Under normal circumstances, the 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 Small Companies located in China. China includes its administrative and other districts, such as Hong Kong. The Fund seeks to invest in smaller companies capable of sustainable growth based on the fundamental characteristics of those companies, including balance sheet information; number of employees; size and stability of cash flow; management’s depth, adaptability and integrity; product lines; marketing strategies; corporate governance; and financial health. The Fund defines Small Companies as companies with market capitalization no higher than the greater of US $5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI China Small Cap Index.
Risks
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. The Fund is non-diversified as it concentrates its investments in small sized companies.
Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies.
These and other risks associated with investing in the Fund can be found in the
prospectus.
China - China includes its administrative and other districts, such as Hong Kong
Fees & Expenses
Gross Expense Ratio
1.55%
Net Expense Ratio
1.41%
Objective
Long-term capital appreciation.
Strategy
Under normal circumstances, the 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 Small Companies located in China. China includes its administrative and other districts, such as Hong Kong. The Fund seeks to invest in smaller companies capable of sustainable growth based on the fundamental characteristics of those companies, including balance sheet information; number of employees; size and stability of cash flow; management’s depth, adaptability and integrity; product lines; marketing strategies; corporate governance; and financial health. The Fund defines Small Companies as companies with market capitalization no higher than the greater of US $5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI China Small Cap Index.
Risks
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. The Fund is non-diversified as it concentrates its investments in small sized companies.
Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies.
The risks associated with investing in the Fund can be found in the prospectus
Performance
Monthly
Quarterly
Calendar Year
As of 02/29/2024
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews China Small Companies Fund - MCSMX
05/31/2011
MCSMX
13.74%
-0.71%
-0.11%
-18.92%
-19.68%
3.88%
5.37%
4.18%
MSCI China Small Cap Index
8.74%
-9.04%
-7.84%
-31.95%
-25.87%
-10.01%
-4.51%
-3.78%
As of 12/31/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews China Small Companies Fund - MCSMX
05/31/2011
MCSMX
-0.60%
-6.96%
-17.51%
-17.51%
-18.23%
6.21%
5.34%
4.25%
MSCI China Small Cap Index
-1.31%
-2.93%
-24.82%
-24.82%
-19.06%
-6.38%
-3.51%
-3.21%
For the years ended December 31st
Name
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
Matthews China Small Companies Fund - MCSMX
MCSMX
-17.51%
-31.26%
-3.59%
82.52%
35.41%
-17.68%
53.88%
-2.35%
4.07%
-3.33%
MSCI China Small Cap Index
-24.82%
-24.77%
-6.26%
27.21%
6.63%
-19.53%
24.62%
-5.95%
3.48%
-0.34%
Unusually high returns may not be sustainable.
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
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. Performance differences between the Institutional class and the Investor class may arise due to differences in fees charged to each class.
Additional performance, attribution, liquidity, value at risk (VaR), security classification and holdings information is available on request for certain time periods.
Growth of a Hypothetical $10,000 Investment Since Inception
(as of 12/31/2023)
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.
Past performance is no guarantee of future results. High ratings and rankings does not assure favorable performance.
The Overall Morningstar® Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and (if applicable) ten-year ratings.
Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Lipper Analytical Services, Inc., rankings are based on total return, including reinvestment of dividends and capital gains for the stated periods. Funds are assigned a rank within a universe of funds similar in investment objective as determined by Lipper. For the absolute rankings shown the lower the number rank, the better the Fund performed compared to other funds in the classification group. Lipper also calculates a quartile ranking which divides the peer group into quartiles to identify funds of similar quality. Funds in the 1st or 2nd quartile had outperformed the average fund in the peer group while funds in the 3rd or 4th quartile had underperformed.
Andrew Mattock is a Portfolio Manager at Matthews and manages the firm’s China, China Small Companies, China A-Share and China Discovery Strategies and co-manages the Pacific Tiger, China Dividend and Emerging Markets Equity Strategies. Prior to joining Matthews in 2015, he was a Fund Manager at Henderson Global Investors for 15 years, first in London and then in Singapore, managing Asia Pacific equities. Andrew holds a Bachelor of Business majoring in Accounting from ACU. He began his career at PricewaterhouseCoopers and qualified as a Chartered Accountant.
