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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

-11.07%

YTD Return

(as of 09/22/2023)

$9.88

NAV

(as of 09/22/2023)

+0.19

1 Day NAV Change

(as of 09/22/2023)

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 $117.59 million (08/31/2023)
Currency USD
Ticker MCSMX
Cusip 577-125-404
Portfolio Turnover 59.0%
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 1.55%
Net Expense Ratio 1.41%

Performance

  • Monthly
  • Quarterly
  • Calendar Year
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As of 08/31/2023
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
-5.40% 8.20% -8.55% -11.66% -12.45% 4.46% 7.93% 5.25%
MSCI China Small Cap Index
-11.48% -3.44% -20.83% -18.42% -14.54% -8.12% -1.97% -2.88%
As of 06/30/2023
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
5.64% -10.95% -10.71% -22.55% -11.84% 2.01% 8.21% 5.12%
MSCI China Small Cap Index
0.57% -14.02% -17.55% -25.81% -9.03% -8.86% -1.14% -2.60%
For the years ended December 31st
Name 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013
Matthews China Small Companies Fund - MCSMX
MCSMX
-31.26% -3.59% 82.52% 35.41% -17.68% 53.88% -2.35% 4.07% -3.33% 28.85%
MSCI China Small Cap Index
-24.77% -6.26% 27.21% 6.63% -19.53% 24.62% -5.95% 3.48% -0.34% 18.68%
 

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 06/30/2023)

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.

Ratings

  • OVERALL
  • out of 101 funds
  • 3 YEAR
  • out of 101 funds
  • 5 YEAR
  • out of 78 funds
  • 10 YEAR
  • out of 54 funds
  • 1 YEAR
  • 3rd
  • 68 out of 110 funds
  • 3 YEAR
  • 4th
  • 72 out of 91 funds
  • 5 YEAR
  • 1st
  • 11 out of 73 funds
  • 10 YEAR
  • 1st
  • 2 out of 49 funds
  • SINCE INCEPTION
  • 1st
  • 7 out of 44 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 06/30/2023)
Fund Benchmark
Number of Positions 47 229
Weighted Average Market Cap $4.8 billion $1.2 billion
Active Share 96.4 n.a.
P/E using FY1 estimates 15.3x 7.8x
P/E using FY2 estimates 12.7x 6.6x
Price/Cash Flow 12.7 4.9
Price/Book 2.5 0.7
Return On Equity 14.9 0.6
EPS Growth (3 Yr) 31.6% 11.1%

Sources: Factset Research Systems, Inc.

Risk Metrics (3 Yr Return)

(as of 06/30/2023)
-4.98%
Alpha
0.78
Beta
65.95%
Upside Capture
90.72%
Downside Capture
-0.49
Sharpe Ratio
-0.18
Information Ratio
15.70%
Tracking Error
71.56

Fund Risk Metrics are reflective of Investor share class.

Sources: Zephyr StyleADVISOR

Top 10 Holdings

(as of 08/31/2023)
Name Sector % Net Assets
Alchip Technologies, Ltd. Information Technology 5.8
China Overseas Property Holdings, Ltd. Real Estate 5.7
Yangzijiang Shipbuilding Holdings, Ltd. Industrials 4.8
KE Holdings, Inc. Real Estate 4.3
Jason Furniture Hangzhou Co., Ltd. Consumer Discretionary 3.8
Samsonite International SA Consumer Discretionary 3.4
Anhui Yingjia Distillery Co., Ltd. Consumer Staples 3.3
Zhejiang Shuanghuan Driveline Co., Ltd. Consumer Discretionary 3.2
ENN Natural Gas Co., Ltd. Utilities 3.2
ACM Research, Inc. Information Technology 3.1
TOTAL 40.6

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 06/30/2023)
  • Sector Allocation
  • Market Cap Exposure
  • China Exposure
Sector Fund Benchmark Difference
Industrials 25.9 10.2 15.7
Information Technology 20.4 10.5 9.9
Consumer Discretionary 19.4 13.0 6.4
Health Care 9.6 22.8 -13.2
Real Estate 8.7 11.6 -2.9
Consumer Staples 5.1 4.3 0.8
Financials 3.6 5.8 -2.2
Utilities 3.2 4.2 -1.0
Communication Services 2.4 9.2 -6.8
Materials 0.7 7.1 -6.4
Energy 0.0 1.2 -1.2
Cash and Other Assets, Less Liabilities 0.9 0.0 0.9

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) 10.0 0.0 10.0
Mid Cap ($3B-$10B) 51.7 0.0 51.7
Small Cap (under $3B) 37.4 100.0 -62.6
Cash and Other Assets, Less Liabilities 0.9 0.0 0.9

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 35.3
SAR (Hong Kong) 20.7
Overseas Listed Companies (OL) 12.8
China-affiliated corporations (CAC) 7.1
H Shares 6.6
Unassigned 16.5
Cash and Other Assets, Less Liabilities 0.9

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)
12/13/2022 12/14/2022 $0.19767 $0.00000 $0.00000 $0.19767 1.7% 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 June 30, 2023

For the first half of 2023, the Matthews China Small Companies Fund returned -10.71% (Investor Class) and -10.70% (Institutional Class), while its benchmark, the MSCI China Small Cap Index, returned -17.55% over the same period. For the quarter ending June 30, 2023, the Fund returned -10.95% (Investor Class) and -10.94% (Institutional Class), while the benchmark returned -14.02%.

