Matthews Emerging Markets Small Companies Fund
MSMLX
Overall Morningstar RatingTM (As of 03/31/2023)
Based on risk-adjusted return among 744 funds in the Diversified Emerging Mkts Category
MutualFund
Snapshot
Seeks alpha in innovative, capital efficient entrepreneurial companies in emerging markets
Focus on firms that have a strong competitive advantage through pricing power, distribution capability, and/or differentiated technologies and services
Bias toward businesses that cater to rising domestic consumer demand
Under normal circumstances, the Matthews Emerging Markets Small Companies 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 emerging market countries. Emerging market countries generally include every country in the world except the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the countries in Western Europe. Certain emerging market countries may also be classified as “frontier” market countries, which are a subset of emerging market countries with newer or even less developed economies and markets, such as Sri Lanka and Vietnam. The list of emerging market countries and frontier market countries may change from time to time. 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 Emerging Markets Small Cap Index.
Risks
Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange rate fluctuations, a high level of volatility and limited regulation. Additionally, investing in emerging and frontier securities involves greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. 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.
Emerging market countries generally include every country in the world except the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the countries in Western Europe.
Fees & Expenses
Gross Expense Ratio
1.49%
Net Expense Ratio
1.37%
Objective
Long-term capital appreciation
Strategy
Under normal circumstances, the Matthews Emerging Markets Small Companies 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 emerging market countries. Emerging market countries generally include every country in the world except the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand, Singapore and most of the countries in Western Europe. Certain emerging market countries may also be classified as “frontier” market countries, which are a subset of emerging market countries with newer or even less developed economies and markets, such as Sri Lanka and Vietnam. The list of emerging market countries and frontier market countries may change from time to time. 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 Emerging Markets Small Cap Index.
Risks
Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange rate fluctuations, a high level of volatility and limited regulation. Additionally, investing in emerging and frontier securities involves greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. 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 04/30/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Emerging Markets Small Companies Fund - MSMLX
09/15/2008
MSMLX
2.63%
-0.16%
8.28%
7.42%
19.79%
8.76%
7.03%
10.93%
MSCI Emerging Markets Small Cap Index
0.70%
-1.20%
4.67%
-5.12%
16.35%
2.40%
3.42%
6.31%
As of 03/31/2023
Average Annual Total Returns
Name
1MO
3MO
YTD
1YR
3YR
5YR
10YR
Since Inception
Inception Date
Matthews Emerging Markets Small Companies Fund - MSMLX
09/15/2008
MSMLX
1.88%
5.50%
5.50%
-1.27%
24.28%
7.76%
6.95%
10.79%
MSCI Emerging Markets Small Cap Index
0.98%
3.94%
3.94%
-10.47%
21.25%
2.24%
3.56%
6.29%
For the years ended December 31st
Name
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
Matthews Emerging Markets Small Companies Fund - MSMLX
MSMLX
-16.84%
22.14%
43.68%
17.38%
-18.05%
30.59%
-1.44%
-9.43%
11.39%
7.19%
MSCI Emerging Markets Small Cap Index
-17.54%
19.29%
19.72%
11.93%
-18.30%
34.22%
2.56%
-6.57%
1.34%
1.35%
Before April 30, 2021, the Fund was managed with a materially different investment strategy and may have achieved materially different performance results under its current investment strategy from the performance shown for periods before that date.
MSCI Emerging Markets Small Cap Index since inception value calculated from 9/15/08.
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 $10,000 Investment Since Inception
(as of 03/31/2023)
MSCI AC Asia ex Japan Small Cap Index since inception value calculated from 9/15/08.
Source: BNY Mellon Investment Servicing (US) Inc. All performance is in US$.
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.
Vivek Tanneeru is a Portfolio Manager at Matthews and manages the firm’s Emerging Markets Sustainable Future, Emerging Markets Small Companies, Asia Small Companies and Asia Sustainable Future Strategies. Prior to joining Matthews in 2011, Vivek was an Investment Manager on the Global Emerging Markets team of Pictet Asset Management in London. While at Pictet, he also worked on the firm’s Global Equities team, managing Japan and Asia ex-Japan markets. Before earning his MBA from the London Business School in 2006, Vivek was a Business Systems Officer at The World Bank and served as a Consultant at Arthur Andersen Business Consulting and Citicorp Infotech Industries. He interned at Generation Investment Management while studying for his MBA Vivek received his Master’s in Finance from the Birla Institute of Technology & Science in India. He is fluent in Hindi and Telugu.
