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Asia Growth

Matthews China Small Companies Fund MCSMX

Snapshot
  • Seeks alpha in China’s lesser known small entrepreneurial companies
  • Invests in industries that are leveraged to China’s increasingly innovative and dynamic economy driven by fast growing domestic consumer demand
  • Tilt towards higher value-added growth sectors benefiting from innovation and capital efficiency

05/31/2011

Inception Date

-5.54%

YTD Return

(as of 01/14/2022)

$15.53

Price

(as of 01/14/2022)

$381.17 million

Fund Assets

(as of 12/31/2021)

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.

These and other risks associated with investing in the Fund can be found in the prospectus.

Fund Facts
Inception Date 05/31/2011
Fund Assets $381.17 million (12/31/2021)
Currency USD
Ticker MCSMX
Cusip 577-125-404
Portfolio Turnover 152.9%
Benchmark MSCI China Small Cap Index
Geographic Focus China - China includes its administrative and other districts, such as Hong Kong
Fees & Expenses
Gross Expense Ratio 1.52%
Net Expense Ratio 1.43%

Performance

  • Monthly
  • Quarterly
  • Calendar Year
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As of 12/31/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews China Small Companies Fund
MCSMX
-5.63% -3.83% -3.59% -3.59% 33.57% 24.73% 15.50% 10.85% 05/31/2011
MSCI China Small Cap Index
-3.43% -8.47% -6.26% -6.26% 8.34% 4.98% 6.08% 1.52%
As of 12/31/2021
Average Annual Total Returns
Name 1MO 3MO YTD 1YR 3YR 5YR 10YR Since Inception Inception Date
Matthews China Small Companies Fund
MCSMX
-5.63% -3.83% -3.59% -3.59% 33.57% 24.73% 15.50% 10.85% 05/31/2011
MSCI China Small Cap Index
-3.43% -8.47% -6.26% -6.26% 8.34% 4.98% 6.08% 1.52%
For the years ended December 31st
Name 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012
Matthews China Small Companies Fund
MCSMX
-3.59% 82.52% 35.41% -17.68% 53.88% -2.35% 4.07% -3.33% 28.85% 10.53%
MSCI China Small Cap Index
-6.26% 27.21% 6.63% -19.53% 24.62% -5.95% 3.48% -0.34% 18.68% 22.98%
 

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 12/31/2021)

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.

Ratings

  • OVERALL
  • out of 95 funds
  • 3 YEAR
  • out of 95 funds
  • 5 YEAR
  • out of 72 funds
  • 10 YEAR
  • out of 53 funds
  • 1 YEAR
  • 2nd
  • 34 out of 105 funds
  • 3 YEAR
  • 1st
  • 4 out of 83 funds
  • 5 YEAR
  • 1st
  • 1 out of 64 funds
  • 10 YEAR
  • 1st
  • 1 out of 46 funds
  • SINCE INCEPTION
  • 1st
  • 1 out of 46 funds

Ratings agency calculation methodology

Portfolio Managers

Andrew  Mattock, CFA photo
Andrew Mattock, CFA

Lead Manager

Winnie  Chwang photo
Winnie Chwang

Lead Manager

Portfolio Characteristics

(as of 12/31/2021)
Fund Benchmark
Number of Positions 66 251
Weighted Average Market Cap $5.2 billion $1.6 billion
Active Share 95.2 n.a.
P/E using FY1 estimates 13.6x n.a.
P/E using FY2 estimates 11.5x n.a.
Price/Cash Flow 14.5 6.4
Price/Book 2.3 0.9
Return On Equity 15.4 5.9
EPS Growth (3 Yr) 42.3% 12.9%

Sources: Factset Research Systems, Inc.

Risk Metrics (3 Yr Return)

(as of 09/30/2021)
24.43%
Alpha
0.68
Beta
115.48%
Upside Capture
51.90%
Downside Capture
1.31
Sharpe Ratio
1.28
Information Ratio
17.69%
Tracking Error
44.80

Fund Risk Metrics are reflective of Investor share class.

