For the year ending December 31, 2022, the Matthews Korea Fund returned -25.42% (Investor Class) and -25.39% (Institutional Class), while its benchmark, the Korea Composite Stock Price Index (KOSPI), returned -28.64% over the same period. For the fourth quarter, the Fund returned 18.42% (Investor Class) and 18.19% (Institutional Class), while the benchmark returned 18.12%.

Market Environment:

2022 was a volatile year for markets, with a healthy dose of uncertainty from quarter to quarter, tied partly to the unevenness with which countries reopened their economies. Though some reopened in early 2022, the notable exception was China which finally began reopening late last quarter. Though Korea was open much earlier in the year, its heavy economic reliance on exports posed a headwind throughout 2022 and weighed on sectors and individual stocks.

The prevailing uncertainty also resulted in an uneven year from a style-leadership perspective, with some quarters value-led and others (notably, the fourth quarter) growth and turnaround story-led.

From a headlines standpoint, inflation and monetary policy were among 2022’s dominant stories. Korea’s central bank largely followed the U.S. Federal Reserve, by increasing rates throughout the year. Banks in Korea were key beneficiaries of this approach and performed well, bolstered by low valuations. On the inflation front, we finally saw some companies able to increase prices—including auto parts and food and beverages companies. From here, the question will be the demand outlook.

Performance Contributors and Detractors:

At the sector level, our stock selection in financials and consumer discretionary were the largest contributors to relative performance for the year. Among individual stocks, Shinhan Financial and Coupang were the biggest contributors to relative performance. In the first half of 2022, the Fund was overweight banks given the inflationary environment and the likelihood that Korea would follow the U.S. from a monetary perspective. Coupang—which can be thought of as the Amazon of Korea—was able to accelerate its market-share gains during COVID. We believe the company will be able to increase ad revenues while maintaining its discipline on promotions costs, ultimately turning free cash-flow positive and strengthening dominancy in e-commerce industry.

Conversely, the Fund’s underweight to the materials sector detracted from relative results, though our individual holdings outperformed benchmark peers. We have maintained our below-benchmark exposure to materials as we have tended to find valuations—particularly among companies involved in the battery value chain in Korea—to be high, alongside high market expectations, making it challenging for us to increase our exposure and weighing on relative results. Given these high valuations, we have preferred to maintain exposure specifically through battery-cell makers, which tend to have more proven track records.

At the individual holdings level, Samsung Electronics preferred shares and SK Hynix were among the biggest detractors to relative performance. Samsung Electronics and SK Hynix faced headwinds amid high semiconductor inventory levels and weak demand. Looking forward, we find Samsung’s valuation and balance sheet attractive and believe expectations have largely been reset heading into 2023.

Notable Portfolio Changes:

We capitalized on the market’s rebound last quarter to make some portfolio adjustments—including introducing new positions in Orion and Hyundai Mobis while exiting our positions in Shinhan Financial Group and SK Innovation.

Orion is a leading confectionary company in the region. Its presence in Korea represents less than 35% of its business while China, Vietnam and Russa make up the balance. Orion has continued to build strong brand equities in each country by introducing new products and managing distribution channels efficiently.

Hyundai Mobis manufactures and sells automotive parts globally. The Fund has been overweight to Korean autos, which we believe are doing well—however, we have lowered our weights in original equipment manufacturers (OEMs) in favor of companies like Hyundai Mobis, which are parts suppliers to innovative areas of the auto business, including autonomous vehicles. With the shares at an attractive valuation and the company paying a dividend, we chose to purchase the stock in the fourth quarter.

Conversely, we exited our position in Shinhan Financial as the valuation recovered. SK Innovation is one of the few battery-cell makers for electronic vehicles globally and certainly has room to take market share. However, we felt its capabilities relative to its competitors were inferior and that we have more attractive options to own some of its peers. We consequently chose to exit our position.

Outlook:

We expect uncertainty in the markets to persist into 2023. Given Korea’s overall reliance on exports, we are attentive to the global demand outlook. We simultaneously remain intently focused on bottom-up, fundamental analysis, with attention on whether companies are staying innovative and taking share relative to their competitors.

From a research perspective, we are focused on finding new companies that can benefit from global innovation—the next generation of what are currently smaller-cap names that could potentially be mid cap (and maybe beyond).

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

Average Annual Total Returns - MAKOX as of 12/31/2022