MATTHEWS ASIA EX JAPAN DIVIDEND FUND
Fund review
When the Matthews Asia ex Japan Dividend Fund launched in November 2015, the intention was the portfolio would always contain a mix of higher-yielding dividend payers and dividend growth stocks. The aim was to create a total-return dividend portfolio that can capture Asia's growth with lower volatility.
It was with this mantra in mind that in November 2015, Matthews Asia launched the Matthews Asia ex Japan Dividend Fund. Managed by Yu Zhang, CFA, the fund takes a dividend approach to capture Asia’s growth with lower volatility. By constructing a portfolio that balances higher-yielding dividend payers with dividend growth stocks, Zhang and his team seek to deliver attractive total return through capital appreciation and the provision of income.
So, more than five years on, how has the fund gone about trying to achieve this aim?
According to Zhang, the hurdles faced in the period since launch have been numerous. Uncertainties around interest rates, a trade war between the US and China and, most recently,
a global pandemic have all contributed at various times to create high levels of market volatility across the region.
“At the same time, within the background, an underlying shift took place within China as its economic growth began to moderate and move from an export-driven to more of a domestic consumption-driven market,” says Zhang. “This structural shift has been to the benefit of the more growth-orientated businesses – such as technology, healthcare and consumer staples – while traditional value companies have struggled.”
However, flash forward to 2021, and a combination of rising inflation expectations, a steepening yield curve and the reopening of economies following the global pandemic has led to a market rotation in the first quarter from growth to value-orientated companies. “When the strategy launched in late 2015, the portfolio had more of a value tilt compared to growth, and with more than half of the positions in dividend-paying stocks,” says Zhang. “Since then there have been a couple of periods when growth has taken more of a centre stage, once in 2017 and again in 2020. Both of these years were bull markets for Asian equities and at the beginning of those two years we increased our exposure to dividend growth names, which paid off well.”
Having ended 2020 with an approximate 60/40 weighting to dividend growth names, Zhang says this hurt the portfolio at the start of 2021 given the rotation to value that took place. However, because of the fund’s flexibility, he has been able to quickly adapt, and at the end of the first quarter the split was back down to approximately 49/51 between growth and dividend-paying stocks. “We made a number of changes, mostly focusing on trimming the most growth-orientated areas of the portfolio and then adding more cyclical value names,” he says. “We reduced our holdings in consumer staples, consumer discretionary and some technology names, which meant cutting our exposure towards Hong Kong and China and upping our holdings in South Korea, where you tend to see cheaper and more cyclical businesses.”
_Portfolio Adviser perspective
_Fund manager perspective
Yu Zhang, portfolio manager, Matthews Asia
Yu Zhang manages the firm's Asia Dividend
and Asia ex Japan Dividend strategies, and co-manages the China Dividend Fund. Prior to joining Matthews Asia in 2007 as a research associate, Zhang was an analyst researching Japanese companies at Aperta Asset
Management from 2005 to 2007.
The balanced route to Asian returns
Since many of the world‘s fastest-growing companies are located in Asia, investing in the region is often part of an all-growth strategy. The problem is, unless you are aligned with a business that will share this growth with you, you may not see any of the end benefits.
_Square Mile perspective
Capitalising on Asia’s strong
growth outlook
During the first two decades of the
21st century, growth in Asian markets
has driven global growth.
‘The region is home to a large number of the companies transforming our world into a more digitalised place’
_Fund buyer perspective
UK fund buyers provide their views on Matthews Asia ex Japan Dividend and explain why it is unique among income funds.
‘Matthews Asia is one of those firms that should be better known as it has a range of quality products that are purely focused on Asia. I would say this is, or should be, its flagship core product for most investors. The focus is on long-term dividend growth as the team believes cash and the ability to pay growing dividends is a sign of long-term health. Interestingly, the focus isn’t just on larger companies; it is truly multi-cap with a big chunk in smaller companies. Asia is often overlooked for income investors but with an estimated 90% of listed companies paying dividends, and generally a much lower payout ratio, there is excellent scope for high and growing dividends and total returns.’