Jeremy Sutch is a Portfolio Manager at Matthews and co-manages the firm’s Emerging Markets Small Companies, Asia Small Companies and Asia ex Japan Total Return Equity Strategies. Prior to joining Matthews in 2015, he was Director and Global Head of Emerging Companies at Standard Chartered Bank in Hong Kong from 2012 to 2015, responsible for the fundamental analysis of companies in Asia, with a particular focus on small- and mid-capitalization companies. From 2009 to 2012, he was Managing Director at MJP Capital in Hong Kong, which he co-founded. His prior experience has included managing small-cap equities at Indus Capital Advisors and serving as Head of Hong Kong Research for ABN AMRO Asia Securities. Jeremy earned an M.A. in French and History from the University of Edinburgh.
Alex Zarechnak is a Portfolio Manager at Mathews and manages the firm’s Emerging Markets Equity, Emerging Markets ex China Strategies and co-manages the Emerging Markets Small Companies Strategy. Prior to joining the firm in 2020, he spent a total of 15 years (1998 – 2006 and 2012 – 2019) at Wellington Management as an analyst for the firm’s flagship Emerging Markets Equity fund as a generalist first covering CEEMEA, then Latin America. From 2006-2012, he was a regional equity analyst at Capital Group, covering Emerging Markets with a focus on energy, telecoms and consumer sectors in Latin America and CEEMEA. Alex began his Emerging Markets career as a Russia equity analyst with Templeton Emerging Markets, based in Moscow. He earned a B.A. in Economics and Government from the College of William & Mary. Alex is fluent in Russian.
Portfolio Characteristics
(as of 03/31/2023)
Fund
Benchmark
Number of Positions
69
1,866
Weighted Average Market Cap
$4.4 billion
$1.7 billion
Active Share
98.1
n.a.
P/E using FY1 estimates
15.2x
11.6x
P/E using FY2 estimates
11.7x
10.2x
Price/Cash Flow
8.1
6.3
Price/Book
2.2
1.4
Return On Equity
10.1
13.8
EPS Growth (3 Yr)
17.8%
20.3%
Sources: Factset Research Systems, Inc.
Risk Metrics (3 Yr Return)
(as of 03/31/2023)
Category
3YR Return Metric
Alpha
5.92%
Beta
0.85
Upside Capture
90.09%
Downside Capture
71.78%
Sharpe Ratio
1.14
Information Ratio
0.24
Tracking Error
12.57%
R²
64.03
5.92%
Alpha
0.85
Beta
90.09%
Upside Capture
71.78%
Downside Capture
1.14
Sharpe Ratio
0.24
Information Ratio
12.57%
Tracking Error
64.03
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 03/31/2023)
Sector Allocation
Country Allocation
Market Cap Exposure
Sector
Fund
Benchmark
Difference
Industrials
29.1
16.3
12.8
Financials
18.9
10.3
8.6
Information Technology
17.4
17.6
-0.2
Health Care
12.8
9.2
3.6
Consumer Discretionary
10.5
10.5
0.0
Real Estate
7.6
6.5
1.1
Communication Services
1.5
4.0
-2.5
Materials
0.9
13.9
-13.0
Consumer Staples
0.0
6.7
-6.7
Utilities
0.0
3.1
-3.1
Energy
0.0
2.0
-2.0
Cash and Other Assets, Less Liabilities
1.2
0.0
1.2
Sector data based on MSCI’s revised Global Industry Classification Standards. For more details, visit www.msci.com.
Country
Fund
Benchmark
Difference
China/Hong Kong
27.8
9.5
18.3
India
18.0
21.7
-3.7
South Korea
12.4
15.5
-3.1
Taiwan
9.6
21.7
-12.1
Brazil
5.5
5.0
0.5
Vietnam
5.5
0.0
5.5
United States
4.3
0.0
4.3
Chile
3.8
0.9
2.9
Indonesia
2.8
2.6
0.2
Philippines
2.7
1.1
1.6
United Arab Emirates
1.6
0.9
0.7
Mexico
1.4
2.5
-1.1
Poland
1.4
1.1
0.3
Thailand
0.7
3.6
-2.9
Turkey
0.7
1.6
-0.9
Bangladesh
0.7
0.0
0.7
Saudi Arabia
0.0
3.3
-3.3
South Africa
0.0
3.3
-3.3
Malaysia
0.0
2.8
-2.8
Kuwait
0.0
1.1
-1.1
Qatar
0.0
0.9
-0.9
Greece
0.0
0.5
-0.5
Egypt
0.0
0.2
-0.2
Colombia
0.0
0.1
-0.1
Czech Republic
0.0
0.1
-0.1
Cash and Other Assets, Less Liabilities
1.2
0.0
1.2
Not all countries are included in the benchmark index(es).
Equity market cap of issuer
Fund
Benchmark
Difference
Mega Cap (over $25B)
0.0
0.0
0.0
Large Cap ($10B-$25B)
7.3
0.1
7.2
Mid Cap ($3B-$10B)
43.3
11.2
32.1
Small Cap (under $3B)
48.3
88.7
-40.4
Cash and Other Assets, Less Liabilities
1.2
0.0
1.2
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 Emerging Markets Small Cap Index.