Winnie Chwang is a Portfolio Manager at Matthews and manages the firm’s China Small Companies, China Dividend and China Discovery Strategies and co-manages the China, Pacific Tiger and Asia Dividend Strategies. She joined the firm in 2004 and has built her investment career at the firm. Winnie earned an MBA from the Haas School of Business and received her B.A. in Economics with a minor in Business Administration from the University of California, Berkeley. She is fluent in Mandarin and conversational in Cantonese.
Portfolio Characteristics
(as of 12/31/2023)
Fund
Benchmark
Number of Positions
44
226
Weighted Average Market Cap
$4.5 billion
$1.3 billion
Active Share
94.0
n.a.
P/E using FY1 estimates
15.1x
8.2x
P/E using FY2 estimates
12.9x
7.1x
Price/Cash Flow
11.4
4.6
Price/Book
2.4
0.7
Return On Equity
12.8
2.2
EPS Growth (3 Yr)
26.3%
10.1%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 12/31/2023)
Category
3YR Return Metric
Alpha
-2.86%
Beta
0.82
Upside Capture
75.98%
Downside Capture
91.44%
Sharpe Ratio
-0.77
Information Ratio
0.06
Tracking Error
14.38%
R²
74.56
-2.86%
Alpha
0.82
Beta
75.98%
Upside Capture
91.44%
Downside Capture
-0.77
Sharpe Ratio
0.06
Information Ratio
14.38%
Tracking Error
74.56
R²
Fund Risk Metrics are reflective of Investor share class.
Top 10 holdings may combine more than one security from the same issuer and related depositary receipts.
Source: BNY Mellon Investment Servicing (US) Inc.
Portfolio Breakdown (%)
(as of 12/31/2023)
Sector Allocation
Market Cap Exposure
China Exposure
Sector
Fund
Benchmark
Difference
Consumer Discretionary
21.9
12.0
9.9
Industrials
20.4
13.5
6.9
Information Technology
18.7
7.4
11.3
Health Care
11.3
23.8
-12.5
Consumer Staples
9.1
5.1
4.0
Communication Services
6.7
7.7
-1.0
Real Estate
6.6
9.7
-3.1
Utilities
2.8
3.9
-1.1
Financials
2.7
4.9
-2.2
Materials
0.0
10.5
-10.5
Energy
0.0
1.6
-1.6
Liabilities in Excess of Cash and Other Assets
-0.3
0.0
-0.3
Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.
Equity market cap of issuer
Fund
Benchmark
Difference
Mega Cap (over $25B)
0.0
0.0
0.0
Large Cap ($10B-$25B)
8.0
0.0
8.0
Mid Cap ($3B-$10B)
55.5
2.7
52.8
Small Cap (under $3B)
36.7
97.3
-60.6
Liabilities in Excess of Cash and Other Assets
-0.3
0.0
-0.3
The Portfolio’s market cap exposure breakdown presented is used for comparison purposes and the definition of the capitalization breakdown is from MSCI.
The Fund defines Small Companies as companies with market capitalization no higher than the greater of US$5 billion or the market capitalization of the largest company included in the Fund's primary benchmark, the MSCI China Small Cap Index.
China Exposure
Portfolio Weight
Hong Kong Listed Companies
42.8
Mainland China Listed Companies
23.9
Other
21.8
ADR/GDR
11.6
Liabilities in Excess of Cash and Other Assets
-0.3
Mainland China listed companies includes A Share and B Shares. A Shares are Mainland Chinese companies incorporated in China and listed on the Shanghai or Shenzhen exchanges, available mostly to local Chinese investors and qualified institutional investors. B Shares are mainland Chinese companies listed on the Shanghai and Shenzhen stock exchanges, available to both Chinese and non-Chinese investors. ADRs are American Depositary Receipts and GDRs are Global Depositary Receipts. Hong Kong Listed Companies include SAR (Hong Kong) companies, China-affiliated corporations, and H Shares. SAR companies are companies that conduct business in Hong Kong and/or mainland China. China-affiliated corporations [CAC], also known as "Red Chips," are mainland China companies with partial state ownership listed in Hong Kong, and incorporated in Hong Kong. H Shares are mainland Chinese companies listed on the Hong Kong exchange but incorporated in mainland China. Other represents Chinese companies listed in other countries or non-China companies with a majority of revenue coming from China such as Japan, Singapore, Taiwan and the United States or other non-China companies.
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.
There is no guarantee that the Fund will pay or continue to pay distributions.
