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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

0.27%

YTD Return

(as of 03/31/2023)

$11.14

NAV

(as of 03/31/2023)

-0.06

1 Day NAV Change

(as of 03/31/2023)

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 $160.59 million (02/28/2023)
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 1.48%
Net Expense Ratio 1.43%

Performance

  • Monthly
  • Quarterly
  • Calendar Year
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As of 02/28/2023
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
-8.58% 1.19% 1.62% -22.40% 2.59% 5.73% 9.59% 6.43%
MSCI China Small Cap Index
-8.71% 8.92% 1.82% -14.42% -2.05% -5.14% 0.29% -0.90%
As of 12/31/2022
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
-0.42% 11.57% -31.26% -31.26% 6.55% 6.16% 10.14% 6.38%
MSCI China Small Cap Index
6.97% 21.39% -24.77% -24.77% -3.55% -5.10% 1.00% -1.07%
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 12/31/2022)

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 91 funds
  • 3 YEAR
  • out of 91 funds
  • 5 YEAR
  • out of 77 funds
  • 10 YEAR
  • out of 52 funds
  • 1 YEAR
  • 4th
  • 94 out of 107 funds
  • 3 YEAR
  • 1st
  • 9 out of 85 funds
  • 5 YEAR
  • 1st
  • 4 out of 72 funds
  • 10 YEAR
  • 1st
  • 1 out of 47 funds
  • SINCE INCEPTION
  • 1st
  • 4 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 12/31/2022)
Fund Benchmark
Number of Positions 64 226
Weighted Average Market Cap $5.0 billion $1.5 billion
Active Share 94.8 n.a.
P/E using FY1 estimates 16.5x n.a.
P/E using FY2 estimates 14.1x 7.1x
Price/Cash Flow 12.0 4.7
Price/Book 2.1 0.7
Return On Equity 11.2 3.8
EPS Growth (3 Yr) 20.5% 4.4%

Sources: Factset Research Systems, Inc.

Risk Metrics (3 Yr Return)

(as of 12/31/2022)
10.35%
Alpha
0.77
Beta
84.30%
Upside Capture
73.44%
Downside Capture
0.20
Sharpe Ratio
0.53
Information Ratio
19.21%
Tracking Error
59.78

Fund Risk Metrics are reflective of Investor share class.

Sources: Zephyr StyleADVISOR

Top 10 Holdings

(as of 02/28/2023)
Name Sector % Net Assets
China Overseas Property Holdings, Ltd. Real Estate 3.9
KE Holdings, Inc. Real Estate 3.0
Morimatsu International Holdings Co., Ltd. Industrials 2.9
Melco International Development, Ltd. Consumer Discretionary 2.8
BOE Varitronix, Ltd. Information Technology 2.8
ENN Natural Gas Co., Ltd. Utilities 2.7
Yadea Group Holdings, Ltd. Consumer Discretionary 2.5
Zhejiang Shuanghuan Driveline Co., Ltd. Consumer Discretionary 2.4
Chailease Holding Co., Ltd. Financials 2.4
Alchip Technologies, Ltd. Information Technology 2.4
TOTAL 27.8

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 12/31/2022)
  • Sector Allocation
  • Market Cap Exposure
  • China Exposure
Sector Fund Benchmark Difference
Industrials 28.2 9.4 18.8
Consumer Discretionary 16.1 14.3 1.8
Information Technology 15.9 10.5 5.4
Health Care 12.0 22.0 -10.0
Real Estate 9.7 14.4 -4.7
Consumer Staples 7.7 4.2 3.5
Financials 3.3 6.2 -2.9
Materials 2.7 7.3 -4.6
Utilities 2.5 3.9 -1.4
Communication Services 2.1 6.3 -4.2
Energy 0.0 1.4 -1.4
Liabilities in Excess of Cash and Other Assets -0.2 0.0 -0.2

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) 8.3 0.0 8.3
Mid Cap ($3B-$10B) 51.9 5.2 46.7
Small Cap (under $3B) 40.0 94.8 -54.8
Liabilities in Excess of Cash and Other Assets -0.2 0.0 -0.2

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 38.7
SAR (Hong Kong) 27.1
H Shares 10.8
Overseas Listed Companies (OL) 7.6
China-affiliated corporations (CAC) 7.1
Unassigned 8.9
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)
12/13/2022 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 December 31, 2022

For the year ending December 31, 2022, the Matthews China Small Companies Fund returned -31.26% (Investor Class) and -31.08% (Institutional Class), while its benchmark, the MSCI China Small Cap Index, returned -24.77% over the same period. For the fourth quarter, the Fund returned 11.57% (Investor Class) and 11.61% (Institutional Class), while the benchmark returned 21.39%. 