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 quarter ending March 31, 2023, the Matthews Emerging Markets Small Companies Fund returned 5.50% (Investor Class) and 5.56% (Institutional Class), while its benchmark, the MSCI Emerging Markets Small Cap Index, returned 3.94%.
Market Environment:
2023 started where 2022 ended with the market closely following inflation data releases and trying to assess U.S. Federal Reserve’s reaction function to them. After doing well in the first few weeks of 2023 on account of a belief that inflation might be softening, the markets had a reality check in February after a worse than expected inflation data print. Silicon Valley Bank’s collapse, followed by troubles at Signature Bank and First Republic Bank, led to a bout of risk-off sentiment and challenges for equity markets in addition to tightening financial conditions toward the end of the quarter.
Select Latin American currencies did well again against the U.S. dollar after a strong 2022 performance. The Mexican peso, Chilean peso, Colombian peso and Brazilian real appreciated the most among emerging markets currencies alongside the Hungarian forint during the quarter. The Argentine peso and Turkish lira, 2022’s worst performers, continued to depreciate against the U.S. dollar as did the Russian ruble and South African rand.
For the quarter, Hungary, Mexico, Taiwan and South Korea were the best-performing small-cap emerging markets. Turkey, Egypt and Colombia were the worst performing markets. A number of the poor performers in 2022 turned in strong performances during the quarter, including Taiwan and South Korea. From a sector perspective, information technology (IT) and materials were the best performers while energy and consumer discretionary were the worst performers.
Performance Contributors and Detractors:
On a country basis, our stock selection in South Korea was the biggest contributor to relative performance during the quarter, followed by our stock selection and underweight in Turkey and our lack of exposure to South Africa. Our holdings in Taiwan were the second-biggest contributor by stock selection. On the other hand, our overweight allocation to China and underweight allocation to Taiwan detracted from performance.
From a sector perspective, our stock selection and overweight in industrials was the biggest contributor to relative performance. Stock selection in IT also contributed positively. On the flip side, stock selection and overweight in financials, alongside stock selection in real estate detracted from relative performance.
At the stock level, South Korean battery supply names in the portfolio including Ecopro BM contributed positively to performance. After having underperformed toward the end of 2022 on worries over weak demand and oversupply concerns, many of these names rebounded strongly in the first quarter on the back of positive news flow over the potential impact on electric vehicle (EV) demand and customer eligibility for IRA subsidy payments of the U.S. Inflation Reduction Act. Strong new customer order wins, especially from U.S. automakers alongside capacity addition announcements, also contributed to strong performance by these stocks.
In contrast, Indian financials such as Bandhan Bank and Shriram Finance detracted from performance amid a general decline in Indian equities, after their strong performance in recent years left relative valuations very expensive, especially compared with China. Indian financials also got caught up in the global financials selloff in the aftermath of turbulence in the U.S. financial system following Silicon Valley Bank’s demise.
Notable Portfolio Changes:
In the last quarter we initiated a new position in Eugene Technology, a South Korean semiconductor fabrication-equipment maker that specializes in deposition gear. In addition to its core expertise in low pressure chemical vapor deposition equipment, Eugene is making strong inroads into atomic layer deposition equipment thereby increasing its addressable market. While the company’s products have largely been used in manufacturing memory products, it is also making progress in the semiconductor foundry manufacturing process as well which presents an attractive growth opportunity in the future.
During the quarter we exited India-based GMR Airports Infrastructure to take profit and we also exited Marico, a health and wellness products company also based in India, to redeploy capital elsewhere.
Outlook:
The Fed’s interest rate strategy and the market’s expectation of its evolution remain the most important variables impacting the near-term performance in emerging markets. That said, we expect the impact of the Fed’s actions this year to be less than it was in 2022 as the tightening cycle enters the late stages.
Our other key focus will be how China’s economic recovery and growth plays out and how it affects the dynamics of other emerging markets. And Russia’s invasion of Ukraine and its effect on energy prices— alongside OPEC’s efforts to keep the prices high—will need ongoing, careful monitoring.
Over the coming years, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This development, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
As the global economy wades through a tricky 2023, we believe small companies in emerging markets offer long-term growth opportunities given their innovation and domestic consumption orientation. We continue to find quality businesses at attractive valuations in this asset class.
Top 10 holdings as of March 31, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MSMLX as of 03/31/2023
1YR
3YR
5YR
10YR
Since Inception
Inception Date
-1.27%
24.28%
7.76%
6.95%
10.79%
09/15/2008
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
1.49%
Net Expense Ratio
1.37%
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.
Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange rate fluctuations, a high level of volatility and limited regulation. Additionally, investing in emerging and frontier securities involves greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. 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.
