Matthews Pacific Tiger Fund Q3 2014 Commentary
For the quarter ending September 30, 2014, the Matthews Pacific Tiger Fund returned 2.39%, outperforming its benchmark, the MSCI All Country Asia ex Japan Index, which fell -1.54%.
Matthews Pacific Tiger Fund: Market Environment
Toward the end of the third quarter, uncertainty stemming from the health of the Chinese economy and the impact of interest rate tightening in the U.S. wiped away some earlier gains. The macroeconomic picture in China remains hazy with one clear trend—slowing growth in the industrial sector, while the consumption side of the economy remains more resilient as evident in continually increasing demand for newer types of consumption like health care and tourism-related services. It is notable that in spite of weak data, the Chinese government has been steadfast in its recent avoidance of large-scale stimulus programs to boost short-term growth. We continue to believe that the investment community remains too fixated on pace of growth, while ignoring the long-term benefits of a more market-oriented economy.
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Interestingly, some mainland Chinese equity indices were up strongly during the quarter while the Hang Seng Index (HSI) was in the red. The HSI has a heavier concentration financials and industrial sector companies while the Shenzhen 300 Index, for example, is more diversified with greater weighting for consumer-related and information technology sectors.
In the aftermath of last summer’s “taper tantrum,” several Asian economies, such as India and Indonesia, were forced to take remedial steps: lowering wasteful energy subsidies, raising interest rates and allowing currencies to depreciate. Recovering exports, and continuing growth in foreign direct investments has helped foreign currency reserves recover, and that may provide some stability should there be a pickup in withdrawal of capital. Separately, both India and Indonesia continue to benefit from new governments that have raised hopes for an upturn in investment activity.
Matthews Pacific Tiger Fund: Performance Contributors and Detractors
South Korean holdings were the biggest driver of relative performance, led by Amorepacific (XKRX:090430), as investors continue to focus on the company’s potential growth opportunities in China. The portfolio’s holdings in the consumer staples and health care sectors also helped relative performance for the portfolio as a recovery in Indian and Indonesian equity markets contributed to the gains.
The Fund’s holdings in Taiwan and Thailand were the biggest detractors of relative performance during the quarter. In Taiwan, the free cash flow yields across several of the holdings have compressed over the past year, and as investors start to anticipate higher rates globally, the compressed yields are less attractive. The operating environment for companies in Thailand has not yet recovered from the political disturbances earlier this year, although there are some signs of stabilization.
Matthews Pacific Tiger Fund: Notable Portfolio Changes
We made no notable changes to the portfolio during the quarter, however, we continue to look for opportunities in sectors like consumer discretionary and health care, particularly in China.
Matthews Pacific Tiger Fund: Outlook
In the past few years, the Asian region has faced a period of rising rates, volatility in capital flows and slowing growth. But some of these factors seem to be shifting. Barring a significant spike in oil prices, inflation is likely to have peaked across many parts of Asia, and that may provide some room for central bankers to consider loosening monetary policies, although it may not happen as quickly as market participants would like. For businesses, there has been a healthy winnowing of competition for well-run companies as weaker firms have found it difficult to survive in these circumstances. With the prospects of recovery slowly improving, these well-run businesses are well-placed to capture increasing market share. We continue to believe that investing in quality businesses run by motivated management teams is a good way to participate in Asia’s long-term growth.
The views and opinions in this commentary were current as of September 30, 2014. 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.
Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.
As of 9/30/2014, the securities mentioned comprised the Matthews Pacific Tiger Fund (Trades, Portfolio) in the following percentages: Amorepacific Corp. 4.8%. Current and future portfolio holdings are subject to risk.
Performance and distribution figures discussed in any of the Manager Commentaries reflect that of the Investor Class Shares.