Sources: Zephyr StyleADVISOR

Top 10 Holdings

(as of 12/31/2021)
Name Sector % Net Assets
Alchip Technologies, Ltd. Information Technology 3.6
Pan Jit International, Inc. Information Technology 3.3
Zhejiang HangKe Technology, Inc., Co. Industrials 3.3
Chailease Holding Co., Ltd. Financials 2.9
Silergy Corp. Information Technology 2.8
Airtac International Group Industrials 2.6
China State Construction International Holdings, Ltd. Industrials 2.6
ACM Research, Inc. Information Technology 2.5
ENN Natural Gas Co., Ltd. Utilities 2.5
China Yongda Automobiles Services Holdings, Ltd. Consumer Discretionary 2.3
TOTAL 28.4

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 12/31/2021)
  • Sector Allocation
  • Market Cap Exposure
  • China Exposure

Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.

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
A Shares 33.6
SAR (Hong Kong) 31.3
Overseas Listed Companies (OL) 6.0
H Shares 5.9
China-affiliated corporations (CAC) 4.7
Unassigned 18.6
Liabilities in Excess of Cash and Other Assets -0.2

Definitions: SAR (Hong Kong) 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. China 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. H Shares are mainland Chinese companies listed on the Hong Kong exchange but incorporated in mainland China. B Shares are mainland Chinese companies listed on the Shanghai and Shenzhen stock exchanges, available to both Chinese and non-Chinese investors. Overseas Listed [OL] companies are companies that conduct business in mainland China but listed in overseas markets such as Japan, Singapore, Taiwan and the United States.

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.

Distributions

Record Date Ex, Pay and
Reinvest Date
Ordinary
Income
Short Term
Capital Gains
Long Term
Capital Gains
Total Distributions
Per Share
% of NAV Nondividend Distribution (Return of Capital)
12/14/2021 12/15/2021 $0.11673 $1.77913 $0.81209 $2.70795 14.0% N.A.
12/15/2020 12/16/2020 $0.13338 $1.96280 $1.27532 $3.37150 18.0% N.A.
View History

 

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.

Commentary

Period ended December 31, 2021

For the year ending December 31, 2021, the Matthews China Small Companies Fund returned -3.59% (Investor Class) and -3.35% (Institutional Class), while its benchmark, the MSCI China Small Cap Index, returned -6.26% over the same period. For the fourth quarter of the year, the Fund returned -3.83% (Investor Class) and -3.79% (Institutional Class), while the benchmark returned -8.47%.

Market Environment:

2021 was a volatile year for Chinese equity markets with a variety of issues including concerns regarding anti-monopoly regulations faced by internet platform companies, Chinese ADR delistings, solvency risks surrounding China’s property markets and general concerns about growth slowing given both internal and external factors. These concerns resulted in weak foreign sentiment and resulted in stock market performance divergence between U.S. and Hong Kong-listed Chinese securities with that of the domestic A-share-listed Chinese securities. Hong Kong dually listed stocks continue to see record high levels of discount compared with those of their China counterparts.

The regulatory environment in China has been rather tight since the end of the first half in 2021 given that China met many of its economic goals early in the year. We believe that regulations continue to be part and parcel of China’s economy and look toward opportunities in sectors where there is continued regulatory support, such as in the areas of renewables and import substitution which will continue to drive local businesses to use more locally made content.

Amid this backdrop, the Chinese market was bifurcated, with the onshore China A shares market ending the year slightly positive while MSCI China and MSCI China All Share Indexes ended up being some of the worst markets, down more than 20% and 10%, respectively. Small cap equities were slightly more insulated from downward pressure.

Performance Contributors and Detractors:

An overweight and stock selection within information technology sector and stock selection within industrials sector contributed the most to performance for the full year. A contributor among individual stocks was Ginlong Technologies Co., a company that manufactures solar inverters for solar energy production. The solar inverters are a critical component in solar modules and may have more pricing protection when compared to other solar module components given a more consolidated market structure. The trajectory of renewable energy expansion in China is very clear in our view and we expect continued solar growth in China given the government’s supportive policies, such as a goal of carbon neutrality by 2060. SITC International, an intra-Asia logistic provider, was another contributor. With a superior management team who is very knowledgeable about the region, the company has executed very well in past years, and the company has done well amid rising shipping rates given tighter supply.