Market Environment:

During the year, Chinese small caps lagged their large cap peers. Chinese equities were weak and choppy most of the year with continued worry of an economic growth slowdown in the country, weighed down by COVID-19 and enforced lockdowns, ADR delisting pricing pressures and investor worries that Russia-like sanctions could be implemented upon select Chinese companies. Additionally, geopolitical headwinds combined with disappointing announcements post the 20th Party Congress weighed on markets. China’s property market sentiment continued to be negative, and the real estate sector has been hit hard as potential buyers and local government casted doubts on whether some financially distressed developers can finish and deliver their pre-sold homes on time.

However, the last quarter of the year saw a reversal as Chinese equities posted some of the strongest results within global markets with a rebound in sentiment stemming from the government’s statements and actions which support the easing of COVID-related restrictions in favor of ‘living with Covid’ policies. The roll-back of COVID restrictions gained momentum during the quarter spurring speculation of a forthcoming increase in consumer discretionary activity and overall mobility.

Performance Contributors and Detractors:

The portfolio’s stock selection within the industrials and utilities sectors as well as its under allocation to the real estate sector contributed the most to the Fund’s relative performance for the full year. Among individual holdings, Yangzijiang Shipbuilding, one of the few private shipbuilders remaining in China and is a well-run and efficient operator, contributed the most to absolute and relative performance. The company outperformed on strong vessel orderbooks given by greater demand on higher freight rates, as well as environmentally driven upgrades which encourages an acceleration of scrapping of old vessels for the industry. China Overseas Property, a property management firm, whose sister company (China Overseas Land and Investment) is one of China’s largest state-owned property developers, was another top contributor to relative performance. In the current market consolidation phase of the real estate industry, state-owned enterprise (SOE) developers are favored as they have some of the strongest balance sheets in the market and have fewer liquidity concerns. China Overseas Property has an asset-light business model and is less subject to liquidity concerns. Further, its association with a SOE developer will continue to enable it to grow steadily while at the same time potentially benefit from M&A opportunities.

On the other hand, holdings in the information technology sector were among the top detractors to performance for the year. Technology holdings, including ACM Research, detracted amid regulatory policies and harsher new technology export controls introduced by the U.S. ACM Research is a semiconductor equipment company which provides a variety of equipment used in China’s foundries. With the new technology export controls in place, which prohibit high end equipment to be exported to China, China’s foundries may slow their CapEx expansion and reduce semiconductor equipment expenditures as they will not as easily move up the technology curve into more advanced processes.

CIFI Ever Sunshine was another detractor to performance. The company is a property management company and shares a similar business model as China Overseas Property, but is associated with private developer, CIFI. Private developers saw a significant multiple de-rating over the quarter given markets’ concerns about solvency. We continue to hold CIFI Ever Sunshine as we believe private developers will continue to see their liquidity conditions improve as contracted sales pick up with COVID restrictions easing.

Notable Portfolio Changes:

During the quarter, we added AK Medical, one of China’s leading orthopedics joint manufacturers. We have observed throughout the year that the overall attitude towards drug and medical devices price cuts have moderated and become less severe. This improves the overall predictability of future pricing impact and strengthens earnings visibility for the sector. AK Medical has also demonstrated its competitiveness under harsh pricing environments and has continued to gain market share. We like the orthopedic industry given its large addressable market. We see continued trends of orthopedic needs increasing given the demographic shifts in China. We also exited China Yongda, a luxury and mass-market auto dealer in China. The company trades at very attractive valuations and we continued to hold onto the stock given potential customer traffic recovery post COVID. However, we eventually decided to sell out of the name due to limited portfolio exposure to the growing category of new energy vehicles (NEVs) and concerns that NEVs will require less service and maintenance and affect a sizable part of revenues and profits for the company.

Outlook:

Looking ahead, China’s reopening will unfortunately be messy and the road to recovery will not be a smooth one. However, the overall direction of recovery remains clear, and we expect much of the COVID-related disruptions endured in 2022 to be behind. Global economic outlook looks increasingly uncertain as the U.S. continues to slow, and Europe’s economic outlook continues to look fragile. In this environment, China will have to depend ever more on its internal growth engine for recovery. This could be a challenge pending more encouraging signs of recovery on the property, consumption and industrial output fronts, although we are cautiously optimistic that China will manage through these challenges given potential government support. Valuations wise, the Hong Kong market has rebounded, with positive stock performance in the fourth quarter of 2022, bolstered by end-of-COVID optimism. The A-share market, however, has not quite reacted to much of the good news surrounding COVID relaxation. Coupled with valuations that are now more attractive, the A-share market stands to benefit from positive catalysts this year and, in our views, is well positioned for an improvement in 2023.

Top 10 holdings as of December 31, 2022. Current and future holdings are subject to change and risk.

Average Annual Total Returns - MCSMX as of 12/31/2022
1YR 3YR 5YR 10YR Since Inception Inception Date
-31.26% 6.55% 6.16% 10.14% 6.38% 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 1.48%
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, 2023. 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.