,208  

Deutsche Bank AG
3.670%c, 04/10/25b,e

    CNY 2,000,000       256,695  
   

 

 

 

Total China/Hong Kong

      38,038,010  
   

 

 

 
   
 
INDIA: 11.1%

 

Network i2i, Ltd.
5.650%c, 01/15/25d,f

    5,000,000       4,840,000  

ABJA Investment Co. Pte, Ltd.
5.450%, 01/24/28b

    4,440,000       4,098,079  

ICICI Bank UK PLC
5.375%c, 09/26/28b

    SGD 1,750,000       1,248,219  

Network i2i, Ltd.
5.650%c, 01/15/25b,d

    1,200,000       1,161,600  
   

 

 

 

Total India

      11,347,898  
   

 

 

 
   
 
INDONESIA: 7.3%

 

PB International BV
7.625%, 01/26/22b

    5,100,000       4,475,154  

Indika Energy Capital III Pte, Ltd.
5.875%, 11/09/24b

    3,300,000       2,938,487  
   

 

 

 

Total Indonesia

      7,413,641  
   

 

 

 
   
 
SWITZERLAND: 3.1%

 

Syngenta Finance N.V.
5.182%, 04/24/28b

    2,400,000       2,560,072  

Syngenta Finance N.V.
4.892%, 04/24/25f

    300,000       315,394  

Syngenta Finance N.V.
5.676%, 04/24/48b

    300,000       303,709  
   

 

 

 

Total Switzerland

      3,179,175  
   

 

 

 
     Face Amount*     Value  
   
PHILIPPINES: 2.6%

 

Jollibee Worldwide Pte, Ltd.
3.900%c, 01/23/25b,d

    1,729,000       $1,613,157  

Royal Capital BV
4.875%c, 05/05/24b,d

    1,041,000       1,014,975  
   

 

 

 

Total Philippines

      2,628,132  
   

 

 

 
   
   
TOTAL NON-CONVERTIBLE CORPORATE BONDS

 

    62,606,856  
   

 

 

 

(Cost $63,336,665)

   
   

FOREIGN GOVERNMENT OBLIGATIONS: 23.2%

 

 
 
INDONESIA: 6.5%

 

Indonesia Government Bond
9.000%, 03/15/29

    IDR 38,000,000,000       2,945,299  

Indonesia Government Bond
8.250%, 05/15/29

    IDR 34,550,000,000       2,574,138  

Indonesia Government Bond
8.375%, 04/15/39

    IDR 15,000,000,000       1,102,660  
   

 

 

 

Total Indonesia

      6,622,097  
   

 

 

 
   
 
MALAYSIA: 5.6%

 

Malaysia Government Bond
4.642%, 11/07/33

    MYR 13,000,000       3,454,790  

Malaysia Government Bond
3.478%, 06/14/24

    MYR 4,800,000       1,163,717  

Malaysia Government Investment Issue
4.119%, 11/30/34

    MYR 4,500,000       1,131,887  
   

 

 

 

Total Malaysia

      5,750,394  
   

 

 

 
   
 
VIETNAM: 4.6%

 

Viet Nam Debt & Asset Trading Corp.
1.000%, 10/10/25b

    6,219,000       4,726,440  
   

 

 

 

Total Vietnam

      4,726,440  
   

 

 

 
   
 
PHILIPPINES: 4.1%

 

Republic of Philippines
3.900%, 11/26/22

    PHP 123,000,000       2,493,778  

Republic of Philippines
6.250%, 01/14/36

    PHP 70,000,000       1,731,945  
   

 

 

 

Total Philippines

      4,225,723  
   

 

 

 
   
 
THAILAND: 2.4%

 

Thailand Government Bond
1.600%, 12/17/29

    THB 72,000,000       2,411,962  
   

 

 

 

Total Thailand

      2,411,962  
   

 

 

 
   
   
TOTAL FOREIGN GOVERNMENT OBLIGATIONS

 

    23,736,616  
   

 

 

 

(Cost $22,877,543)

   
   
 

 

14    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Total Return Bond Fund

June 30, 2020

Schedule of Investmentsa (unaudited) (continued)

CONVERTIBLE CORPORATE BONDS: 11.5%

 

     Face Amount*     Value  
   
CHINA/HONG KONG: 11.5%

 

Luye Pharma Group, Ltd., Cnv.
1.500%, 07/09/24b

    4,700,000       $4,478,395  

Bosideng International Holdings, Ltd., Cnv.

   

1.000%, 12/17/24b

    5,000,000       4,225,000  

Baozun, Inc., Cnv.
1.625%, 05/01/24

    1,900,000       1,832,096  

Weibo Corp., Cnv.
1.250%, 11/15/22

    1,268,000       1,179,171  
   

 

 

 

Total China/Hong Kong

 

    11,714,662  
   

 

 

 
   
   
TOTAL CONVERTIBLE CORPORATE BONDS

 

    11,714,662  
   

 

 

 

(Cost $12,519,515)

   
   
   
TOTAL INVESTMENTS: 96.0%

 

    98,058,134  

(Cost $98,733,723)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 4.0%

 

    4,047,106  
   

 

 

 

NET ASSETS: 100.0%

 

    $102,105,240  
   

 

 

 
a

Certain securities were fair valued under the valuation policies approved by the Board of Trustees (Note 2-A).

 

b

The securities may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the Securities Act of 1933.

 

c

Security is a fix-to-float security, which carries a fixed coupon until a certain date, upon which it switches to a floating rate. Reference rate and spread are provided if the rate is currently floating.

 

d

Perpetual security with no stated maturity date. First call date is disclosed.

 

e

Security is valued using significant unobservable inputs and is classified as Level 3 in the fair value hierarchy. The aggregate value of Level 3 security is $256,695 and 0.25% of net assets.

 

f

Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. The security may be resold in transactions exempt from registration normally to qualified institutional buyers. The security has been determined to be liquid in accordance with procedures adopted by the Funds’ Board of Trustees. At June 30, 2020, the aggregate value is $5,155,394, which is 5.05% of net assets.

 

*

All Values in USD unless otherwise specified

 

3M MYR-KLIBOR

Three Month Kuala Lumpur Interbank Offered Rate

 

6M THB-THBFIX

Six Month Thai Baht Interest Rate Fixing

 

Cnv.

Convertible

 

 

CNY

Chinese Renminbi (Yuan)

 

IDR

Indonesian Rupiah

 

KRW

Korean Won

 

MYR

Malaysian Ringgit

 

OTC

Over-the-counter

 

PHP

Philippine Peso

 

SGD

Singapore Dollar

 

THB

Thai Baht

 

USD

U.S. Dollar

 

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

 

Currency
Purchased
     Currency Sold        Counterparty   Settlement
Date
       Unrealized
Appreciation
(Depreciation)
 
CNY 14,368,260        USD 2,020,000       

Bank of America, N.A.

    09/21/20          $3,528  
                

 

 

 
USD 1,000,000        IDR 16,495,000,000       

Bank of America, N.A.

    07/09/20          (147,259
KRW 5,270,220,000        USD 4,600,000       

JPMorgan Chase & Co.

    07/16/20          (211,777
THB 90,630,000        USD 3,000,000       

Bank of America, N.A.

    07/21/20          (67,895
KRW 6,677,976,000        USD 5,756,876       

Bank of America, N.A.

    07/29/20          (189,494
SGD 6,374,892        USD 4,700,000       

Bank of America, N.A.

    07/30/20          (125,299
CNY 19,250,000        USD 2,750,000       

Bank of America, N.A.

    08/04/20          (32,550
                

 

 

 
                   (774,274
                

 

 

 
Net Unrealized Depreciation

 

              ($770,746
                

 

 

 

OTC INTEREST RATE SWAPS*

 

Floating Rate
Paid by Fund

 

Fixed Rate

Received by Fund

 

     Counterparty

 

Termination

Date

    Notional
Amount (000)
   

Value

   

Upfront
Premium
Paid

(Received)

   

Unrealized

Appreciation

 
Rate   Frequency   Rate   Frequency

3M MYR-KLIBOR, 2.280%

  Quarterly   3.300%  

Quarterly

  Bank of America, N.A.     06/19/2024       MYR 13,000     $ 143,964           $ 143,964  

6M THB-THBFIX, 0.526%

  Semi-annual   1.610%  

Semi-annual

  Bank of America, N.A.     06/21/2024       THB 281,000       324,763             324,763  

6M THB-THBFIX, 0.914%

  Semi-annual   1.265%  

Semi-annual

  Bank of America, N.A.     09/04/2024       THB 210,000       160,092             160,092  
             

 

 

 

Total

              $ 628,819           $ 628,819  
             

 

 

 

 

*

Swaps are not centrally cleared.

See accompanying notes to financial statements.

 

matthewsasia.com  |   800.789.ASIA      15  


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Teresa Kong, CFA   Satya Patel

Lead Manager

 

Lead Manager

FUND FACTS        
    Investor   Institutional

Ticker

  MCRDX   MICPX

CUSIP

  577130677   577130669

Inception

  4/29/16   4/29/16

NAV

  $9.88   $9.88

Initial Investment

  $2,500   $100,000

Gross Expense Ratio1

  1.24%   1.07%

After Fee Waiver and Reimbursement2

  1.12%   0.90%

Portfolio Statistics

 

Total # of Positions

  35

Net Assets

  $92.0 million

Modified Duration3

  3.3

Portfolio Turnover4

  81.08%

Benchmark

   

J.P. Morgan Asia Credit Index

OBJECTIVE

 

 

Total return over the long term.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in debt and debt-related instruments issued by companies as well as governments, quasi-governmental entities, and supra-national institutions in Asia. Debt and debt-related instruments typically include bonds, debentures, bills, securitized instruments (which are vehicles backed by pools of assets such as loans or other receivables), notes, certificates of deposit and other bank obligations, bank loans, senior secured bank debt, convertible debt securities, exchangeable bonds, credit-linked notes, inflation-linked instruments, repurchase agreements, payment-in-kind securities and derivative instruments with fixed income characteristics. Asia consists of all countries and markets in Asia, such as China and Indonesia, in addition to the developed, emerging, and frontier countries and markets in the Asian region.

