For the first half of 2014, the Matthews Pacific Tiger Fund (Trades, Portfolio) gained 10.48% while its benchmark, the MSCI All Country Asia ex Japan Index, returned 6.57%. For the quarter ending June 30, the Fund returned 7.98% while its benchmark returned 7.30%. Following a difficult start to the year, the region posted modest gains in the second quarter led by expectations for better economic growth.
We believe the macroeconomic picture for Asia has improved somewhat, in contrast to the dire predictions made last summer. The improvement is being led by a recovery in exports, although the pace of recovery varies across Asia. Indian exports seem to have benefited from a depreciation of the Indian rupee while Indonesian exports continue to be lackluster as demand for commodities remains weak. Another factor that has helped to restore a semblance of stability to the region was the muted withdrawal of capital from Asia in the aftermath of the U.S. Federal Reserve’s decision to taper bond purchases. Regulators and policymakers were forced to make some difficult and unpopular decisions like reducing wasteful energy subsidies but that may have also provided some confidence to the investment community. Thus far this year, inflows to Asia have been positive and significant in driving equity values across the region. In the short term, this is good news but it may present a risk in the event of sudden and sharp changes to global interest rates.
A key event that influenced Asia’s capital markets during the first half of the year was the landslide win of India’s Modi-led government. This outcome is being seen as a mandate for rejuvenating growth, and better governance.
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By sector, financials were among the biggest contributor to performance, led by Indian banks. While the portfolio’s Indian holdings significantly contributed to both the portfolio’s year-to-date and second quarter performance, it is worth nothing that the list of top contributors includes companies from across the region. This attests to the importance of deciding portfolio weighting for individual stocks. Amorepacific (XKRX:090430), a South Korean luxury skincare and cosmetics maker, was the largest contributor to Fund performance for the first half of the year. The firm did well, helped by some early signs that its marketing and distribution-related investments in China have started to bear fruit.
As a group, the portfolio’s Chinese holdings posed a significant drag on the Fund’s year-to-date performance. In particular, consumer-oriented firms continued to wrestle with slowing growth and rising competitive intensity. China Resources Enterprise (HKSE:00291), a conglomerate that focuses partly on retailing food processing and distribution, was among the biggest detractors. The company’s efforts to increase scale through some strategic acquisitions may depress its near-term profitability and return on capital metrics. We continue to believe that the execution risk stemming from integration of some acquired supermarkets and hypermarkets remains manageable. However, the firm may still be challenged by the trend of shoppers increasingly turning to online platforms.
Looking ahead, two of the largest economies in Asia—China, and India are at various stages of economic reforms that strive to address the unique challenges facing their respective economies. In India, the new administration faces the difficult task of revitalizing investment growth while maintaining fiscal prudence, and taming inflation. Meanwhile, Chinese authorities are trying to bolster services growth as well as improve the quality of growth. The results from these efforts are likely to manifest only over the medium to long term, but we believe these are steps in the right direction. We continue to look for businesses run by motivated management teams that are best-placed to navigate Asia’s changing regulatory and economic environment.
The views and opinions in this commentary were current as of June 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 6/30/2014, the securities mentioned comprised the Matthews Pacific Tiger Fund (Trades, Portfolio) in the following percentages: Amorepacific Corp., 4.2% and China Resources Enterprise, Ltd., 1.8%. 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.