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 March 31, 2023
For the quarter ending March 31, 2023, the Matthews Emerging Markets Small Companies Fund returned 5.50% (Investor Class) and 5.56% (Institutional Class), while its benchmark, the MSCI Emerging Markets Small Cap Index, returned 3.94%.
Market Environment:
2023 started where 2022 ended with the market closely following inflation data releases and trying to assess U.S. Federal Reserve’s reaction function to them. After doing well in the first few weeks of 2023 on account of a belief that inflation might be softening, the markets had a reality check in February after a worse than expected inflation data print. Silicon Valley Bank’s collapse, followed by troubles at Signature Bank and First Republic Bank, led to a bout of risk-off sentiment and challenges for equity markets in addition to tightening financial conditions toward the end of the quarter.
Select Latin American currencies did well again against the U.S. dollar after a strong 2022 performance. The Mexican peso, Chilean peso, Colombian peso and Brazilian real appreciated the most among emerging markets currencies alongside the Hungarian forint during the quarter. The Argentine peso and Turkish lira, 2022’s worst performers, continued to depreciate against the U.S. dollar as did the Russian ruble and South African rand.
For the quarter, Hungary, Mexico, Taiwan and South Korea were the best-performing small-cap emerging markets. Turkey, Egypt and Colombia were the worst performing markets. A number of the poor performers in 2022 turned in strong performances during the quarter, including Taiwan and South Korea. From a sector perspective, information technology (IT) and materials were the best performers while energy and consumer discretionary were the worst performers.
Performance Contributors and Detractors:
On a country basis, our stock selection in South Korea was the biggest contributor to relative performance during the quarter, followed by our stock selection and underweight in Turkey and our lack of exposure to South Africa. Our holdings in Taiwan were the second-biggest contributor by stock selection. On the other hand, our overweight allocation to China and underweight allocation to Taiwan detracted from performance.
From a sector perspective, our stock selection and overweight in industrials was the biggest contributor to relative performance. Stock selection in IT also contributed positively. On the flip side, stock selection and overweight in financials, alongside stock selection in real estate detracted from relative performance.
At the stock level, South Korean battery supply names in the portfolio including Ecopro BM contributed positively to performance. After having underperformed toward the end of 2022 on worries over weak demand and oversupply concerns, many of these names rebounded strongly in the first quarter on the back of positive news flow over the potential impact on electric vehicle (EV) demand and customer eligibility for IRA subsidy payments of the U.S. Inflation Reduction Act. Strong new customer order wins, especially from U.S. automakers alongside capacity addition announcements, also contributed to strong performance by these stocks.
In contrast, Indian financials such as Bandhan Bank and Shriram Finance detracted from performance amid a general decline in Indian equities, after their strong performance in recent years left relative valuations very expensive, especially compared with China. Indian financials also got caught up in the global financials selloff in the aftermath of turbulence in the U.S. financial system following Silicon Valley Bank’s demise.
Notable Portfolio Changes:
In the last quarter we initiated a new position in Eugene Technology, a South Korean semiconductor fabrication-equipment maker that specializes in deposition gear. In addition to its core expertise in low pressure chemical vapor deposition equipment, Eugene is making strong inroads into atomic layer deposition equipment thereby increasing its addressable market. While the company’s products have largely been used in manufacturing memory products, it is also making progress in the semiconductor foundry manufacturing process as well which presents an attractive growth opportunity in the future.
During the quarter we exited India-based GMR Airports Infrastructure to take profit and we also exited Marico, a health and wellness products company also based in India, to redeploy capital elsewhere.
Outlook:
The Fed’s interest rate strategy and the market’s expectation of its evolution remain the most important variables impacting the near-term performance in emerging markets. That said, we expect the impact of the Fed’s actions this year to be less than it was in 2022 as the tightening cycle enters the late stages.
Our other key focus will be how China’s economic recovery and growth plays out and how it affects the dynamics of other emerging markets. And Russia’s invasion of Ukraine and its effect on energy prices— alongside OPEC’s efforts to keep the prices high—will need ongoing, careful monitoring.
Over the coming years, we expect the emerging markets gross domestic product (GDP) growth-differential with developed markets to improve from a 23-year low reached in 2022. This development, alongside relatively attractive valuations, should potentially lend support to better equity performance against developed markets compared with the last decade.
As the global economy wades through a tricky 2023, we believe small companies in emerging markets offer long-term growth opportunities given their innovation and domestic consumption orientation. We continue to find quality businesses at attractive valuations in this asset class.
Top 10 holdings as of March 31, 2023. Current and future holdings are subject to change and risk.
Average Annual Total Returns - MSMLX as of 03/31/2023
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.
Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange rate fluctuations, a high level of volatility and limited regulation. Additionally, investing in emerging and frontier securities involves greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets. 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.