Matthews Asia Credit Opportunities Fund

Portfolio Manager Commentary  (unaudited)

For the first half of 2020, the Matthews Asia Credit Opportunities Fund returned –4.74 (Investor Class) and –4.62% (Institutional Class) while its benchmark, the J.P. Morgan Asia Credit Index, returned 2.26%. For the quarter ending June 30, the Fund returned 9.15% (Investor Class) and 9.23% (Institutional Class) compared to the benchmark return of 6.08% over the same period.

Market Discussion:

We have now witnessed the end of a credit cycle in Asia after an unusually long run of 11 years. The old adage in credit analysis that “cash is king but liquidity rules” is important in this part of the cycle as credit markets begin their recovery. Differentials in access to liquidity across companies, industries, countries and regions are dictating the recovery for issuers.

For the most credit-worthy issuers, liquidity is ample. In fact, issuance in U.S. investment grade hit all-time highs in the first half. Asian investment grade issuance has also recovered reasonably well in recent months. The combination of central bank buying and investors’ demand for safety means that recovery in the investment grade market has been broad, having a positive spillover to Asia bonds through relative value. Asian investment-grade credit spreads narrowed 40 basis points (0.40%) in the second quarter, after rising by 123 basis points (1.23%) in the first quarter.

For high yield issuers, liquidity is more segmented, leading to an uneven recovery. Issuance within Asian high yield is down significantly year-on-year. Issuers from countries like China and in industries like its domestic property sector have been able to borrow in the international capital markets, albeit at a higher cost than earlier in the year. But other countries across emerging and frontier Asia have yet to see meaningful new high yield issuance from their corporates. The biggest uncertainty in the Asian high yield market is whether companies with imminent maturities will be able to refinance their debt. This has led to some parts of the Asian high yield market to be bifurcated between issuers with no refinancing risk, where spreads have tightened substantially, and issuers with refinancing risk, where spreads have tightened much less or even widened since the first quarter.

Performance Contributors and Detractors:

The primary driver of the Fund’s outperformance during the second quarter has been the portfolio’s exposure to high yield, which outpaced gains in investment grade issuers. In terms of sectors, exposures in basic industry and consumer discretionary were the top contributors. Within these sectors, issuers such as Indika, an Indonesian coal miner, Tata Steel, an Indian steel producer, and PB International, an Indonesia textile manufacturer, were the top contributors. These names had been among the most punished within the portfolio in the first quarter and therefore, had substantial room to rebound.

Amongst the biggest detractors to performance were the perpetual bonds. Within these, China Jinmao and Sino-Ocean perpetual bonds were the top detractors. Perpetual bonds suffered from poor liquidity and wide bid-offer spreads during the crisis and therefore, recovery was much slower in the second quarter due to these liquidity risks. Vietnam Debt and Asset Trading Corporation bonds have been

(continued)

 

 

1

Prospectus expense ratios.

2

Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90% first by waiving class specific expenses (i.e., shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses (e.g., custody fees) of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 0.90% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 0.90%. Pursuant to this agreement, any amount waived for prior fiscal years with respect to the Fund is not subject to recoupment. This agreement will remain in place until April 30, 2021 and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

3

Modified duration measures the percent change in value of the fixed income portion of the portfolio in response to a 1% change in interest rates. In a multi-currency denominated portfolio with sensitivities to different interest rate regimes, modified duration will not accurately reflect the change in value of the overall portfolio from a change in any one interest rate regime.

4

The lesser of fiscal year 2019 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

16    MATTHEWS ASIA FUNDS


Table of Contents
             
PERFORMANCE AS OF JUNE 30, 2020                                          
 

 

    

 

      

 

     Average Annual Total Retuns

 

      

 

 
     3 Months      YTD      1 Year      3 Years     

Since

Inception

    

Inception

Date

 
Investor Class (MCRDX)      9.15%        -4.74%        -1.30%        2.39%        4.13%        4/29/16  
Institutional Class (MICPX)      9.23%        -4.62%        -1.09%        2.65%        4.37%        4/29/16  
J.P. Morgan Asia Credit Index5      6.08%        2.26%        5.39%        4.81%        4.72%     

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 
INCOME DISTRIBUTION HISTORY  
    2020

 

          2019

 

 
 

Jan.

    Feb.     Mar.     Apr.     May     June     July     Aug.     Sept.    

Oct.

   

Nov.

   

Dec.

   

Total

          Q1     Q2     Q3     Q4     Total  
Investor (MCRDX)     n.a.     $ 0.04     $ 0.03     $ 0.04     $ 0.04     $ 0.04       n.a.       n.a.       n.a.       n.a.       n.a.       n.a.     $ 0.18       $ 0.10     $ 0.10     $ 0.13     $ 0.11     $ 0.44  
Inst’l (MICPX)     n.a.     $ 0.04     $ 0.03     $ 0.04     $ 0.04     $ 0.04       n.a.       n.a.       n.a.       n.a.       n.a.       n.a.     $ 0.20       $ 0.10     $ 0.11     $ 0.14     $ 0.11     $ 0.46  

Note: This table does not include capital gains distributions. Totals may differ by $0.02 due to rounding. For income distribution history, visit matthewsasia.com.

 

   

30-DAY YIELD:

 

Investor Class: 6.14% (6.14% excluding waivers)

Institutional Class: 6.38% (6.33% excluding waivers)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 6/30/20, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

YIELD TO WORST: 7.07%

 

Yield to worst is the lowest yield that can be received on a bond assuming that the issuer does not default. It is calculated by utilizing the worst case assumptions for a bond with respect to certain income-reducing factors, including prepayment, call or sinking fund provisions. It does not represent the yield that an investor should expect to receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems

 

 

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions, or redemption of Fund shares. Values are in US$.

 

  5

It is not possible to invest directly in an index. Source: Index data from J.P. Morgan and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 90 for index definition.

 

       
TOP TEN HOLDINGS                     
     Sector      Currency      % of Net Assets  
Network i2i, Ltd., 5.650%, 04/15/2068    Communication Services      U.S. Dollar        5.5%  
Honghua Group, Ltd., 6.375%, 08/01/2022    Energy      U.S. Dollar        5.1%  
PB International BV, 7.625%, 01/26/2022    Consumer Discretionary      U.S. Dollar        5.1%  
Sino-Ocean Land Treasure III, Ltd., 4.900%, 03/21/2068    Real Estate      U.S. Dollar        5.1%  
King Talent Management, Ltd., 5.600%, 06/04/2068    Financials      U.S. Dollar        5.0%  
Indika Energy Capital III Pte, Ltd., 5.875%, 11/09/2024    Energy      U.S. Dollar        4.8%  
Viet Nam Debt & Asset Trading Corp., 1.000%, 10/10/2025    Financials      U.S. Dollar        4.7%  
Bosideng International Holdings, Ltd., Cnv., 1.000%, 12/17/2024    Consumer Discretionary      U.S. Dollar        4.5%  
Franshion Brilliant, Ltd., 5.750%, 07/17/2067    Real Estate      U.S. Dollar        4.4%  
Luye Pharma Group, Ltd., Cnv., 1.500%, 07/09/2024    Health Care      U.S. Dollar        4.2%  
% OF ASSETS IN TOP TEN                48.4%  

 

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Table of Contents
 
CURRENCY ALLOCATION (%)6,7  
US Dollar     100.0  

 

 
COUNTRY ALLOCATION (%)6,7,8  
China/Hong Kong     53.8  
Indonesia     20.4  
India     8.4  
Vietnam     6.2  
Australia     2.4  
Philippines     2.4  
Switzerland     2.1  

Cash and Other Assets, Less Liabilities

    4.3  
Total     100.0  

 

 
SECTOR ALLOCATION (%)6,7  
Real Estate     27.5  
Financials     18.0  
Consumer Discretionary     15.7  
Energy     12.6  
Materials     7.5  
Communication Services     5.5  
Health Care     4.2  
Utilities     2.4  
Foreign Government Bonds     1.5  
Industrials     0.8  

Cash and Other Assets, Less Liabilities

    4.3  
Total     100.0  

 

 
ASSET TYPE BREAKDOWN (%)6,7  
Non-Convertible Corporate Bonds     77.8  
Government Bonds     11.7  
Convertible Corporate Bonds     6.2  
Cash and Other Assets, Less Liabilities     4.3  

 

6

Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.

 

7

Cash and other assets may include forward currency exchange contracts and certain derivative instruments that have been marked-to-market.

 

8

Not all countries where the Fund may invest are included in the benchmark index.

Matthews Asia Credit Opportunities Fund

Portfolio Manager Commentary  (unaudited) (continued)

remarkably stable this year and were among the top performers in the crisis, but they were marked marginally lower in the second quarter, leading to a small loss in the position.