Market Environment:

The overall environment for China remained challenging during the first half of the year with continued negative headlines related to U.S. –  China relations, Taiwan – China tensions and an overall bumpy corporate earnings growth story. Earnings in the first quarter were uneven with some sectors and industries recovering faster than others. Given the disruption experienced with much of the population contracting COVID, first quarter earnings were generally still on the weaker side. In areas of faster earnings recovery, many questioned if earnings growth would be sustainable, as a lack of supportive policies continued to weigh on market sentiment. Given this environment, the market continues to be in profit taking mode despite the fact that some companies have delivered on earnings estimates. At the same time, property market recovery has been volatile with general market conditions being still soft. This part of China’s economy continues to be important in determining the stability of the country’s recovery and more monitoring of on-the-ground conditions are required.

Performance Contributors and Detractors:

From a sector perspective, the portfolio’s stock selection in information technology and consumer discretionary contributed the most to the portfolio’s relative performance during the first half of the year. On the other hand, stock selection within industrials and an underweight and stock selection within communication services were the biggest detractors to performance.

Turning to individual holdings, Alchip, an integrated circuit (IC) backend design company was the top contributor to performance. Alchip’s stock was severely impacted last year by geopolitical worries that it could no longer ship to its major Chinese super-computing customers. Since then, the company has diversified its customer base and has continued to execute well in shipment delivery to tier-one customers. At the same time, market exuberance around the prospect of artificial intelligence (AI) and the need for more customized, AI chips have driven a re-rating in Alchip’s share price. Another contributor to performance was Legend Biotech, a global, commercial-stage company with pipeline of cell therapy platforms which includes Chimeric antigen receptor (CAR) T-cell and non-gene editing CAR technologies. The company continues to publish promising data which further improves its prospects of being able to successfully commercialize.

On the other hand, Hainan Meilan Airport and Kanzhun were among the detractors to performance. Hainan Meilan is one of two airport operators on the island of Hainan. The stock has been under pressure due to profit taking in the tourism space given some concerns on a second wave of COVID in China, and also on worries of whether increased outbound travel in China would affect domestic duty-free purchases. Hainan remains China’s largest duty-free shopping region and increased talks about making the whole island of Hainan duty-free also gives rise to concerns about market share losses at Meilan Airport. We remain long-term believers of Hainan’s presence as China’s duty-free mecca. Even if there might be some market share losses, we think the pie will expand and as an asset owner in the duopoly airport market in Hainan, we think Meilan’s current valuations are attractive and remain invested in the name. Kanzhun is a leading recruitment platform company in China. The company’s shares have been under pressure as the overall economic recovery in China remains bumpy and uneven. Small businesses have generally been more cautious about hiring and are awaiting more stability in the economic recovery. However, Kanzhun continues to gain share as online penetration of recruiting increases and has seen a pickup across both blue and white collared jobs.

Notable Portfolio Changes:

Overall, the number of names in the portfolio has decreased and there has generally been a consolidation of smaller, less than 1% positions in more expensive areas of the portfolio. The market correction has given us the opportunity to add to quality areas where valuations have come off meaningfully. The portfolio’s A-share exposure has trended down from the high thirties to the low thirties percentage given more attractive valuations in the Hong Kong market and we have been adding to the portfolio’s Hong Kong-listed names.

During the year-to-date period, we added names such as Elite Material, Centre Testing, OPT Machine. Elite Materials is a copper clad laminate producer with exposure to high-end server chips. The company is a beneficiary of the overall growth and penetration of high-performance server chips and traded at an attractive valuation. Centre Testing is the leading testing agency in China and saw shares pull back from high multiples to more reasonable levels. We continue to find that the testing and certification business is one that can deliver resilient and stable growth and we added to the position. OPT Machine provides factory automation solutions and uses its vision-related solutions to optimize operations in identifying product deficiencies. We believe the company has proven that its solutions can continue to penetrate new industries, and therefore enables the company to sustainably deliver on growth.

Outlook:

Looking ahead, earnings story should continue to benefit from easier comparables from the second half of 2022. We expect earnings to continue to be a catalyst. However, given weak sentiment, China almost needs to deliver a very strong set of earnings to re-rate in a meaningful way, and unfortunately, we remain more cautious on that front and expect only a gradual recovery ahead. Variables to be mindful of include whether there will be more stimulus ahead and whether China’s property market conditions continue to improve. Sentiment on the ground remains weak, which could call for more supportive policies. At the same time, we continue to see more companies delivering on monetization and increased room for shareholder return as more companies consider buybacks and dividends. Geopolitics remain a relevant concern, and unfortunately, does not offer much optimism at the moment, leading to a continued volatile market conditions.

 

View the Fund’s Top 10 holdings as of June 30, 2023. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MCSMX as of 06/30/2023
1YR 3YR 5YR 10YR Since Inception Inception Date
-22.55% -11.84% 2.01% 8.21% 5.12% 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.

 

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.