Past performance is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost.
For the year ending December 31, 2023, the Matthews China Small Companies Fund returned -17.51% (Investor Class) and -17.37% (Institutional Class), while its benchmark, the MSCI China Small Cap Index, returned -24.82% over the same period. For the fourth quarter, the Fund returned -6.96% (Investor Class) and -6.91% (Institutional Class), while the benchmark returned -2.93%.
Market Environment
2023 was a disappointing year for Chinese equities and the Chinese economy overall. It’s disappointing, in our view, not just in the sense of the underwhelming recovery of Chinese consumer spending post-COVID lockdowns, but also due to the lack of any significant stimulus measures by the government. While the government started to gradually loosen nearly all property purchase-restrictions across most cities in China, the expectations of potential home buyers regarding future house prices and their own income levels have changed. As a result, these policy changes have barely helped to arrest the slump in the real estate market. As the year progressed, investors gradually gave up on the idea that the Chinese central government would step in to engineer a stronger consumption rebound.
The challenging real estate market and the soft consumption environment create a potential formula for deflation, in our view. From what we can see, many entrepreneurs, whose animal spirits were curbed during the COVID period, are now hesitating to start any new investments in this environment. From a geopolitical standpoint, the highly anticipated Biden-Xi summit in San Francsico in November have not curbed the ongoing concerns of the market.
In terms of markets, quarterly results of leading Chinese companies, especially large cap technology firms seem to be hinting towards upward surprises in terms of top line revenue and earnings. During the last quarter of the year, information technology and utilities were the only positive sectors while real estate was weakest followed by consumer staples and communication services. Chinese small and mid caps ended lower but outperformed weak large and mega caps during the quarter.
Performance Contributors and Detractors
From a sector perspective, our allocation to health care and stock selection within industrials detracted the most from relative performance in the year. We have been underweight health care relative to the index given its larger exposure in biotech where we have been more selective this year. Industrials have underperformed given our exposure in renewables which is going through a slower growth period amid capacity expansions and increased worries that oversupply might lead to weaker pricing. Turning to individual holdings, Xtep International Holdings, a consumer discretionary company engaged in the development and manufacturing of sportswear detracted the most from the portfolio’s absolute and relative performance. Xtep has been impacted by weaker-than-expected consumption environment which has led to slower-than-expected growth in the sportswear industry. BOE Varitronix, an auto parts manufacturer, was another detractor. The company has been experiencing some pricing pressures given a slowdown in the growth of both China’s traditional ICE (Internal combustion engine) and EV (electric vehicle) auto industry. We believe these two names sold down more relative to their weaker outlook, and that their current valuations have more than compensated for a lower growth outlook ahead.
On the other hand, stock selection within information technology and real estate sectors contributed the most to the Fund’s relative performance. Two Taiwan-listed information technology names including Alchip Technologies contributed the most to the Fund’s absolute and relative performance as beneficiaries from the secular trends of AI (artificial intelligence). Alchip designs application-specific integrated circuits (ASIC) and the company continues to see growing penetration and development from customized AI chip designs. Anhui Yingjia Distrillery, a mass market white liquor manufacturer, was another top contributor. Anhui Yingjia has done well given the company’s positive efforts in distribution and branding restructuring in its hometown of Anhui province.
Notable Portfolio Changes
We streamlined the number of positions in the portfolio from 64 to 44 over the course of the year. Overall exposure in mainland-listed companies has been reduced from around 39% in Dec 2022 to 24% at the end of the year. Many smaller A-shares positions that were more expensive were exited from the portfolio as cheaper valuations given the pull back enabled us to build more into better quality holdings. In the more recent quarters, we have incrementally added to our positions in certain communication services names such as Cloud Music (driven by low valuations as well as increased willingness of consumers to spend and pay for online services). We’ve also added to consumer names such as Melco Resorts & Entertainment and Tongcheng Travel Holdings (driven by the pull back of these names leading to attractive valuations for what are still renowned brands in China) and to health-care names such as HUTCHMED and Kangji Medical Holdings.
Outlook
2023 has been generally a challenging year for China. Despite the lifting of COVID restrictions in the country, the government’s lack of stimulus generally led to weakening economic support. At the same time, property market woes continued, impacting sentiment and business confidence in the country. While more supportive measures have been rolled out later in the year to address property market concerns, a meaningful inflection remains to be seen.