Notable Portfolio Changes:

We made a number of changes to the portfolio in the second quarter. We exited our positions in sovereign U.S. dollar bonds of the Pakistan and Sri Lanka sovereigns. Given the heavy fiscal burden to be borne by these frontier markets and the limited assistance available from multi-lateral and bilateral institutions, we believe the upside in these bonds were limited. We also exited China’s Weibo and Citic Telecom bonds. These bonds carry investment-grade level risk and had performed well during the sell-off. We decided to take profits and redeploy into bonds with a more positive skew. Finally, we exited the bonds of Modernland Realty, an Indonesian property developer because we became less convinced on the company’s willingness and ability to refinance its upcoming maturities.

We also added a number of bonds in which we saw potential upside in the coming quarters and years. We added Sritex, an Indonesia textile manufacturer, Adaro, an Indonesian energy producer, and Syngenta, a chemicals company based in Switzerland wholly owned by ChemChina, a state owned enterprise. These bonds had a slower pace of recovery since the first quarter sell-offs, but we felt that their fundamentals warrant further recovery.

Outlook:

Many Asian high yield companies are asset-rich and have little solvency risk. In fact, in terms of economic fundamentals, Asia in many ways actually looks better than the U.S. The economic reopening in Asia is further along than that in the U.S., giving companies in Asia a better environment to operate in. For instance, for China real estate developers, which represent the biggest overweight in the portfolio, many are seeing sales match or surpass levels from a year ago and they’ve seem to be experiencing a V-shaped recovery. As such, we expect Asia high yield default rates to be lower than that of U.S. and global high yields. However, companies typically do not default because of solvency, but because of lack of liquidity. As such, we see liquidity as both a near-term challenge and a long-term opportunity. Our top priority is a careful evaluation of each company’s capital structure, liquidity profile and refinancing channel to help us navigate the recovery and uncover opportunities.

For long-term investors, we believe it is currently an attractive entry opportunity because yields are elevated due to continued financing risk. As the new issue market normalizes in the coming quarters, we believe the liquidity premium in Asia high yield will continue to go down, driving bond price appreciation.

 

 

18    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Credit Opportunities Fund

June 30, 2020

Schedule of Investmentsa (unaudited)

 

NON-CONVERTIBLE CORPORATE BONDS: 77.8%  

 

     Face Amount*     Value  
CHINA/HONG KONG: 42.1%    

Honghua Group, Ltd. 6.375%, 08/01/22b

    4,800,000       $4,691,819  

Sino-Ocean Land Treasure III, Ltd. 4.900%c, 09/21/22b,d

    5,600,000       4,650,633  

King Talent Management, Ltd. 5.600%c, 12/04/22b,d

    5,300,000       4,560,485  

Franshion Brilliant, Ltd. 5.750%c, 01/17/22b,d

    4,700,000       4,048,110  

KWG Group Holdings, Ltd. 5.875%, 11/10/24b

    3,200,000       3,047,532  

Standard Chartered PLC 7.750%c, 04/02/23b,d

    2,850,000       2,974,687  

CIFI Holdings Group Co., Ltd. 6.550%, 03/28/24b

    2,600,000       2,664,698  

HSBC Holdings PLC 6.375%c, 03/30/25d

    2,400,000       2,464,512  

Wanda Group Overseas, Ltd. 7.500%, 07/24/22b

    2,500,000       2,325,289  

Wanda Properties International Co., Ltd. 7.250%, 01/29/24b

    2,400,000       2,253,000  

CIFI Holdings Group Co., Ltd. 5.375%c, 08/24/22b,d

    2,000,000       1,947,420  

Logan Group Co., Ltd. 5.250%, 02/23/23b

    1,500,000       1,488,662  

KWG Group Holdings, Ltd. 7.875%, 09/01/23b

    1,300,000       1,345,483  

KWG Group Holdings, Ltd. 7.400%, 03/05/24b

    300,000       306,342  
   

 

 

 

Total China/Hong Kong

      38,768,672  
   

 

 

 
   
     
INDONESIA: 20.4%    

PB International BV 7.625%, 01/26/22b

    5,300,000       4,650,651  

Indika Energy Capital III Pte, Ltd. 5.875%, 11/09/24b

    5,000,000       4,452,253  

PT Adaro Indonesia 4.250%, 10/31/24b

    2,600,000       2,453,750  

PT Indonesia Asahan Aluminium Perser 6.757%, 11/15/48b

    1,900,000       2,308,811  

Listrindo Capital BV 4.950%, 09/14/26b

    2,200,000       2,211,000  

PT Sri Rejeki Isman 7.250%, 01/16/25b

    1,600,000       1,491,085  

Theta Capital Pte, Ltd. 6.750%, 10/31/26b

    1,500,000       1,191,522  
   

 

 

 

Total Indonesia

      18,759,072  
   

 

 

 
   
     
INDIA: 8.4%    

Network i2i, Ltd. 5.650%c, 01/15/25d,e

    3,000,000       2,904,000  

ABJA Investment Co. Pte, Ltd. 5.450%, 01/24/28b

    2,900,000       2,676,674  

Network i2i, Ltd. 5.650%c, 01/15/25b,d

    2,200,000       2,129,600  
   

 

 

 

Total India

      7,710,274  
   

 

 

 
   
     
AUSTRALIA: 2.4%    

Australia & New Zealand Banking Group, Ltd. 6.750%c, 06/15/26b,d

    2,000,000       2,218,760  
   

 

 

 

Total Australia

      2,218,760  
   

 

 

 
   
     
PHILIPPINES: 2.4%    

Jollibee Worldwide Pte, Ltd. 3.900%c, 01/23/25b,d

    1,556,000       1,451,748  

Royal Capital BV 4.875%c, 05/05/24b,d

    782,000       762,450  
   

 

 

 

Total Philippines

      2,214,198  
   

 

 

 
   
     Face Amount*     Value  
SWITZERLAND: 2.1%    

Syngenta Finance N.V. 5.182%, 04/24/28b

    1,400,000       $1,493,375  

Syngenta Finance N.V. 4.892%, 04/24/25e

    200,000       210,262  

Syngenta Finance N.V. 5.676%, 04/24/48b

    200,000       202,473  
   

 

 

 

Total Switzerland

      1,906,110  
   

 

 

 
   
   
TOTAL NON-CONVERTIBLE CORPORATE BONDS

 

    71,577,086  
   

 

 

 

(Cost $73,265,838)

   
   

CONVERTIBLE CORPORATE BONDS: 11.7%

 

 
     
CHINA/HONG KONG: 11.7%    

Bosideng International Holdings, Ltd., Cnv. 1.000%, 12/17/24b

    4,900,000       4,140,500  

Luye Pharma Group, Ltd., Cnv. 1.500%, 07/09/24b

    4,100,000       3,906,685  

Baozun, Inc., Cnv. 1.625%, 05/01/24

    2,800,000       2,699,931  
   

 

 

 

Total China/Hong Kong

      10,747,116  
   

 

 

 
   
   
TOTAL CONVERTIBLE CORPORATE BONDS

 

    10,747,116  
   

 

 

 

(Cost $11,528,829)

   
   

FOREIGN GOVERNMENT OBLIGATIONS: 6.2%

 

 
     
VIETNAM: 6.2%    

Viet Nam Debt & Asset Trading Corp. 1.000%, 10/10/25b

    5,689,000       4,323,640  

Socialist Republic of Vietnam 5.500%, 03/12/28

    1,350,000       1,356,750  
   

 

 

 

Total Vietnam

      5,680,390  
   

 

 

 
   
   
TOTAL FOREIGN GOVERNMENT OBLIGATIONS

 

    5,680,390  
   

 

 

 

(Cost $5,805,057)

   
   
     
TOTAL INVESTMENTS: 95.7%       $88,004,592  

(Cost $90,534,789)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 4.3%

 

    3,994,508  
   

 

 

 

NET ASSETS: 100.0%

      $91,999,100  
   

 

 

 

 

a

Certain securities were fair valued under the valuation policies approved by the Board of Trustees (Note 2-A).

 

b

The securities may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the Securities Act of 1933.

 

c

Security is a fix-to-float security, which carries a fixed coupon until a certain date, upon which it switches to a floating rate. Reference rate and spread are provided if the rate is currently floating.

 

d

Perpetual security with no stated maturity date. First call date is disclosed.

 

e

Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. The security may be resold in transactions exempt from registration normally to qualified institutional buyers. The security has been determined to be liquid in accordance with procedures adopted by the Funds’ Board of Trustees. At June 30, 2020, the aggregate value is $3,114,262, which is 3.39% of net assets.

 

*

All Values in USD unless otherwise specified

 

Cnv.

Convertible

 

USD

U.S. Dollar

See accompanying notes to financial statements.

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS*
Robert J. Horrocks, PhD   Kenneth Lowe, CFA

Lead Manager

  Lead Manager
Satya Patel  

Co-Manager

   

*   As of August 31, 2020

FUND FACTS
    Investor   Institutional

Ticker

  MACSX   MICSX

CUSIP

  577130206   577130842

Inception

  9/12/94   10/29/10

NAV

  $14.53   $14.51

Initial Investment

  $2,500   $100,000

Gross Expense Ratio1

  1.08%   0.94%

Portfolio Statistics

 

Total # of Positions

  60

Net Assets

  $1.3 billion

Weighted Average Market Cap

  $84.6 billion

Portfolio Turnover2

  21.89%

Benchmark

 

MSCI AC Asia ex Japan Index

OBJECTIVE

 

 

Long-term capital appreciation. The Fund also seeks to provide some current income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in dividend-paying common stock, preferred stock and other equity securities, and convertible securities as well as fixed-income securities, of any duration or quality, including high yield securities, of companies located in Asia, which consists of all countries and markets in Asia, including developed, emerging and frontier countries and markets in the Asian region.

