Matthews Pacific Tiger Fund letter to investors for the period ended March 31, 2015.
For the quarter ending March 31, 2015, the Matthews Pacific Tiger Fund returned 7.53% (Investor Class), outperforming its benchmark, the MSCI All Country Asia ex Japan Index, which returned 4.90%.
Matthews Pacific Tiger Fund: Market Environment
In the first quarter of this year, the impact of a potential rise in U.S. policy rates on Asian economies, the health of the Chinese economy, and progress with structural reforms in countries like India and Indonesia were key topics influencing Asia’s capital markets. Amid these debates, the MSCI AC Asia ex Japan Index posted a slight gain, led by stocks in North Asia, while some of the equity markets of the Association of Southeast Asian Nations were weak, reflecting concerns over the impact from rising interest rates in the U.S.
The mainland Chinese markets of Shanghai and Shenzhen were among the best-performing in the region, led primarily by a recovery in valuations. On the other hand, Malaysia was the weakest. Investors’ concern over the extent of debt in the Malaysian economy was compounded by the fall in oil prices causing a sharp depreciation in its currency, which wiped away the gains made in the local equity market. Compared to the U.S. dollar, many of Asia’s currencies have struggled recently, but there is a divergence in performance as relatively high interest rates in countries like India have helped stabilize its currency.
Matthews Pacific Tiger Fund: Performance Contributors and Detractors
The portfolio’s relative outperformance was driven by favorable stock selection in South Korea and Singapore. The continued strength in some South Korean consumer holdings is a reflection of the growing visibility in their China operations.
During the quarter, Indonesia and Taiwanese holdings were among the biggest detractors to Fund performance. Some of the portfolio’s holdings in the utilities sector were a drag on performance. In particular, uncertainties around profitability of PT Perusahaan Gas Negara Persero hurt the underlying equity, which was further exacerbated by a fall in the Indonesian rupiah. In addition, the company’s decision to modestly lower the dividend payout ratio highlights the constraints on their cash flow arising from weakening profitability and continuing investments, which may only yield returns in the long term.
Matthews Pacific Tiger Fund: Notable Portfolio Changes
During the quarter, we exited Keppel Land, a Singaporean real estate company. Keppel is being privatized by its parent company at a significant premium, which caused us to tender our shares. One of the newer additions to the Fund was insurance company AIA that has a diversified presence across many parts of Asia.
Matthews Pacific Tiger Fund: Outlook
Over the past few years, one of the key factors depressing Asian equity markets has been a steady erosion in corporate profitability as measured by return on equity. However, some of the factors that have been working against Asian businesses are turning increasingly favorable. The fall in commodity prices, especially oil, is supportive of margins, although the extent of the beneficial impact varies. In addition, real rates of interest are still fairly high in countries like China and India, and lower inflation expectations gives some leeway to central banks to loosen monetary policy. This may lead to lower funding costs for some of the companies. While these two factors are supportive, the uneven recovery in domestic demand continues to pose a challenge to companies across the region. Income growth has slowed and fiscal government budgetary pressures may constrain their ability to engage in widespread stimulus programs. This is where the attempts in countries like India and Indonesia to steer the fiscal budget away from wasteful subsidies into more long-term investments can be helpful.
Although valuations have generally expanded across Asia, on a country-by-country basis there are some differences. In China, valuations remain at an acceptable level while India stands at a slightly higher-than-fair level compared to historical levels. Meanwhile, valuations in the Philippines look more challenging at this point. We are watchful of valuation levels, particularly with respect to witnessing a recovery in fundamental profitability in corporates in Asia.
The views and opinions in this commentary were current as of March 31, 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 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 03/31/2015, the securities mentioned comprised the Matthews Pacific Tiger Fund in the following percentages: PT Perusahaan Gas Negara Persero 1.1% and AIA Group, Ltd. 1.1%. The Fund held no positions in Keppel Land, Ltd. Current and future portfolio holdings are subject to risk.