Looking ahead, we are cautiously looking for a stabilization of the deterioration in property markets. While we do not expect a significant warming of geo-politics, the ongoing current status quo of a more constructive post-APEC posturing would be welcomed by the market. Valuations continued to trend down in 2023, and the broader China market hovers around similar levels as 2009 despite better quality businesses and earnings profile. We continue to believe that patience is needed in these market environments and, that it could ultimately pay off if the market turns.
View the Fund’s Top 10 holdings as of December 31, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MCSMX as of 12/31/2023
1YR
3YR
5YR
10YR
Since Inception
Inception Date
-17.51%
-18.23%
6.21%
5.34%
4.25%
05/31/2011
All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, 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. Please see the Fund's most recent month-end performance.
Fees & Expenses
Gross Expense Ratio
1.55%
Net Expense Ratio
1.41%
Matthews has contractually agreed to waive fees and reimburse expenses to limit the Total Annual Fund Operating Expenses until April 30, 2024. Please see the Fund’s prospectus for additional details.
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. The Fund is non-diversified as it concentrates its investments in small sized companies.
Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies.
The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI All Country Asia Pacific Index is a free float–adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Index is a free float-adjusted market capitalization-weighted index of Chinese equities that includes H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges, Hong Kong-listed securities known as Red chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China) and foreign listings (e.g. ADRs).
The MSCI China All Shares Index captures large and mid-cap representation across China A shares, B shares, H shares, Red chips (issued by entities owned by national or local governments in China), P chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g. ADRs). The index aims to reflect the opportunity set of China share classes listed in Hong Kong,Shanghai, Shenzhen and outside of China.
The MSCI Emerging Markets (EM) Asia Index is a free float-adjusted market capitalization weighted index of the stock markets of China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan and Thailand. The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets ex China Index is a free float-adjusted market capitalization-weighted index that captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries excluding China: Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI Emerging Markets Small Cap Index is a free float-adjusted market capitalization weighted small cap index of the stock markets of Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungry, India, Indonesia, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan Thailand, Turkey and United Arab Emirates.
The S&P Bombay Stock Exchange 100 (S&P BSE 100) Index is a free float–adjusted market capitalization–weighted index of 100 stocks listed on the Bombay Stock Exchange.
The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan.
The Korea Composite Stock Price Index (KOSPI) is a market capitalization–weighted index of all common stocks listed on the Korea Stock Exchange.
The MSCI All Country Asia ex Japan Small Cap Index is a free float–adjusted market capitalization–weighted small cap index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan and Thailand.
The MSCI China Small Cap Index is a free float-adjusted market capitalization-weighted small cap index of the Chinese equity securities markets, including H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges,Hong Kong-listed securities known as Red Chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China), and foreign listings (e.g., ADRs).
The MSCI India Index is a free float-adjusted market capitalization-weighted index of Indian equities listed in India.
The MSCI Korea Index is a free float-adjusted market capitalization-weighted index of Korean equities listed in Korea.
Indexes are for comparative purposes only and it is not possible to invest directly in an index.
The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Neither the funds nor the Investment Advisor accept any liability for losses either direct or consequential caused by the use of this information.
The views and opinions in the commentary were as of the report date, subject to change and may not reflect current views. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund's future investment intent. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. The information does not constitute a recommendation to buy or sell any securities mentioned.
Commentary
Period ended December 31, 2023
For the year ending December 31, 2023, the Matthews China Small Companies Fund returned -17.51% (Investor Class) and -17.37% (Institutional Class), while its benchmark, the MSCI China Small Cap Index, returned -24.82% over the same period. For the fourth quarter, the Fund returned -6.96% (Investor Class) and -6.91% (Institutional Class), while the benchmark returned -2.93%.
Market Environment
2023 was a disappointing year for Chinese equities and the Chinese economy overall. It’s disappointing, in our view, not just in the sense of the underwhelming recovery of Chinese consumer spending post-COVID lockdowns, but also due to the lack of any significant stimulus measures by the government. While the government started to gradually loosen nearly all property purchase-restrictions across most cities in China, the expectations of potential home buyers regarding future house prices and their own income levels have changed. As a result, these policy changes have barely helped to arrest the slump in the real estate market. As the year progressed, investors gradually gave up on the idea that the Chinese central government would step in to engineer a stronger consumption rebound.