Matthews Asian Growth and Income Fund

Portfolio Manager Commentary (unaudited)

For the first half of 2020, the Matthews Asian Growth and Income Fund returned –6.95% (Investor Class) and –6.83% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index returned –4.65% over the same period. For the quarter ending June 30, 2020, the Fund returned 14.71% (Investor Class) and 14.82% (Institutional Class), while the benchmark returned 16.79%.

Market Environment:

The deep drops suffered across risk assets during the first quarter were almost entirely reversed over the last three months, a move that was far swifter than most would have anticipated. Although meant to be strong discounting mechanisms, one can’t help but view the more recent recovery in markets as being driven by other forces to some extent. Those include the ongoing tinkering by central banks and governments in underpinning market prices, as well as the increase in retail investor participation across the globe, which has added yet more liquidity. Despite the continued uncertain outlook, the recent recovery in equities has been one of the quickest on record.

For Asia, these moves have been equally fierce. However, it could be argued that they are more justified than elsewhere, particularly in the case of China where the recovery appeared to be ahead of the curve and V-shaped in nature. The rebound in areas such as auto and property sales, fixed asset investment and Purchasing Managers Index data (a measure of the prevailing direction of economic trends in manufacturing) suggests an impressive return to normalcy. This confluence of improving sentiment globally, solid Chinese economic data and a gradually weakening U.S. dollar helped all Asian markets to double digit returns for the quarter.

Performance Contributors and Detractors:

Although trailing the market rebound, the Fund had a respectable 90% upside capture during the quarter. This was despite our more conservative investment approach and growth stocks leading the charge. The largest contributors to performance came from China, where stay-at-home economy stocks including Tencent and Netease gained significantly. Tencent, the country’s dominant social network rose on continued growth in games through its key titles and ongoing updates as well as via e-commerce advertising and payments. Games company Netease rose partly as it successfully launched a second listing in Hong Kong, and as its games pipeline looks strong with additional growth expected to come from overseas. Further Netease’s online education business Youdao and its cloud music operations also appear to be performing well. Elsewhere in China leading white goods company Midea gained as China’s consumption recovery continues and due to further market share wins. Leading baijiu producer Jiangsu Yanghe also performed strongly as its ongoing sales channel restructure bears fruit.

In Hong Kong, Techtronic Industries delivered solid performance again as the pandemic is causing a surge in DIY activity. The firm is also using the environment to invest in the business when others are cutting costs. The largest detractor over the quarter also came from the city state. Conglomerate Jardine Matheson dropped as its consumer facing businesses in areas like auto, retail and property are struggling and caused the company to profit warn. HSBC also fell following a worsened outlook for global trade, questions over Hong Kong’s role in international finance and a suspension of its dividend. We exited our position during the quarter. China Mobile sputtered as its first quarter results saw weaker users and decreased roaming fees whilst domestic Hong Kong REITs Fortune and LINK REIT dropped on concerns of weak sales amongst their tenants.

(continued)

 
1

Prospectus expense ratios.

2

The lesser of fiscal year 2019 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

20    MATTHEWS ASIA FUNDS


Table of Contents
                 
PERFORMANCE AS OF JUNE 30, 2020                                                        
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      YTD      1 Year      3 Years      5 Years      10 Years      Since
Inception
     Inception
Date
 
Investor Class (MACSX)      14.71%        -6.95%        -3.38%        1.01%        2.06%        4.74%        8.48%        9/12/94  
Institutional Class (MICSX)      14.82%        -6.83%        -3.17%        1.16%        2.22%        n.a.        3.60%        10/29/10  
MSCI AC Asia ex Japan Index3      16.79%        -4.65%        1.97%        3.80%        4.70%        6.21%        4.40% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

               
INCOME DISTRIBUTION HISTORY                                                         
       2020

 

          2019

 

 
       June        December        Total           June        December        Total  
Investor (MACSX)      $ 0.11          n.a.        $ 0.11       $ 0.17        $ 0.18        $ 0.35  
Inst’l (MICSX)      $ 0.12          n.a.        $ 0.12       $ 0.18        $ 0.19        $ 0.38  

Note: This table does not include capital gains distributions. Totals may differ by $0.02 due to rounding. For income distribution history, visit matthewsasia.com.

 

   

30-DAY YIELD:

 

3.78% (Investor Class) 3.92% (Institutional Class)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 6/30/20, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

DIVIDEND YIELD: 3.16%

 

The dividend yield (trailing) for the portfolio is the weighted average sum of the dividends paid by each equity security held by the Fund over the 12 months ended 6/30/20 divided by the current price of each equity as of 6/30/20. The annualized dividend yield for the Fund is for the equity-only portion of the portfolio. Please note that this is based on gross equity portfolio holdings and does not reflect the actual yield an investor in the Fund would receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems, Bloomberg, MICM

 

 

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3

It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 90 for index definition.

 

  4

Calculated from 8/31/94.

 

       
TOP TEN HOLDINGS5                     
     Sector      Country      % of Net Assets  
Tencent Holdings, Ltd.    Communication Services      China/Hong Kong        5.2%  
Taiwan Semiconductor Manufacturing Co., Ltd.    Information Technology      Taiwan        4.9%  
AIA Group, Ltd.    Financials      China/Hong Kong        3.7%  
Samsung Electronics Co., Ltd.    Information Technology      South Korea        2.9%  
Techtronic Industries Co., Ltd.    Industrials      China/Hong Kong        2.1%  
Macquarie Korea Infrastructure Fund    Financials      South Korea        2.1%  
LG Household & Health Care, Ltd., Pfd.    Consumer Staples      South Korea        2.0%  
Ascendas, REIT    Real Estate      Singapore        1.9%  
Advantech Co., Ltd.    Information Technology      Taiwan        1.9%  
NetEase, Inc.    Communication Services      China/Hong Kong        1.8%  
% OF ASSETS IN TOP TEN                28.5%  

 

  5

Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
 
COUNTRY ALLOCATION (%)6,7  
China/Hong Kong     45.4  
Singapore     10.3  
South Korea     9.8  
Taiwan     8.4  
India     6.5  
France     3.2  
Indonesia     2.8  
United States     1.9  
Japan     1.5  
Philippines     1.4  
Vietnam     1.4  
United Kingdom     1.4  
Australia     1.3  
Thailand     1.0  
Cash and Other Assets, Less Liabilities     3.8  
Total     100.1  

 

 
SECTOR ALLOCATION (%)7  
Consumer Discretionary     17.2  
Financials     15.7  
Information Technology     14.3  
Communication Services     13.5  
Industrials     10.8  
Consumer Staples     9.5  
Real Estate     7.4  
Utilities     4.2  
Health Care     3.6  
Cash and Other Assets, Less Liabilities     3.8  
Total     100.0  

 

 
MARKET CAP EXPOSURE (%)7  
Mega Cap (over $25B)     42.9  
Large Cap ($10B-$25B)     23.2  
Mid Cap ($3B-10B)     23.9  
Small Cap (under $3B)     6.2  
Cash and Other Assets, Less Liabilities     3.8  

 

 
ASSET TYPE BREAKDOWN (%)7,8  
Common Equities and ADRs     86.0  
Convertible Corporate Bonds     8.2  
Preferred Equities     2.0  
Cash and Other Assets, Less Liabilities     3.8  

 

6

Not all countries where the Fund may invest are included in the benchmark index.

 

7

Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.

 

8

Bonds are not included in the MSCI All Country Asia ex Japan Index.

Matthews Asian Growth and Income Fund

Portfolio Manager Commentary  (unaudited) (continued)

Notable Portfolio Changes:

During the second quarter, we added seven new holdings and exited eight holdings amidst an environment where the outlook for companies is changing rapidly. In general terms, this has caused an increase to our weighting within mainland China and a decrease in Hong Kong as we remain concerned about the impacts of the new security law. Within equities, we added new positions in Lepu Medical, China Yangtze Power, LINK REIT, Digital Telecom Infrastructure Fund in Thailand and TCS in India. To fund these, we exited Pacific Textiles, Fortune REIT, HSBC, Cognizant in the U.S. and Kasikornbank in Thailand.

This is significant change for the portfolio. We had noted in the first quarter that part of our process during periods of volatility was to look to upgrade our holdings. Many of these transitions are a manifestation of this. As an example, we believe that LINK REIT is better positioned in Hong Kong than Fortune REIT, in our view, due to its superior diversity, quality of assets and asset enhancement history. Recent weakness allowed this switch. We have also purposefully cut our weightings in commercial banks given stress on asset quality, margins, capital and dividends.

There has also been some change in our convertible bonds, with Chinese sportswear company Anta being added after exiting bonds in China Mengniu, Zhongsheng and Top Glove. This followed strong performance in the latter two.

Outlook:

After what has been an unprecedented first half of the year in 2020, the second half and beyond requires continued caution. It appears that Asia, and China in particular, is well placed in our view, relative to the rest of the globe in the speed at which it may be able to return to 2019 levels of economic activity. However, it remains unclear what the ramifications of the coronavirus pandemic will have upon consumer behavior as well as the attitude that corporate management teams will have toward risk taking. This could impinge upon consumer spending, capital expenditure budgets, dividend policies and views around what appropriate capital structures are in an era of outlandish debt levels. Further, market performance may also be dictated by the forces of an impending U.S. election and once again rising geopolitical tensions between the globe’s two largest economies. Not only is there a risk of increasing barriers to trade, but a move away from just in time toward just in case supply chains and a potential technological divide between the two countries could hamper global growth and productivity.

At a fundamental level, it will be some time before companies are able to recover prior levels of profitability. Ongoing stimulus measures should help smooth this path, but it remains bumpy. Despite this, markets have priced in an imminent resumption of growth with Asia ex. Japan earnings expected to rise over 20% in 2021, and the benchmark trading at 13.9x those earnings estimates.

