The Matthews China Fund
The Matthews China Fund – Investor Class (MCHFX) is the second-largest fund under this review, with net assets of $607.0 million as of January 2016. The fund has a gross expense ratio of 1.13%, the lowest among all the funds. The fund was incepted in February 1998.
The fund employs a bottom-up, fundamental investment philosophy with a focus on long-term investment performance.
For the year ended December 31, 2015, MCHFX returned 2.4% while its benchmark, the MSCI China Index, returned -7.62%. For the 4Q15, the fund returned 10.3% versus 4.03% for the index. The fund was down 0.4% month-over-month in December 2015. Meanwhile, year-to-date (from the end of December 2015 to February 26), the fund fell 17.3%, the highest among all the funds under this review.
Bottom-up stock selection helped the fund in tough conditions during 2015. Minimizing stock selection mistakes and staying away from companies where the outlook was particularly uncertain ensured that the fund outperformed its benchmark.
The latest portfolio composition is available for December 2015. MCHFX has the highest weight to the financials sector among all other funds under this review. Financials dominated the portfolio with a 38.5% weight. Other major sectors included consumer discretionary, information technology, and industrials sectors, with 17.7%, 16.8%, and 15.4% weights, respectively.
The fund has increased positions in the life insurance industry in the fourth quarter, which significantly boosted the financials’ weighting. Although life insurers are classified within the financial sector, the fund views such businesses as consumer discretionary holdings.
As of December 2015, the fund held 43 positions. The top ten holdings account for 39.8% of the portfolio assets. The top ten holdings include Tencent Holdings (TCEHY), JD.com (JD), and NetEase (NTES). Its other equity holdings include Vipshop Holdings Limited (VIPS) and Baidu (BIDU).
Going forward, it is expected that China’s central government would continue to achieve a balance between non-intervention and major stimulus programs. The government has been making efforts to accelerate the reform process by encouraging and supporting the private sector economy and increasing the role of market forces.
Despite valuations being cheap, we expect volatility should present attractive alpha-generating ideas. The reform agenda in place may be slower than the market would like, but it must be remembered that the changes taking place are significant. Plus, this is an occurrence that has not been seen since China’s World Trade Organization deal was signed.