The challenging real estate market and the soft consumption environment create a potential formula for deflation, in our view. From what we can see, many entrepreneurs, whose animal spirits were curbed during the COVID period, are now hesitating to start any new investments in this environment. From a geopolitical standpoint, the highly anticipated Biden-Xi summit in San Francsico in November have not curbed the ongoing concerns of the market.
In terms of markets, quarterly results of leading Chinese companies, especially large cap technology firms seem to be hinting towards upward surprises in terms of top line revenue and earnings. During the last quarter of the year, information technology and utilities were the only positive sectors while real estate was weakest followed by consumer staples and communication services. Chinese small and mid caps ended lower but outperformed weak large and mega caps during the quarter.
Performance Contributors and Detractors
From a sector perspective, our allocation to health care and stock selection within industrials detracted the most from relative performance in the year. We have been underweight health care relative to the index given its larger exposure in biotech where we have been more selective this year. Industrials have underperformed given our exposure in renewables which is going through a slower growth period amid capacity expansions and increased worries that oversupply might lead to weaker pricing. Turning to individual holdings, Xtep International Holdings, a consumer discretionary company engaged in the development and manufacturing of sportswear detracted the most from the portfolio’s absolute and relative performance. Xtep has been impacted by weaker-than-expected consumption environment which has led to slower-than-expected growth in the sportswear industry. BOE Varitronix, an auto parts manufacturer, was another detractor. The company has been experiencing some pricing pressures given a slowdown in the growth of both China’s traditional ICE (Internal combustion engine) and EV (electric vehicle) auto industry. We believe these two names sold down more relative to their weaker outlook, and that their current valuations have more than compensated for a lower growth outlook ahead.
On the other hand, stock selection within information technology and real estate sectors contributed the most to the Fund’s relative performance. Two Taiwan-listed information technology names including Alchip Technologies contributed the most to the Fund’s absolute and relative performance as beneficiaries from the secular trends of AI (artificial intelligence). Alchip designs application-specific integrated circuits (ASIC) and the company continues to see growing penetration and development from customized AI chip designs. Anhui Yingjia Distrillery, a mass market white liquor manufacturer, was another top contributor. Anhui Yingjia has done well given the company’s positive efforts in distribution and branding restructuring in its hometown of Anhui province.
Notable Portfolio Changes
We streamlined the number of positions in the portfolio from 64 to 44 over the course of the year. Overall exposure in mainland-listed companies has been reduced from around 39% in Dec 2022 to 24% at the end of the year. Many smaller A-shares positions that were more expensive were exited from the portfolio as cheaper valuations given the pull back enabled us to build more into better quality holdings. In the more recent quarters, we have incrementally added to our positions in certain communication services names such as Cloud Music (driven by low valuations as well as increased willingness of consumers to spend and pay for online services). We’ve also added to consumer names such as Melco Resorts & Entertainment and Tongcheng Travel Holdings (driven by the pull back of these names leading to attractive valuations for what are still renowned brands in China) and to health-care names such as HUTCHMED and Kangji Medical Holdings.
Outlook
2023 has been generally a challenging year for China. Despite the lifting of COVID restrictions in the country, the government’s lack of stimulus generally led to weakening economic support. At the same time, property market woes continued, impacting sentiment and business confidence in the country. While more supportive measures have been rolled out later in the year to address property market concerns, a meaningful inflection remains to be seen.
Looking ahead, we are cautiously looking for a stabilization of the deterioration in property markets. While we do not expect a significant warming of geo-politics, the ongoing current status quo of a more constructive post-APEC posturing would be welcomed by the market. Valuations continued to trend down in 2023, and the broader China market hovers around similar levels as 2009 despite better quality businesses and earnings profile. We continue to believe that patience is needed in these market environments and, that it could ultimately pay off if the market turns.
View the Fund’s Top 10 holdings as of December 31, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MCSMX as of 12/31/2023
All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, 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. Please see the Fund's most recent month-end performance.
Fees & Expenses
Matthews has contractually agreed to waive fees and reimburse expenses to limit the Total Annual Fund Operating Expenses until April 30, 2024. Please see the Fund’s prospectus for additional details.
Investments in Asian securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. In addition, investments in a single-country fund, which is considered a non-diversified fund, may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. The Fund is non-diversified as it concentrates its investments in small sized companies. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies.