Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The Matthews China Fund aims to provide access to domestic demand growth in China across the market-cap spectrum, inclusive of China A-shares. It seeks companies that are current or future market leaders at attractive valuation, aiming to capture growth at a reasonable price and provide consistent alpha.
The portfolio typically holds between 35 and 45 high-conviction stocks, diversified by sector and market capitalization. In constructing the portfolio, we look to diversify the portfolio between approximately 80% core and 20% cyclical growth holdings. The core holdings are businesses that are viewed as long-term positions and have long-term cash flow predictability. These include opportunities in consumer staples, internet/e-commerce, health care, and environmental. Our 20% cyclical growth holdings are generally in shares of companies that have less-predictable cash flows. These cyclical growth holdings often represent investments in more cyclical industries such as transportation, property, wealth management, energy and commodities.
Andrew Mattock is the Lead Manager for the Matthews China Strategy and is responsible for day-to-day investment decisions. He is supported by co-manager Winnie Chwang and a dedicated Research Analyst. The team is further supported by two China macro strategists, as well as the firm's Knowledge Platforms, which are groups of research analysts and portfolio managers that come together to generate and discuss new investment ideas, perform industry analysis, and respond to ad-hoc research requests from portfolio management teams. Most investment professionals are based in San Francisco, but we also have team members on the ground in Shanghai and Hong Kong.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
Overall we remain optimistic about both the near-term and long-term growth prospects in China. China's approach to combatting the virus has been more effective than any other large economy. Because COVID is largely under control in China, people have been able to resume a normal life. Consumption is rising, auto sales are growing, restaurants have long lines and consumers feel comfortable gathering indoors.
At a portfolio level, we have been taking advantage of volatility in the market. In the first three quarters of 2020, valuations in consumer staples, information technology and health care sectors shot up, but remained largely flat in the financials, materials, energy and industrials sectors. In our view these unloved areas provided value: we took profits from some of the ‘stay at home' and health care stocks and allocated them toward cyclical recovery opportunities. This increased the Fund's weighing to industrials and we also added to the Fund's information technology exposure.
In 2021 we continued to rotate some capital. Chinese growth stocks took a breather in the first quarter of 2021, giving up some of their earlier gains from 2020, creating buying opportunities. Taking an all- shares approach to investing in Chinese equities, we found interesting opportunities in the Hong Kong (H- shares) market in terms of both valuation and quality.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Over the long-term, we expect that China's growth will continue to be driven by growing domestic consumption. Key themes that we are following include technology upgrades, health and wellness trends, services that enhance quality of life and premium consumer goods.
Looking at sectors, one notable distinction of the Fund is its overweight to financials. China has embarked on a series of capital markets reforms which aim to open up the financial market and create fund raising channels for small and medium-sized companies. We believe these reforms present opportunities for some financial companies. The Fund is positioned accordingly with diverse exposure to brokerages and stock exchanges that can potentially capitalize on these reforms. The Fund's second largest overweight is in information technology. China's seeks to become self-sufficient in key areas of technology and the digitalization of the economy, and there are many listed companies that can help China reduce its reliance on foreign technology. These over-weights, however, are the result of active stock selection rather than taking sector bets. We evaluate each individual case on its own merits and look across sectors to identify the right opportunity, focusing on relative attractiveness, the impact on the portfolio's objective, style and market capitalization.
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Risk Considerations
The value of an investment in the Fund can go down as well as up and possible loss of principal is a risk of investing. Investments in international and emerging market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The Fund invests in holdings denominated in foreign currencies, and is exposed to the risk that the value of the foreign currency will increase or decrease. The Fund invests primarily in equity securities, which may result in increased volatility. Investments in a single-country fund may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. These and other risks associated with investing in the Fund can be found in the Prospectus.
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