Matthews Japan Fund Third Quarter 2013 Commentary
Japanese markets concluded another roller coaster quarter, on a high note this time, with particularly strong performance in September. Tokyo’s winning bid to host the 2020 Olympics, upwardly revised second quarter GDP figures and prospects for a corporate tax cut all served as catalysts for the market rally. The surprise decision by the U.S. Federal Reserve to maintain easing measures for the time being also provided some support for equity performance.
By sector, information technology contributed most to relative outperformance. One of the Fund’s long-term holdings, Internet services operator Kakaku.com, extended its rally on the back of a healthy expansion of its online restaurant review website. The number of restaurants advertising on its website, Tabelog, has continued to expand while the number of individual users paying a monthly subscription fee for premium services has increased. Nuflare Technology, a semiconductor manufacturing equipment producer, also contributed positively due to improved capital expenditures by leading semiconductor producers. However, as we believe that the positive aspects of such a cyclical recovery had already been reflected in the share price, we exited the position during the quarter.
Meanwhile, the Fund’s allocation to the materials sector negatively affected relative performance. Specialty chemical company Shin-Etsu Chemical (TSE:4063), the world’s largest manufacturer of polyvinyl chloride and silicon wafers, performed poorly on the back of weaker U.S. housing starts and lower-than-expected demand for silicon wafers. We view these factors to be temporary in nature while valuations remain relatively undemanding.
During the quarter, non-bank financial services company Orix (IX) was the largest individual contributor to performance. Orix is seeing improving fundamentals as the company is exposed to various parts of the broad Japanese economy through its financing operations. We view Orix’s management team as one of the most capable teams in Japan’s financial sector—one which has also succeeded in building a unique financial services platform. Orix continues to diversify its business overseas; most recently it acquired Robeco, a global asset manager with more than US$250 billion in assets under management.
On the other hand, data center operator Bit-Isle (JAS:3811), was the biggest detractor to Fund performance. The stock has corrected sharply since the beginning of May and remains depressed. We suspect some investors were scared off following cancellations from a major client but we deem that to be a one-off event. Internet data traffic in Japan continues to grow and we believe demand for Bit-Isle’s cloud services should also continue to grow at a healthy pace.
In July, Japan’s ruling Liberal Democratic Party won Upper House elections with another landslide. With no major national elections scheduled for the next three years, politics in Japan appears to be entering a rare phase of stability. Thus far, execution on various policy measures by Prime Minister Shinzo Abe has been positive, albeit somewhat slow. There are a number of reform measures being actively discussed, such as additional corporate tax cuts, easing of labor regulations and new programs to incentivize investment in new production capacity. We believe such policy measures are critical in determining Japan’s future and will keep a close and patient eye on how these discussions evolve going forward.
While we expect the path to further reform to be bumpy, we are optimistic that Japan is moving in the right direction. We will continue to focus on finding companies running fundamentally sound businesses that can deliver growth in shareholder value over the long term.
The views and opinions in this commentary were current as of September 30, 2013. 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 9/30/2013, the securities mentioned comprised the Matthews Japan Fund in the following percentages: Kakaku.com, Inc. 1.6%, Shin-Etsu Chemical Co., Ltd. 1.3%, ORIX Corp. 4.4, Bit-isle, Inc. 1.3%. The Fund held no positions in Nuflare Technology, Inc. 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.