For the Fund, we remain constructive. Asia’s relative economic standing is solid, but volatility is likely to persist and growth across the globe weaker. We believe that a focus on quality investing that incorporates both a keen eye on mitigating volatility and producing total returns through the steadier means of balancing growth and income should be well placed to deliver for clients.

 

 

22    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asian Growth and Income Fund

June 30, 2020

Schedule of Investmentsa (unaudited)

COMMON EQUITIES: 86.0%

 

     Shares     Value  
CHINA/HONG KONG: 39.0%    

Tencent Holdings, Ltd.

    1,014,400       $65,000,635  

AIA Group, Ltd.

    4,998,400       46,773,053  

Techtronic Industries Co., Ltd.

    2,632,000       26,042,471  

NetEase, Inc. ADR

    53,200       22,843,016  

Jiangsu Yanghe Brewery Joint-Stock Co., Ltd. A Shares

    1,513,444       22,600,173  

Yum China Holdings, Inc.

    449,300       21,597,851  

Midea Group Co., Ltd. A Shares

    2,372,079       20,119,418  

Jiangsu Expressway Co., Ltd. H Shares

    16,770,000       19,710,180  

China Yangtze Power Co., Ltd. A Shares

    7,295,600       19,598,899  

HKT Trust & HKT, Ltd.

    13,284,000       19,493,852  

Inner Mongolia Yili Industrial Group Co., Ltd. A Shares

    4,376,775       19,335,196  

Shanghai International Airport Co., Ltd. A Shares

    1,834,462       18,740,098  

Zhejiang Supor Co., Ltd. A Shares

    1,809,028       18,229,917  

CLP Holdings, Ltd.

    1,726,200       16,953,427  

CK Asset Holdings, Ltd.

    2,810,172       16,852,024  

Guangdong Investment, Ltd.

    9,648,000       16,641,726  

CK Hutchison Holdings, Ltd.

    2,540,172       16,449,105  

Link REIT

    1,827,400       15,003,259  

Minth Group, Ltd.

    5,196,000       14,915,133  

BOC Hong Kong Holdings, Ltd.

    4,545,000       14,552,611  

Lepu Medical Technology Beijing Co., Ltd.

   

A Shares

    2,661,573       13,758,148  

Jardine Matheson Holdings, Ltd.

    289,300       12,095,875  

China Mobile, Ltd. ADR

    334,100       11,239,124  
   

 

 

 

Total China/Hong Kong

      488,545,191  
   

 

 

 
   
     
SINGAPORE: 8.6%    

Ascendas, REIT

    10,266,184       23,554,859  

Singapore Technologies Engineering, Ltd.

    8,765,425       20,920,854  

Venture Corp., Ltd.

    1,614,300       18,865,847  

Singapore Telecommunications, Ltd.

    10,515,700       18,706,356  

United Overseas Bank, Ltd.

    1,193,000       17,431,958  

Ascendas India Trust

    8,946,700       8,675,461  
   

 

 

 

Total Singapore

      108,155,335  
   

 

 

 
   
     
TAIWAN: 8.4%    

Taiwan Semiconductor Manufacturing Co., Ltd.

    5,754,187       61,451,957  

Advantech Co., Ltd.

    2,302,000       23,166,740  

Taiwan Secom Co., Ltd.

    7,112,000       21,049,990  
   

 

 

 

Total Taiwan

      105,668,687  
   

 

 

 
   
     
SOUTH KOREA: 7.8%    

Samsung Electronics Co., Ltd.

    823,968       36,475,113  

Macquarie Korea Infrastructure Fund

    2,708,261       25,750,987  

Coway Co., Ltd.

    330,466       19,978,153  

Hanon Systems

    2,016,529       15,282,684  
   

 

 

 

Total South Korea

      97,486,937  
   

 

 

 
   
     Shares     Value  
     
INDIA: 6.5%    

Housing Development Finance Corp., Ltd.

    979,513       $22,775,756  

Sanofi India, Ltd.

    165,908       17,307,445  

Tata Consultancy Services, Ltd.

    628,279       17,294,967  

ITC, Ltd.b

    6,217,860       16,055,088  

Embassy Office Parks, REIT

    1,644,000       7,481,180  
   

 

 

 

Total India

      80,914,436  
   

 

 

 
   
     
FRANCE: 3.2%    

LVMH Moet Hennessy Louis Vuitton SE

    46,973       20,738,257  

Pernod Ricard SA

    121,618       19,150,657  
   

 

 

 

Total France

      39,888,914  
   

 

 

 
   
     
INDONESIA: 2.8%    

PT Ace Hardware Indonesiab

    167,711,400       17,760,287  

PT Bank Rakyat Indonesia Persero

    78,744,300       16,807,430  
   

 

 

 

Total Indonesia

      34,567,717  
   

 

 

 
   
     
UNITED STATES: 1.8%    

Broadcom, Inc.

    70,600       22,282,066  
   

 

 

 

Total United States

      22,282,066  
   

 

 

 
   
     
JAPAN: 1.5%    

KDDI Corp.

    624,900       18,645,233  
   

 

 

 

Total Japan

      18,645,233  
   

 

 

 
   
     
PHILIPPINES: 1.4%    

Bank of the Philippine Islands

    12,247,404       17,746,490  
   

 

 

 

Total Philippines

      17,746,490  
   

 

 

 
   
     
VIETNAM: 1.4%    

Vietnam Dairy Products JSC

    3,596,093       17,578,658  
   

 

 

 

Total Vietnam

      17,578,658  
   

 

 

 
   
     
UNITED KINGDOM: 1.3%    

Prudential PLC

    1,125,099       16,953,010  
   

 

 

 

Total United Kingdom

      16,953,010  
   

 

 

 
   
     
AUSTRALIA: 1.3%    

Macquarie Group, Ltd.

    197,166       16,363,176  
   

 

 

 

Total Australia

      16,363,176  
   

 

 

 
   
     
THAILAND: 1.0%    

Digital Telecommunications Infrastructure Fund F Shares

    25,577,000       12,539,899  
   

 

 

 

Total Thailand

      12,539,899  
   

 

 

 
   
     
TOTAL COMMON EQUITIES       1,077,335,749  
   

 

 

 

(Cost $968,561,957)

   
 

 

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Table of Contents

Matthews Asian Growth and Income Fund

June 30, 2020

Schedule of Investmentsa (unaudited) (continued)

 

CONVERTIBLE CORPORATE BONDS: 8.2%   PREFERRED EQUITIES: 2.0%

 

     Face Amount*     Value  
   
CHINA/HONG KONG: 6.4%    

Bosideng International Holdings, Ltd., Cnv.

 

1.000%, 12/17/24c

    24,700,000       $20,871,500  

ANLLIAN Capital, Ltd., Cnv. 0.000%, 02/05/25c

    EUR 14,800,000       15,439,375  

China Education Group Holdings, Ltd., Cnv.

 

 

2.000%, 03/28/24c

    HKD 111,000,000       15,218,773  

Harvest International Co., Cnv.
0.000%, 11/21/22c

    HKD 111,000,000       14,658,090  

Luye Pharma Group, Ltd., Cnv.
1.500%, 07/09/24c

    14,101,000       13,436,138  
   

 

 

 

Total China/Hong Kong

      79,623,876  
   

 

 

 
   
     
SINGAPORE: 1.7%    

CapitaLand, Ltd., Cnv.
1.950%, 10/17/23c

    SGD 31,250,000       21,448,497  
   

 

 

 

Total Singapore

      21,448,497  
   

 

 

 
   
     
UNITED STATES: 0.1%    

JPMorgan Chase Bank NA, Cnv.
0.125%, 01/01/23d

    1,539,000       1,623,645  
   

 

 

 

Total United States

      1,623,645  
   

 

 

 
   
   
TOTAL CONVERTIBLE CORPORATE BONDS

 

    102,696,018  
   

 

 

 

(Cost $109,688,509)

   
     Shares     Value  
   
SOUTH KOREA: 2.0%    

LG Household & Health Care, Ltd., Pfd.

    41,042       $24,863,573  
   

 

 

 

Total South Korea

      24,863,573  
   

 

 

 
   
     
TOTAL PREFERRED EQUITIES       24,863,573  
   

 

 

 

(Cost $11,577,044)

   
   
     
TOTAL INVESTMENTS: 96.2%       1,204,895,340  

(Cost $1,089,827,510)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 3.8%
      47,338,340  
   

 

 

 

NET ASSETS: 100.0%

      $1,252,233,680  
   

 

 

 

 

a

Certain securities were fair valued under the valuation policies approved by the Board of Trustees (Note 2-A).

 

b

Non-income producing security.

 

c

The securities may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the Securities Act of 1933.

 

d

Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. The security may be resold in transactions exempt from registration normally to qualified institutional buyers. The security has been determined to be liquid in accordance with procedures adopted by the Funds’ Board of Trustees. At June 30, 2020, the aggregate value is $1,623,645, which is 0.13% of net assets.

 

*

All Values in USD unless otherwise specified

 

ADR

American Depositary Receipt

 

Cnv.

Convertible

 

EUR

Euro

 

HKD

Hong Kong Dollar

 

JSC

Joint Stock Co.

 

Pfd.

Preferred

 

REIT

Real Estate Investment Trust

 

SGD

Singapore Dollar

 

USD

U.S. Dollar

See accompanying notes to financial statements.

