For the year ending December 31, 2020, the Matthews Asia Growth Fund returned 46.76% (Investor Class) and 47.01% (Institutional Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned 20.07%. For the fourth quarter, the Fund returned 26.54% (Investor Class) and 26.64% (Institutional Class) versus 17.88% for the Index.

Market Environment:

Equities across Asia were volatile in the year, but broad market indexes tracking the region ultimately generated attractive returns. Global markets fell in the first quarter, as worries surrounding the spread of COVID-19 moved from China throughout Europe to the U.S. and then back to South Asia, including India. Fears of a global growth slowdown turned into reality as governments worldwide began to implement different versions of ‘shelter in place’ to contain the movement of the virus. Early in the year, cyclically sensitive sectors like energy, materials, industrials and financials suffered most while companies related to communication services and technology performed better. In the second quarter, most global financial markets, including Asia’s, began to rise as major economies began to relax prior pandemic-related restrictions. The gradual reopening of businesses—especially those focused on services and consumption— helped bolster sentiment and bring a floor to stock prices globally.

In the third quarter, economic recovery and improved sentiment began to take hold as major economies continued to relax COVID-19 lockdown restrictions even further. China’s V-shaped recovery in manufacturing along with a steady recovery in domestic consumption brought some normalcy to daily life. EM currencies rallied slightly against the U.S. dollar in the third quarter, acting as a slight tailwind for EM equities. Growth stocks outpaced value and small caps outperformed large caps in the third quarter. The fourth quarter saw further economic strengthening. Cyclical stocks in beaten-up or export-driven markets such as Indonesia and South Korea rallied most in the fourth quarter, while markets that experienced early recovery like China, Japan and India lagged slightly. Market strength gained momentum following the U.S. Presidential elections in November as markets hoped for less confrontational U.S. – China relations, combined with an announcement of several approved COVID-19 vaccines that were due for distribution early in 2021.

Performance Contributors and Detractors:

From a regional perspective, stock selection in China/Hong Kong was a notable contributor to performance. China’s economy went into lockdown and emerged from lockdown earlier than other major economies, boosting local sentiment and asset prices. From a sector perspective, stock selection and our overweight in health care was a notable contributor to performance. Health care stocks occupy an interesting spot in the risk-reward continuum in our view, because they offer the potential for both attractive growth and steady growth.

On the other hand, our underweight to Taiwan and South Korea detracted slightly from relative performance. Our underweight to the information technology sector was also a slight detractor from relative performance, even though stock selection in information technology was a contributor. Large-cap information technology companies, which have a strong presence in Taiwan and South Korea, generated strong gains in the year. The Fund’s underweights are result of our bottom-up stock selection process.

Turning to individual securities, the Chinese electric vehicle (EV) maker Xpeng, which we purchased during its IPO in the mid-August, generated strong gains in the reporting period. China continues to focus on cleaner energy and cleaner transit, fueling demand for EVs. On the other hand, the Chinese health care company Kangji Medical Holdings was a detractor. We exited the company in the fourth quarter to redeploy the capital in higher conviction holdings.

By market capitalization, stock selection among mid-cap stocks (those with a market cap between $3 billion and $10 billion) was also a strong contributor in the period. In our view, mid-cap stocks offer attractive alpha generation potential because they are often in an earlier stage of growth with a longer trajectory for generating future returns. The spirit of a growth-oriented fund is to capture this early stage growth when possible. While the Fund skews towards large caps in aggregate, we continue to find compelling opportunities in mid caps. On the other hand, stock selection in small caps was a detractor in the period. While the economic recovery is starting to broaden out and include smaller companies, investors gravitated toward larger companies with larger balance sheets amid a year of economic disruption. Small caps remains a focus of our research efforts, particularly in Japan.

Notable Portfolio Changes:

A robust IPO market in China led to a busy fourth quarter in terms of new portfolio additions. We purchased China-based health care companies Jacobio Pharmaceuticals Group, JD Health International, JW Cayman Therapeutics and Remegen Co. In addition, we purchased Chinese real estate management company Shimao Services and Chinese cosmetics company Yatsen Holding. The surge of IPOs created some interesting buying opportunities. Elsewhere in the region, we initiated a small position in the Indian non-banking financials company Bajaj Finance. And in Singapore, we initiated a position in Sea, Ltd.

Outlook:

Looking ahead, we expect China and Japan to remain compelling markets from a bottom-up perspective. U.S. – China trade tensions may linger to some degree, even as the incoming Biden administration appears likely to employ a more nuanced and diplomatic tone. For Japan, as the global economic outlook improves due to vaccine rollouts and lessening impacts of the pandemic, we expect the country’s macro conditions to improve as well. We especially see opportunities among small-cap names in Japan. In both markets, active security selection will remain key in our view. Turning to South and Southeast Asian economies such as India, the outlook is improving in many parts of the region and we continue to look for opportunities in these markets as well.

From a sector perspective, continued prospects for growth in the health care sector remains sound in our view, with attractive compounding potential for bottom-up equity investors. What’s more we find a broader universe of opportunity among health care companies. Whereas a sector such as communication services tends to be dominated by a few large players, we can more easily diversify our exposure within the health care sector because of the breadth and depth of the universe. Parts of the health care sector have seen a rise in valuations, but opportunities remain and we expect the sector to become a much larger part of the indexes and broader universe of stocks in Asia over time. From a bottom-up perspective, we are also finding opportunities in sectors such as real estate and information technology that have been less represented in the portfolio in the past. The core of our process remains in identifying opportunities on a company-by-company basis with strong top-line growth, strong management teams and an ability to grow its market share.

As of 12/31/2020, the securities mentioned comprised the Matthews Asia Growth Fund in the following percentages: XPeng, Inc. ADR, 2.2%; Jacobio Pharmaceuticals Group Co., Ltd., 0.7%; JD Health International, Inc., 1.4%; JW Cayman Therapeutics Co., Ltd., 0.4%; RemeGen Co., Ltd. H Shares, 0.8%.Shimao Services Holdings, Ltd., 1.2%; Yatsen Holding, Ltd. ADR, 0.9%; Bajaj Finance, Ltd., 1.0%; and Sea, Ltd. ADR, 0.9%. The fund held no positions in Kangji Medical Holdings. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MPACX as of 12/31/2020