For the year ending December 31, 2023, the Matthews Asia Dividend Fund returned 4.69% (Investor Class) and 4.77% (Institutional Class), while its benchmark, the MSCI All Country Asia Pacific Index, returned 11.81% over the same period. For the fourth quarter, the Fund returned 7.08% (Investor Class) and 7.04% (Institutional Class), while the benchmark returned 8.00%.

Market Environment

Asia Pacific markets rallied during the final quarter of the year, helping drive full-year performance to a respectable double-digit level although this did lag behind the returns of other major geographies. The year started brightly with the hope of a strong recovery in the Chinese economy—after reopening from prior COVID restrictions—alongside robust performance from other markets. This was, however, short lived for China, with markets there peaking in January and ending the year in negative territory. Issues such as the challenged property market, soft consumer sentiment, regulatory changes, dampened animal spirits and geopolitical tensions all weighed on China as the market ended the year at around 9 x earnings. Much of the rest of the region proved more fruitful for investors during 2023. India was again a strong performer rising over 20% as it benefited in part from capital flows as earnings delivery was robust while the political and monetary outlooks also appear supportive. Japan similarly gained as reasonable earnings growth was accompanied by a continuation of improvements in areas such as corporate governance and shareholder returns. The technology heavy markets of South Korea and Taiwan also made meaningful gains in 2023.

Performance Contributors/Detractors

At the country level, the portfolio’s overweight and stock selection in Hong Kong/China was the largest detractor to total and relative returns in 2023 in part because this market suffered relative to the broader region. Stock selection in Japan also hurt relative performance as did underweights and stock selection in Taiwan and India. Conversely, the portfolio’s off-benchmark position in Vietnam aided relative performance while stock selection in Australia and Indonesia was also positive. 

At the sector level, stock selection in consumer discretionary was the biggest detractor to total and relative returns. Stock selection and a slight underweight in industrials also detracted. On the other hand, the portfolio’s stock selection within information technology (IT) was the biggest contributor to total and relative returns despite the negative of a slight underweight position. Allocation and stock selection in utilities and energy also contributed to relative performance. 

At the stock level, some of the largest detractors to relative performance for the year came from companies within China. Duty free retailer China Tourism Group Duty Free Corp. was the worst performer and the biggest detractor to returns, potentially due to disappointing earnings as well as the possibility of rising competition in certain markets. Online retailer JD.com also fell significantly, likely given the backdrop of a soft consumer as well as rising competitive intensity in the industry. Logistics and distribution company Milkyway Chemical Supply Chain Service similarly dropped alongside weaker-than expected-earnings while consumer-oriented companies Wuliangye Yibin and Yum China were also detractors amid domestic macro headwinds. For Yum China, there also appear to be worries around competitive pressures.  

The best performer and largest contributor to returns came from Japan, with semiconductor equipment manufacturer Disco Corp. posting a significant gain. A leader in precision processing equipment for cutting, grinding and polishing, the stock moved up in part due to its exposure to solid growth areas such as generative artificial intelligence (AI) and power semiconductors. Fellow Japanese company Shin-Etsu Chemical was a significant contributor to returns and gained on hopes of improving outlooks for certain end markets such as semiconductors. Australian small appliance company Breville Group also aided returns as its medium-term growth outlook still appears to be robust in areas such as its core coffee offering. Mega cap Samsung Electronics was a significant contributor to absolute returns while Indian transmission business Power Grid also gained. 

Notable Portfolio Changes

The portfolio underwent significant alterations during the course of the year in a bid to change certain country and sector allocations as well as to help to improve the portfolio’s balance of growth and yield while also attempting to ensure that the portfolio was one with a bias toward what we believe to be quality companies. This led to a reduction in the weightings of Vietnam and China, with increases in areas such as Japan, Hong Kong, and Taiwan. At a sector level, weightings in areas such as consumer discretionary, health care, and industrials declined while financials, IT and consumer staples, among others, all rose. 

These adjustments led to a substantially higher turnover for the portfolio during 2023 than should be expected going forward as we aim to be long-term investors in businesses that we allocate our shareholders’ capital toward. 

Fourth quarter activity was notably lower. We exited positions in leading medical device and endoscope maker Olympus Corp. in Japan as well as in China Tourism Group Duty Free given declining conviction in both holdings.  

Outlook

Monetary policy expectations for the U.S. in 2024 have changed meaningfully in recent months with hopes that interest rates have peaked and that cuts will return. This helped to propel markets upward as 2023 drew to a close and the trajectory of these alterations, in conjunction with how contained inflation actually is and whether the U.S. can attain a soft landing, will all play a role in determining market movements over the next year. These will also, in part, determine stock prices in Asia in the near term as it may allow some easing while the U.S. dollar could also be impacted. Beyond this, we continue to remain concerned about the challenges that China faces within its own economy as well as broader geopolitical tensions that appear to be structural in nature. While these are reasons for caution there are also reasons to be constructive; weak sentiment, policy flexibility, appealing valuations and an earnings base that companies have potential to grow from, being a few. In India, although valuations are expensive, structural earnings growth appears intact while Taiwan and Korea are also expected to grow reasonably in 2024. For Japan, the positive forces of corporate governance improvements and increasing shareholder returns appear to still be in place although it is important to monitor the potential for the end of negative interest rates alongside currency movements and the possible implications that this may have for select sectors.

Given what may be a peak in the cost of capital, robust valuations of 12.2x FY24 earnings and EPS growth expected to be over 14% for the region in 2024, the outlook for Asia Pacific appears solid although scope for volatility remains. We continue to think that a focus on investing in what we believe to be quality companies at reasonable prices that also generally provide some form of current income is well placed to deliver for clients over the long term.

Top 10 holdings as of December 31, 2023. Current and future holdings are subject to change and risk. Dividends are not guaranteed and may fluctuate.

Average Annual Total Returns - MAPIX as of 03/31/2024