 

 

24    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Yu Zhang, CFA  

Lead Manager

 
Robert Horrocks, PhD   S. Joyce Li, CFA

Co-Manager

  Co-Manager
Sherwood Zhang, CFA  

Co-Manager

 
FUND FACTS
    Investor   Institutional

Ticker

  MAPIX   MIPIX

CUSIP

  577125107   577130750

Inception

  10/31/06   10/29/10

NAV

  $16.84   $16.84

Initial Investment

  $2,500   $100,000

Gross Expense Ratio1

  1.03%   0.93%

After Fee Waiver and Reimbursement2

  1.02%   0.92%

Portfolio Statistics

Total # of Positions

  57

Net Assets

  $3.8 billion

Weighted Average Market Cap

  $45.5 billion

Portfolio Turnover3

  30.32%

Benchmark

   

MSCI AC Asia Pacific Index

OBJECTIVE

 

 

Total return with an emphasis on providing current income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in Asia. Asia consists of all countries and markets in Asia, and includes developed, emerging and frontier countries and markets in the Asian region. The Fund may also invest in convertible debt and equity securities of companies located in Asia.

 

Matthews Asia Dividend Fund

Portfolio Manager Commentary  (unaudited)

For the first half of 2020, the Matthews Asia Dividend Fund returned –2.62% (Investor Class) and –2.57% (Institutional Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned –6.29% over the same period. For the quarter ending June 30, the Fund returned 20.37% (Investor Class) and 20.40% (Institutional Class), while the benchmark returned 15.99%.

Market Environment:

Asian equities staged a sharp rally during the second quarter of 2020, recovering a significant portion of the steep losses incurred during the first quarter. Having learned from previous crisis moments, central banks and governments in Asia responded very quickly with an unprecedented liquidity injection and fiscal stimulus measures, providing a much-needed backstop to the real economy and to the capital market. As the Asian region, led by North Asia, effectively flattened the COVID-19 curve and started shifting focus towards economic recovery, equity investors also looked beyond the near-term corporate earnings headwind. Instead, investors were positioning for an economic rebound by bidding up equity prices.

Performance Contributors and Detractors:

The Fund performed well during the current market rally. Using a barbell approach, which invests in both higher-yielding dividend paying stocks together with faster-growing dividend growth stocks, we steadily increased the portfolio’s overall exposure towards dividend growth stocks amid the first quarter market volatility. The “dividend growth” bucket of the portfolio delivered strong returns during the second quarter. Among some of the top-performing dividend growth stocks during the quarter was China Int’l Travel Service (CITS), a Chinese duty-free store operator listed in the mainland A-share market. While travel retail industry is going through a very challenging operating environment globally, CITS saw its underlying duty-free store business in Hainan Island—a famous tourist spot for Chinese consumers, recover swiftly thanks to a favorable policy change which increased the duty-free allowance from RMB 30,000 per annum to RMB 100,000 per annum for Chinese visitors to the island. The market responded very favorably towards this latest change, and CITS’s share price more than doubled during the quarter (the company recently changed its corporate name from CITS to China Tourism Duty Free Corp, a better reflection of its underlying duty-free shopping business).

On the other hand, stocks with defensive earnings streams but with more moderated growth profiles became the relative laggards during the quarter. Top detractors to performance included Japanese wireless telecom carrier NTT DoCoMo and Japanese small-cap medical device manufacturer Eiken Chemical. Both DoCoMo and Eiken outperformed during the first quarter, as the underlying business was either minimally affected, in the case of DoCoMo’s telecom business, or was benefiting from new demand due to the pandemic (Eiken introduced a COVID-19 testing kit). However, as the market moved from a defensive posture into more of a “risk-on” mode, these defensive businesses became less of a focus area for the market.

Notable Portfolio Changes:

During the second quarter, we initiated several new positions, focusing on firstly finding new dividend growth stocks whose underlying business is

(continued)

 

 

1

Prospectus expense ratios.

2

Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2021 and may be terminated (i) at any time by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews at the annual expiration date of the agreement upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty.

3

The lesser of fiscal year 2019 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

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Table of Contents
 
PERFORMANCE AS OF JUNE 30, 2020  
 

 

    

 

      

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      YTD      1 Year      3 Years      5 Years      10 Years      Since
Inception
     Inception
Date
 
Investor Class (MAPIX)      20.37%        -2.62%        2.31%        2.26%        4.09%        6.95%        7.98%        10/31/06  
Institutional Class (MIPIX)      20.40%        -2.57%        2.48%        2.39%        4.21%        n.a.        5.89%        10/29/10  
MSCI AC Asia Pacific Index4      15.99%        -6.29%        1.35%        3.50%        4.33%        6.30%        4.03% 5    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund’s fees and expenses had not been waived. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

                   
INCOME DISTRIBUTION HISTORY                                                               
    2020

 

          2019

 

 
    Q1      Q2      Q3      Q4      Total           Q1      Q2      Q3      Q4      Total  
Investor (MAPIX)   $ 0.04      $ 0.12        n.a.        n.a.      $ 0.16       $ 0.03      $ 0.12      $ 0.11      $ 0.09      $ 0.36  
Inst’l (MIPIX)   $ 0.05      $ 0.12        n.a.        n.a.      $ 0.17       $ 0.04      $ 0.12      $ 0.12      $ 0.10      $ 0.37  

Note: This table does not include capital gains distributions. Totals may differ by $0.02 due to rounding and a return of capital. For distribution history please visit matthewsasia.com.

 

   

30-DAY YIELD:

 

Investor Class: 1.18% (1.17% excluding waivers)

Institutional Class: 1.27% (1.26% excluding waivers)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 6/30/20, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

DIVIDEND YIELD: 2.35%

 

The dividend yield (trailing) for the portfolio is the weighted average sum of the dividends paid by each equity security held by the Fund over the 12 months ended 6/30/20 divided by the current price of each equity as of 6/30/20. The annualized dividend yield for the Fund is for the equity-only portion of the portfolio. Please note that this is based on gross equity portfolio holdings and does not reflect the actual yield an investor in the Fund would receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems, Bloomberg, MICM.

 

 

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  4

It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 90 for index definition.

 

  5

Calculated from 10/31/06.

 

       
TOP TEN HOLDINGS6                     
     Sector      Country      % of Net Assets  
Minth Group, Ltd.    Consumer Discretionary      China/Hong Kong        4.9%  
China Tourism Group Duty Free Corp., Ltd.    Consumer Discretionary      China/Hong Kong        3.8%  
Anritsu Corp.    Information Technology      Japan        3.8%  
Chongqing Brewery Co., Ltd.    Consumer Staples      China/Hong Kong        3.3%  
Taiwan Semiconductor Manufacturing Co., Ltd.    Information Technology      Taiwan        3.2%  
Breville Group, Ltd.    Consumer Discretionary      Australia        3.1%  
Hoya Corp.    Health Care      Japan        3.0%  
LG Chem, Ltd., Pfd.    Materials      South Korea        3.0%  
MISUMI Group, Inc.    Industrials      Japan        3.0%  
Shenzhou International Group Holdings, Ltd.    Consumer Discretionary      China/Hong Kong        2.7%  
% OF ASSETS IN TOP TEN                33.8%  

 

  6

Holdings may combine more than one security from same issuer and related depositary receipts.

 

26    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Dividend Fund

Portfolio Manager Commentary  (unaudited) (continued)

positively exposed to more secular growth trends. Secondly, we also added certain cyclical businesses whose fundamentals are negatively affected by the virus outbreak to pair with the dividend growers. The valuation discount on these cyclical businesses is very significant, but we believe the long-term strength of these companies remains intact and have the potential to rebound back from the current downturn. Among the new dividend growth names is Pharmaron Beijing, a Chinese contract-research-organization (CRO) company providing research and development outsourcing services to global pharmaceutical firms. The company is in a rapid growth phase. With rising scale, Pharmaron has seen a meaningful expansion of its profit margin and has turned free-cash-flow positive. Dividend payment was also initiated and has been growing rapidly.

Among the cyclical recovery names is our new position in BOC Aviation, an aircraft leasing company based in Singapore. BOC Aviation’s stock was heavily punished by the market, down about 35% as of the end of the second quarter because of the deep disruption to the global aviation industry. While we share the market’s concern on the aviation industry headwind, from a bottom-up perspective we consider BOC Aviation to be one of the higher-quality aircraft financing vendors globally. The company is run by a well-seasoned management team who has been through multiple industry cycles. Owning one of the newer aircraft fleet assets with long-term leasing contracts, the company is also receiving a strong financial backing from its parent company Bank of China. With these relative competitive advantages, the company is adopting a counter-cycle strategy, actively expanding its aircraft leasing business during the current industry downturn. Trading at 0.8 times price-to-book against a normalized mid-teen ROE, and with a 6% trailing dividend yield, we think the risk-reward profile on the stock is quite attractive.

Outlook:

Looking ahead we see two potential risks that could have major market implications. First, the risk of the coronavirus resurgence and its impact on the re-opening of global economy could continue to dictate short-term market volatility. While the Asian economy as a whole is better positioned for a strong revival due to more effective virus suppression, individual countries, such as India, are still struggling with its virus control efforts and economic recovery is being pushed out. Second, the downward spiral of U.S.—China relations has the potential of upending the decades’-long geopolitical stability, a crucial factor behind the booming of Asia’s economy. Notwithstanding, improving signs of economic recovery, led by China, are building a solid fundamental foundation to sustain the current equity rally. In the current environment, we believe our dividend investment approach of balancing stable dividend payers with fast-growing dividend growers continues to offer a sensible way of tapping Asian-regional’s long-term growth potential.

 
COUNTRY ALLOCATION (%)7,8  
China/Hong Kong     35.5  
Japan     31.9  
South Korea     8.6  
Singapore     7.5  
Australia     6.2  
Taiwan     3.7  
Philippines     2.0  
India     1.6  
Thailand     1.6  
Bangladesh     1.2  

Cash and Other Assets, Less Liabilities

    0.1  
Total     99.9  

 

SECTOR ALLOCATION (%)8  
Consumer Discretionary     29.2  
Consumer Staples     13.4  
Information Technology     13.0  
Industrials     11.8  
Communication Services     11.5  
Real Estate     8.8  
Health Care     6.6  
Materials     3.5  

Financials

    2.0  

Cash and Other Assets, Less Liabilities

    0.1  
Total     99.9  

 

MARKET CAP EXPOSURE (%)8  
Mega Cap (over $25B)     31.6  
Large Cap ($10B–$25B)     15.8  
Mid Cap ($3B–10B)     29.8  
Small Cap (under $3B)     22.7  
Cash and Other Assets, Less Liabilities     0.1  

 

7

Not all countries where the Fund may invest are included in the benchmark index.

 

8

Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.

 

 

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Table of Contents

Matthews Asia Dividend Fund

June 30, 2020

Schedule of Investmentsa (unaudited)

COMMON EQUITIES: 95.1%

 

     Shares     Value  
CHINA/HONG KONG: 35.5%

 

Minth Group, Ltd.

    64,635,000       $185,534,957  

China Tourism Group Duty Free Corp., Ltd. A Shares

    6,576,311       144,198,885  

Chongqing Brewery Co., Ltd. A Shares

    12,305,570       127,394,420  

Shenzhou International Group Holdings, Ltd.

    8,406,100       102,194,759  

Zhongsheng Group Holdings, Ltd.

    17,974,000       100,523,713  

Tencent Holdings, Ltd.

    1,392,900       89,254,125  

Gree Electric Appliances, Inc. of Zhuhai A Shares

    10,169,803       81,719,079  

HKBN, Ltd.

    46,034,623       80,724,641  

China Education Group Holdings, Ltd.b

    45,563,000       73,477,679  

Yuexiu Transport Infrastructure, Ltd.

    93,902,000       65,871,323  

China Resources Land, Ltd.

    16,316,000       62,362,937  

Pharmaron Beijing Co., Ltd. A Shares

    4,327,964       60,222,510  

Wuliangye Yibin Co., Ltd. A Shares

    2,427,344       59,005,809  

China East Education Holdings, Ltd.b,c

    31,845,000       57,887,928  

Sun Art Retail Group, Ltd.

    27,221,500       46,701,821  

Pharmaron Beijing Co., Ltd. H Sharesb,c

    1,609,500       16,668,620  

WH Group, Ltd.b,c

    2,255,000       1,948,758  

Crystal International Group, Ltd.b,c

    6,860,000       1,496,529  
   

 

 

 

Total China/Hong Kong

      1,357,188,493  
   

 

 

 
   
 
JAPAN: 31.9%

 

Anritsu Corp.

    6,038,300       143,453,217  

Hoya Corp.

    1,206,400       115,523,653  

MISUMI Group, Inc.

    4,559,400       114,479,202  

KATITAS Co., Ltd.

    4,210,800       97,964,485  

Pigeon Corp.

    2,198,400       85,089,258  

Nintendo Co., Ltd.

    173,000       77,342,911  

Bandai Namco Holdings, Inc.

    1,376,500       72,456,306  

BELLSYSTEM24 Holdings, Inc.

    5,137,700       66,858,350  

LIXIL Group Corp.

    4,632,900       65,065,720  

Disco Corp.

    263,600       64,289,053  

TDK Corp.

    598,500       59,581,529  

Kao Corp.

    718,700       57,034,463  

Oriental Land Co., Ltd.

    428,600       56,637,832  

MANI, INC.

    2,038,000       54,103,758  

Shiseido Co., Ltd.

    678,200       43,215,334  

Mitsubishi Pencil Co., Ltd.

    2,403,000       30,145,767  

Daifuku Co., Ltd.

    129,800       11,374,646  

Eiken Chemical Co., Ltd.

    403,000       6,450,892  
   

 

 

 

Total Japan

      1,221,066,376  
   

 

 

 
   
 
SINGAPORE: 7.5%

 

Keppel DC, REIT

    39,365,580       72,091,241  

NetLink NBN Trustb

    98,664,300       68,918,175  

Ascendas India Trust

    57,288,600       55,551,772  

CapitaLand Retail China Trust, REIT

    51,969,100       47,424,750  

BOC Aviation, Ltd.b,c

    6,857,300       44,144,186  
   

 

 

 

Total Singapore

      288,130,124  
   

 

 

 
   
 
AUSTRALIA: 6.2%

 

Breville Group, Ltd.

    7,564,257       119,567,691  

Macquarie Group, Ltd.

    765,538       63,533,436  

Sydney Airport

    13,935,221       54,996,429  
   

 

 

 

Total Australia

      238,097,556  
   

 

 

 
     Shares     Value  
SOUTH KOREA: 3.9%

 

Hyundai Mobis Co., Ltd.

    457,734       $73,475,102  

Samsung Electronics Co., Ltd.

    914,230       40,470,797  

BGF Retail Co., Ltd.

    287,799       33,361,026  
   

 

 

 

Total South Korea

      147,306,925  
   

 

 

 
   
 
TAIWAN: 3.7%

 

Taiwan Semiconductor Manufacturing Co., Ltd. ADR

    1,210,140       68,699,648  

Taiwan Semiconductor Manufacturing Co., Ltd.

    4,934,469       52,697,762  

China Steel Chemical Corp.

    5,272,000       18,818,417  
   

 

 

 

Total Taiwan

      140,215,827  
   

 

 

 
   
 
PHILIPPINES: 2.0%

 

Globe Telecom, Inc.

    1,872,220       77,816,261  
   

 

 

 

Total Philippines

      77,816,261  
   

 

 

 
   
 
INDIA: 1.6%

 

Minda Industries, Ltd.

    13,532,234       49,285,693  

HDFC Bank, Ltd.

    965,013       13,563,762  
   

 

 

 

Total India

      62,849,455  
   

 

 

 
   
 
THAILAND: 1.6%

 

Thai Beverage Public Co., Ltd.

    123,128,000       60,106,538  
   

 

 

 

Total Thailand

      60,106,538  
   

 

 

 
   
 
BANGLADESH: 1.2%

 

GrameenPhone, Ltd.

    16,665,233       45,173,878  
   

 

 

 

Total Bangladesh

      45,173,878  
   

 

 

 
   
   
TOTAL COMMON EQUITIES

 

    3,637,951,433  
   

 

 

 

(Cost $2,868,519,144)

   
   

PREFERRED EQUITIES: 4.8%

   
 
SOUTH KOREA: 4.8%

 

LG Chem, Ltd., Pfd.

    545,384       114,740,796  

Samsung Electronics Co., Ltd., Pfd.

    1,733,915       67,543,453  
   

 

 

 

Total South Korea

      182,284,249  
   

 

 

 
   
   
TOTAL PREFERRED EQUITIES

 

    182,284,249  
   

 

 

 

(Cost $112,743,798)

   
   
   
TOTAL INVESTMENTS: 99.9%

 

    3,820,235,682  

(Cost $2,981,262,942)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 0.1%
      3,980,374  
   

 

 

 

NET ASSETS: 100.0%

      $3,824,216,056  
   

 

 

 
 

 

28    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Dividend Fund

June 30, 2020

Schedule of Investmentsa (unaudited) (continued)

 

a

Certain securities were fair valued under the valuation policies approved by the Board of Trustees (Note 2-A).

 

b

The securities may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the Securities Act of 1933.

 

c

Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. The security may be resold in transactions exempt from registration normally to qualified institutional buyers. The security has been determined to be liquid in accordance with procedures adopted by the Funds’ Board of Trustees. At June 30, 2020, the aggregate value is $122,146,021, which is 3.19% of net assets.

 

Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

 

ADR

American Depositary Receipt

 

Pfd.

Preferred

 

REIT

Real Estate Investment Trust

See accompanying notes to financial statements.

    

 

 

matthewsasia.com  |   800.789.ASIA      29  


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Sherwood Zhang, CFA  

Lead Manager

   
Yu Zhang, CFA   S. Joyce Li, CFA

Co-Manager

  Co-Manager
FUND FACTS        
    Investor   Institutional

Ticker

  MCDFX   MICDX

CUSIP

  577125305   577130735

Inception

  11/30/09   10/29/10

NAV

  $16.48   $16.48

Initial Investment

  $2,500   $100,000

Gross Expense Ratio1

  1.15%   1.01%

Portfolio Statistics

 

Total # of Positions

  46

Net Assets

  $321.8 million

Weighted Average Market Cap

  $62.8 billion

Portfolio Turnover2

  65.69%

Benchmark

   

MSCI China Index

OBJECTIVE

 

 

Total return with an emphasis on providing current income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in China. China includes its administrative and other districts, such as Hong Kong. The Fund may also invest in convertible debt and equity securities of companies located in China.

Matthews China Dividend Fund

Portfolio Manager Commentary  (unaudited)

For the first half of 2020, the Matthews China Dividend Fund returned 4.02% (Investor Class) and 4.09% (Institutional Class), while its benchmark, the MSCI China Index, returned 3.58%. For the quarter ending June 30, 2020, the Matthews China Dividend Fund returned 19.18% (Investor Class) and 19.26% (Institutional Class), while its benchmark, the MSCI China Index, returned 15.37%.

Market Environment:

Asia’s markets experienced considerable volatility related the global COVID-19 pandemic, but Chinese equities generated the strongest returns in the region, as domestic Chinese sentiment gained strength on the back of a quick resumption of economic activity. China, along with South Korea and Taiwan, made considerable progress in flattening its curve of new virus infections in the reporting period. Amid strong returns, we also saw some volatility related to the Chinese government’s amendment of national security laws in Hong Kong during China’s annual gathering of its top legislative body, the People’s Congress. Although the nature and legislative process of this law is arguably controversial, it was passed and became effective in Hong Kong on July 1, which attracted international attention and protests from Hong Kong citizens.

On the economic polices front, China’s central bank refrained from adopting unconventional monetary policy tools such as Quantitative Easing and a zero interest rate. It only guided down the benchmark lending rate by 10 to 20 basis points (0.10% to 0.20%) during April, while cutting the required reserve ratio to release liquidity from the banking system. In terms of fiscal policy, the People’s Congress adopted a budget with historical high fiscal deficit of 3.76 trillion renminbi, and for the first time, it breached 3% of China’s GDP.

Performance Contributors and Detractors:

Stock selection made a significant contribution to relative performance in the first half of the year, with Hope Education Group, Tencent Holdings and Sun Art Retail Group contributing the most. Hope Education, a provider of educational services including training and knowledge point sharing, had very limited revenue impact from the COVID-19 outbreak, and the company also reported strong earnings. Tencent Holdings, the leading social media company in China has a wide range of product offerings including online games, mobile messaging and mobile payment. These offerings significantly gained their popularity during lock down and social distancing period in China. The Fund’s third largest contributor was Sun Art Retail Group, China’s largest hypermarket operator. Sun Art Retail benefited significantly from consumers stocking up on food and groceries and spending less time eating out. From a sector perspective, the Fund’s significant underweight allocation to financials and security selection in real estate contributed most to the Fund’s outperformance during the first half of the year.

On the other hand, Geely Automobile was the largest performance detractor as passenger car sales plunged due to the pandemic. However, we believe the company will continue to be a leader among China’s domestic branded passenger car makers. However, the planned merger with its parent controlled Volvo Cars could impair its ability to pay dividends in the near future, thus we decided to exit the position. Security selection in communication services and industrials sectors also caused a significant drag to Fund performance during the first half of the year. Two of the top three detractors were China B share market listed industrial companies, Shanghai Mechanical & Electrical Industry, a leading elevator maker in China, and Guangdong Provincial Expressway Development, a regional toll road operator in

(continued)

 
1

Prospectus expense ratios.

2

The lesser of fiscal year 2019 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

30    MATTHEWS ASIA FUNDS


Table of Contents
   
PERFORMANCE AS OF JUNE 30, 2020         
 

 

    

 

      

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      YTD      1 Year      3 Year      5 Year      10 Years      Since
Inception
     Inception
Date
 
Investor Class (MCDFX)      19.18%        4.02%        3.56%        8.18%        6.94%        9.99%        9.76%        11/30/09  
Institutional Class (MICDX)      19.26%        4.09%        3.72%        8.34%        7.12%        n.a.        8.85%        10/29/10  
MSCI China Index3      15.37%        3.58%        13.28%        8.73%        5.49%        6.60%        5.66% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

               
INCOME DISTRIBUTION HISTORY                                                         
       2020           2019  
       June        December        Total           June        December        Total  
Investor (MCDFX)      $ 0.36          n.a.        $ 0.36       $ 0.24        $ 0.02        $ 0.26  
Inst’l (MICDX)      $ 0.38          n.a.        $ 0.38       $ 0.25        $ 0.03        $ 0.28  

Note: This table does not include capital gains distributions. Totals may differ by $0.02 due to rounding. For income distribution history, visit matthewsasia.com.

 

   

30-DAY YIELD:

 

1.64% (Investor Class) 1.77% (Institutional Class)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 6/30/20, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

DIVIDEND YIELD: 3.23%

 

The dividend yield (trailing) for the portfolio is the weighted average sum of the dividends paid by each equity security held by the Fund over the 12 months ended 6/30/20 divided by the current price of each equity as of 6/30/20. The annualized dividend yield for the Fund is for the equity-only portion of the portfolio. Please note that this is based on gross equity portfolio holdings and does not reflect the actual yield an investor in the Fund would receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems, Bloomberg, MICM.

 

 

GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3

It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 90 for index definition.

 

  4

Calculated from 11/30/09.

 

       
TOP TEN HOLDINGS5                     
     Sector             % of Net Assets  
Tencent Holdings, Ltd.    Communication Services             7.6%  
Livzon Pharmaceutical Group, Inc.    Health Care             3.4%  
Hope Education Group Co., Ltd.    Consumer Discretionary             3.0%  
China International Capital Corp., Ltd.    Financials             3.0%  
Chengdu Hongqi Chain Co., Ltd.    Consumer Staples             3.0%  
Shanghai Baosight Software Co., Ltd.    Information Technology             3.0%  
KWG Group Holdings, Ltd.    Real Estate             2.8%  
Gree Electric Appliances, Inc. of Zhuhai    Consumer Discretionary             2.8%  
CITIC Telecom International Holdings, Ltd.    Communication Services             2.8%  
WH Group, Ltd.    Consumer Staples             2.8%  
% OF ASSETS IN TOP TEN                34.2%  

 

  5

Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
 

COUNTRY ALLOCATION (%)6,7

 
China/Hong Kong     88.7  
Taiwan     5.5  
Singapore     3.1  
Cash and Other Assets, Less Liabilities     2.6  
Total     99.9  

 

   

SECTOR ALLOCATION (%)7

     
Consumer Discretionary     20.1  
Communication Services     18.3  
Consumer Staples     12.2  
Information Technology     9.9  
Industrials     8.5  
Health Care     7.4  
Financials     6.9  
Real Estate     6.1  
Energy     4.1  
Materials     3.9  
Cash and Other Assets, Less Liabilities     2.6  
Total     100.0  

 

 

MARKET CAP EXPOSURE (%)7

 
Mega Cap (over $25B)     24.0  
Large Cap ($10B-$25B)     12.5  
Mid Cap ($3B-10B)     28.7  
Small Cap (under $3B)     32.1  
Cash and Other Assets, Less Liabilities     2.6  

 

6

Not all countries where the Fund may invest are included in the benchmark index.

 

7

Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent, so the values may not sum to 100% due to rounding. Percentage values may be derived from different data sources and may not be consistent with other Fund literature.

Matthews China Dividend Fund

Portfolio Manager Commentary  (unaudited) (continued)

Guangdong province. China’s B share market, originally designed for only foreign investors, has been gradually marginalized as A shares are now accessible to global investors. However, there are still companies listed as B shares on the Shanghai and Shenzhen exchanges in foreign currency with sound fundamental while offering attractive dividend yields and valuations. But, due to the less liquid nature of the B share market, they could underperform further in a severe sell off.

Notable Portfolio Changes:

During the second quarter, we initiated a new position in Tsingtao Brewery, one of the oldest Chinese companies listed in Hong Kong. We believe the Chinese beer industry is entering into a market share consolidation phase with top four market share leaders all focusing on premium products and profitability. In addition, for the first time of its history, Tsingtao Brewery launched a share based management incentive program to align management’s interest with minority shareholders. We believe the positive industry dynamics and management incentive could revitalize one of the best known consumer brands in China. We also initiated a position in Zhongsheng Group Holdings, a large premium car dealership network operator in China to replace Geely Automobile.

During the quarter, we exited our position in Hua Hong Semiconductor as the company decided to cut its dividend to maintain financial flexibility. We also exited China Merchants Bank as we expect the liquidity injection by central banks both domestic and globally will impact commercial banks’ ability to keep their profitability.

Outlook:

As China has started to recover its economic activity, its leaders have also been cautioning that the country is increasingly likely to be isolated politically and economically due to potential sanctions and diversification of global supply chain. “Internal Circulation” strategy of domestic consumption and home grown technology—key investment themes for us—has been proposed as a potential solution. We believe these themes will become even more attractive investment areas.

In the meantime, we are encouraged to see China has not given up its effort to open further to the world. In June, the Chinese government announced some major policy initiatives to make Hainan Island a free trade port benchmarked to Dubai and Singapore. These include significantly increasing Chinese tourists’ duty free spending limit, lowering corporate and personal income tax on the island to a low rate comparable to Hong Kong and Singapore and allowing more business areas for foreign investors to invest. These efforts could sow early seeds of a much freer open economy very much like China launching a few special economic zones along its coast 40 years ago.

 

 

32    MATTHEWS ASIA FUNDS


Table of Contents

Matthews China Dividend Fund

June 30, 2020

Schedule of Investmentsa (unaudited)

COMMON EQUITIES: 97.4%

 

     Shares     Value  
CONSUMER DISCRETIONARY: 20.1%    

Specialty Retail: 7.1%

   

China Tourism Group Duty Free Corp., Ltd. A Shares

    402,396       $8,823,344  

Zhongsheng Group Holdings, Ltd.

    1,439,000       8,047,937  

Topsports International Holdings, Ltd.b,c

    4,620,000       5,943,923  
   

 

 

 
      22,815,204  
   

 

 

 
   

Diversified Consumer Services: 5.2%

   

Hope Education Group Co., Ltd.b,c

    28,296,000       9,746,569  

China Education Group Holdings, Ltd.c

    4,251,000       6,855,423  
   

 

 

 
      16,601,992  
   

 

 

 
   

Household Durables: 2.8%

   

Gree Electric Appliances, Inc. of Zhuhai A Shares

    1,137,104       9,137,158  
   

 

 

 
   

Auto Components: 2.0%

   

Minth Group, Ltd.

    2,272,000       6,521,783