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Matthews Asia Pacific Fund
CommentaryQuarter Ending June 30, 2008The Matthews Asia Pacific Fund declined -15.38% during the first half of 2008, compared with its benchmark, the MSCI All Country Asia Pacific Index, which fell -12.18%. As of 6/30/2008, the average annual total returns for the Matthews Asia Pacific Fund for the one-year, three-year and since inception periods were -12.01%, 9.32% and 11.59%, respectively. All performance quoted is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. Returns would have been lower if certain of the Fund's fees and expenses had not been waived. Please see the Fund's most recent month-end performance. Fees and ExpensesAnnual Operating Expenses Gross1 1 Ratio has been restated to reflect current management and administrative and
shareholder servicing fees expected to be incurred by the Funds and paid to the Advisor. Matthews Asian Funds do not
charge 12b-1 fees. The Asia Pacific markets continued through tough times in the second quarter of 2008 as prices for food and energy jumped to record levels. Ongoing problems related to U.S. financial institutions also continued to be a drag on market sentiment. While the second quarter marked declines throughout the region, these varied widely by country and, in some cases, even among different exchanges within the same country: the Chinese A share market declined another 26% in the second quarter after falling 29% in the first quarter. The MSCI China Index, however, was down just under 5% in the second quarter. The India portion of the MSCI All Country Asia Pacific Index declined 41%, while Japan was down only 5%. We have, however, seen encouraging signs in recently passed legislation that, we believe, should help Chinese manufacturers reduce inefficiencies in the years to come. A new Chinese labor law that raises the minimum wage by an annual double-digit percentage increase, coupled with annual appreciation of China’s currency against the U.S. dollar, should prompt factories to shift manufacturing methods so they are more capital-intensive and less labor-intensive. In addition, new regulations to battle pollution should help produce better conditions. Improved factory automation is something that has been emerging in China and some Japanese companies are big beneficiaries of this. Two of the portfolio’s holdings, FANUC and Keyence, both Japanese, are good examples of this trend in Chinese factories. FANUC is a leading supplier of industrial robots to Chinese companies and Keyence offers Chinese firms automation technology mainly through its advanced sensors. One of the Fund’s new holdings serves as another example of efficient manufacturing: China’s Tingyi is one of the country’s best food and beverage companies, and the country’s top instant noodle maker with dominant market share. What is so attractive about this company is its efficient manufacturing technologies, which are competitive with those of its Japanese and Korean peers. The company possesses a rare combination of both impressive factory automation and efforts to make daily improvements, which is the basic driving force behind the industry’s consolidation. These improvements are reminiscent of Toyota’s “kaizen,” a Japanese philosophy of bettering standardized activities and processes through daily activities to eliminate waste. The Fund has traditionally avoided commodity companies where we believe forward earnings are unpredictable due to the cyclical nature of these firms. Because of this, we have typically underweighted Australia due to its large commodities and energy sectors. This hurt performance in the first half of 2008 as commodities prices rose. Our overweight in Korean stocks also hurt the Fund as Korea has faced a rapid depreciation of its currency against the U.S. dollar, which has pushed up import costs. From a valuation standpoint, China and India now appear more attractive, and the Fund has a growing list of new investment opportunities in solid companies with attractive long-term growth prospects. We also retain conviction in our current holdings. The Fund attempts to capture the growth prospects for the entire Asia Pacific region, in which Japan is becoming more and more relevant. Japan’s domestic growth potential may not be as high as that of Asia-ex Japan, but it is our belief that more Japanese companies will benefit from growth in the region. It is important to note that we have been witnessing more regional cooperation, both economically and politically, over the last six months than we have at any time in the last decade. Looking ahead, one of the key questions facing investors is the ability of the region to withstand a global slowdown. In that context, it is encouraging to see these signs of greater integration within the Asia Pacific region, despite the current downturn in Asian equity markets. The views and opinions in this commentary were current as of June 30, 2008. 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 Funds' 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 6/30/08, Fanuc, Ltd. accounted for 1.0% of the Matthews Asia Pacific Fund, Keyence Corp. accounted for 0.9%, Tingyi (Cayman Islands) Holding Corp. accounted for 0.8% and Toyota Motor Corp. accounted for 1.2% of the Fund. |
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