On the other hand, the Fund’s utilities, health care and real estate holdings detracted from relative performance. The market continued to be increasingly worried about real estate sentiment in the second half of the year which drove stock prices down. A detractor among individual stocks was Times China Holdings, a southern China focused developer which experienced weak performance due to a tightening policy environment. We believe that this presents the opportunity for market consolidation over the longer term, and that leading regional players such as Times China should be able to grow market share under these conditions given their strong balance sheets. Real estate opportunities in China are also attractively valued and may offer high dividend yields making the risk reward still favorable in our view. Another detractor among individual securities was Peijia Medical, which manufactures TAVR products used in heart surgeries which still has very low penetration in China. China’s overall health care sector suffered from additional concerns of the regulatory impact from price cuts and investors held a negative view on the sector’s growth. While we expect penetration of such products to increase, we are also mindful of the situation on pricing and a bit cautious on the name given still high valuations; hence our position is rather small.

The Fund’s allocation to A-shares has continued to increase over time during the year. At the end of 2021, the Fund had 33.6% in A-shares compared to the beginning of the year, where it had 27.5%. As A-shares have performed much better compared to both the U.S. and Hong Kong-listed shares, the portfolio’s increasing allocation to A-shares generated positive returns.

Notable Portfolio Changes:

During the quarter, we reduced the portfolio’s overall exposure to health care and materials sectors and increased our exposure to information technology sector given secular growth opportunities ahead. We initiated new positions in Sino Wealth Electronics, maker of microcontroller unit (MCU) components that are used in a wide variety of electronics including that of home applications. There are still a lot of opportunities in “catch-up” technology available in China and Sino Wealth helps to cater to this. Broadly as well, the proliferation of smart devices is expanding, necessitating more semi components such as MCUs. We also reinitiated our position in property management company China Overseas Property given the recent property correction. The company provides professional condo management for homeowners in China, a relatively new category of professional services.

Outlook:

Looking ahead, we believe 2022 will be a year of adaptation to the new policies in place. Tough regulations might have moderated growth but have not completely derailed growth for many of China’s leading companies. There will likely be stability, both economically and politically, for the country as highlighted in the recent central economic work conference. China’s government also has sufficient monetary tools to deploy if it needs to step in to support economic growth. However, given growth targets which are largely within expectation, we expect that any monetary support will be more targeted.

In 2022, we believe that China will continue to be focused on a strict COVID-19 policy. China’s well executed COVID measures have ensured that most businesses operations continued smoothly albeit the recovery in consumer related opportunities may take slightly longer to unfold. China will also be focused on its longer-term renewable goals and we continue to expect these areas to be fast growing opportunities.

There are many reasons why we think small companies will remain resilient. Not only are they at the front and center of China’s economy across metrics such as contribution to GDP, percentage of patents and innovation, but they are more insulated from trade and geopolitical affairs. Small companies are highly driven by domestic demand, and they tend to be asset-light and capital-efficient. As such, small companies are often nimble companies that can react quickly to a changing market environment. We remain focused on the longer-term fundamentals of the domestic growth engine. 

As of Dec 31, 2021, the securities mentioned comprised the Matthews China Small Companies Fund in the following percentages: Ginlong Technologies Co., Ltd., 1.3%; SITC International Holdings Co., Ltd., 1.0%;  Times China Holdings, Ltd., 1.0%; Peijia Medical, Ltd., 0.7%; Sino Wealth Electronics, Ltd., 1.8%; China Overseas Property Holdings, Ltd., 1.7%.

Current and future holdings are subject to change and risk.

 

Average Annual Total Returns - MCSMX as of 12/31/2021
1YR 3YR 5YR 10YR Since Inception Inception Date
-3.59% 33.57% 24.73% 15.50% 10.85% 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 1.52%
Net Expense Ratio 1.43%

Matthews has contractually agreed to waive fees and reimburse expenses to limit the Total Annual Fund Operating Expenses until April 30, 2022. 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.

 

Visit our Glossary of Terms page for definitions and additional information.

Index Definitions

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.