Matthews Asian Growth And Income Fund half yearly commentary for the period ended June 30, 2015.
For the first half of 2015, the Matthews Asian Growth and Income Fund gained 3.46% (Investor Class), underperforming its benchmark, the MSCI All Country Asia ex Japan Index, which rose 5.59%. For the quarter ending June 30, the Fund gained 1.43% (Investor Class) while its benchmark rose 0.65%.
Matthews Asian Growth And Income Fund – Market Environment:
Monetary policy and politics took center stage during the second quarter of the year, sparking yet further volatility across global markets. In the U.S., following the dropping of the word “patient” from the previous U.S. Federal Reserve policy statement, Fed Chairwoman Janet Yellen further commented that rate rises will be gradual in nature as they wait for more decisive evidence of economic growth. In Europe, Greece once again dominated headlines as the heavily indebted nation defaulted on a repayment to the International Monetary Fund. Despite this, at the time of writing, the Greek government continues to refuse European officials’ request for structural reform in order to ensure additional bailout funds. Turning to Asia, China underwent further liquidity injections into the financial system through reserve ratio requirement cuts, interest rate reductions and capital injections into state-owned policy banks. Additionally, the Chinese finance ministry, central bank and banking regulator announced plans to allow commercial banks to use local government bonds that they purchase as collateral for low-cost loans from the central bank in order to increase overall liquidity. All of these measures, alongside yet more retail investor participation and margin lending, led the domestic Chinese and Hong Kong markets to outperform those across the rest of the region. Markets in Southeast Asia were the poorest performers on slowing growth and political woes.
Matthews Asian Growth And Income Fund – Portfolio Contributors and Detractors:
The largest contributors to Fund performance during the quarter came from our holdings in Hong Kong and China, with our convertible bond in Hong Kong Exchanges & Clearing the strongest of these. The underlying stock was up strongly on increasing average daily turnover as markets rallied and Exchange Traded Funds participation increased. We used this as an opportunity to exit our position as valuations had become stretched at 40X price-to-earnings.* Yum! Brands, the quick service restaurant chain that owns Taco Bell, KFC and Pizza Hut, also performed well as it appears that the reputational damage they suffered from supply chain issues in China is subsiding, and customers are returning to their stores. The stock was also helped after a well-known activist investor took a stake in the company, highlighting potential value realization from a break up of its businesses.
Although the Fund has little exposure to the Philippines, our holding in Globe Telecom, the number two wireless carrier in the market, also helped returns. Increasing smartphone penetration and decreasing competitive intensity on data pricing helped the firm deliver good earnings growth.
The Fund’s holdings within Malaysia were the largest detractors to returns, partially due to a challenging political backdrop in the wake of a corruption scandal involving Prime Minister Najib Razak and the state-owned investment fund 1Malaysia Development Bhd ( 1MDB). Alongside this, the country’s exposure to energy prices also created challenges. Additionally, we witnessed stock weakness in holdings, such as commercial bank AMMB, as concerns arise around potential asset quality issues within the financial system.
Matthews Asian Growth And Income Fund – Notable Portfolio Changes:
The Fund initiated four new positions during the quarter. The first of these was Techtronic Industries, a market-leading power tool and floor care appliance brand owner and manufacturer. We believe the company has fairly strong growth prospects as it continues to win market share from its rivals in both the DIY and professional power tool markets due to its impressive cordless technology and price points. Earnings should also benefit from lower commodity prices and greater efficiencies. The stock is trading at what we believe to be an attractive 17x P/E in light of these growth prospects and a strong balance sheet.
We also initiated positions in Singapore Telecom (“Singtel”), a regional wireless company, Guangdong Investment, and Insurance Australia Group. For Singtel, we believe that the company has an attractive set of quality assets across Asia Pacific that still has room for growth as smartphone and 4G penetration increase, whilst the company continues to better tier pricing. The stock currently provides a healthy combination of both growth potential and income given its yield of about 4% year to date. Guangdong Investment is somewhat similar in nature as the regulated water utility provides a defensive and visible stream of earnings and dividends that are both still growing healthily on continued volume increases and new projects. Insurance Australia Group is the country’s largest personal lines insurance company, and as of the end of June offered an attractive 5% yield given an interesting combination of stable cash flow at home and growth options in Asia.
These positions were funded through the sale of our holdings in Hong Kong Exchanges & Clearing, and China Oilfield Services Limited.
Matthews Asian Growth And Income Fund – Outlook:
The overall demand backdrop across the globe continues to be moderately weak, with Europe particularly challenged by the threat of deflation, leading to little support for Asian exports. Additionally, fairly aggressive credit growth across much of Asia since the Global Financial Crisis of 2008 means that further increases in indebtedness is unlikely to fuel economic growth. In prior commentaries we have noted that many governments throughout the region now have pro-reform regimes in place, and progress within these is vital in order to ensure that the region sees sustainable growth coming from productivity improvements. Although moderately early on in the reigns of many, change has been somewhat slow to materialize, at the very least in relation to what were quite lofty expectations for leaders such as India’s Narendra Modi and Indonesia’s Joko Widodo. In the latter case, for example, we have seen an array of mixed signals and nationalistic tendencies in what appears to be a man in a weak leadership position.
With these issues in mind, we believe that it is likely that the corporate earnings cycle in Asia will continue to disappoint and suffer further downgrades. A combination of volatile macroeconomic headlines, weak earnings and valuations that are not overly compelling—at about 18.7x P/E on average for the MSCI Asia ex Japan Index on an equal weighted-basis year to date—provide us with reason for caution. More positively, despite this, the Fund looks relatively well-placed given our ethos of buying into what we believe are quality companies at attractive valuations that have the ability to protect our fund holder’s capital in more challenging environments.
*Price-to-Earnings Ratio (P/E Ratio) is a valuation ratio of a company’s current share price compared to its per-share earnings and is calculated as the market value per share divided by the Earnings per Share (EPS).
The views and opinions in this commentary were current as of June 30, 2015. 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