This strong growth outlook looks set to continue, given the favourable demographics, a growing middle class driving domestic consumption and the region being home to a large number of the companies transforming our world into a more digitalised place.
In fact, Asia is home to a large number of the global technology and e-commerce champions, some of which are household names, such as Samsung Electronics. Others are largely unheard of in the UK, but which many of us rely on in our day-to-day lives, including the likes of TSMC and Largan Precision. Within the region, particularly in China, companies such as Alibaba and Tencent are staples of many of our daily lives. Clearly, as with any market, there will be winners and losers, and so a successful investor will need an approach that helps them identify the key characteristics of companies most likely to thrive.
To identify these characteristics, we believe you will need a well-practiced process, along with an experienced and dedicated team, consisting of astute portfolio managers, who will actively manage your investments. In this region we think taking a long-term view, which seeks to profit from shorter-term opportunities and a lack of understanding of the dynamics driving the region, is a good approach. The Matthews Asia team possesses such a skill set.
Matthews Asia is a San Francisco-based asset manager specialising in Asian investment. It was established in 1991 and is one of the largest dedicated US investors in the Asian market. While the Matthews brand is very well-known in the US, it is still less familiar across Europe and the UK, particularly among retail investors, although it is now well-established within the institutional market. Additionally, a number of its strategies appear to have short track records, but if one looks beyond the European-domiciled vehicles, there is usually a long-term track record via their US vehicles. This means for those investors who are willing to do some research and scratch beneath the surface, they can often unearth strategies with strong long-term track records and a consistency of approach.
We believe one of Matthew’s strengths is its people. While the investment team has seen some turnover during the past 12 months, it remains well-resourced, consisting of about 40 fund managers and analysts. Although the team share research and information across all strategies and work in a collaborative manner, they are also organised into more focused groups with responsibility for specific strategies.
As a firm that specialises in investing in Asia, Matthews has always had a strong focus on governance, but it has recently started to use more formal tools internally to quantitatively monitor and regularly review a company’s ESG risks. While the firm makes use of external data sources, the coverage of certain regions and smaller companies in Asia can be limited (or non-existent), and so the group relies largely on its own research.
In terms of dedicated resources, the firm has a head of ESG, who ensures the investment teams have the appropriate data to assess businesses, and who also challenges portfolio managers on companies with red flags. As a firm, it believes in engagement, but it is not aggressive in its approach. It recognises that Asian shareholder rights are not as well developed as some parts of the globe, so the approach is to explain to companies what good looks like and work with them to achieve this.
Launched at the end of November 2015, the Matthews Asia Ex Japan Dividend Fund is managed in a similar manner to the Matthews Asia Dividend Fund, which dates back to October 2006, with the inception of the US-domiciled fund. It is managed by the same team, who follow a similar approach, focusing on generating capital accumulation via income and capital appreciation. They look for companies with either a more mature dividend-paying culture or those which are likely to grow their dividend over time, as these are deemed to represent a strong business model and greater alignment of interests with shareholders.
The lead manager of this fund, Yu Zhang, is an accomplished investor. Since launch, not only has he been able to identify good businesses but he has been able to allocate successfully across his favoured companies as sentiment in the region has ebbed and flowed.
Since launch the fund has benefited from its smaller size. This has allowed the lead manager to invest, to a significant degree, into medium and smaller-sized firms and to enter the more emerging Asian and frontier markets, including Vietnam, as well as the China A-Share market, which is home to some of the most innovative and exciting businesses in the region. However, with this approach comes risks, and such exposures are dependent on the opportunity set that the lead manager and his team find at any given time.
Team effort
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NAME_Adam Lewis
YEARS IN INDUSTRY_20
JOB TITLE_Content editor
COMPANY_Portfolio Adviser
LOCATION_London
NAME_Alex Farlow
YEARS IN INDUSTRY_21
JOB TITLE_Head of risk-based
solutions research
COMPANY_Square Mile
Investment Consulting
& Research
LOCATION_London
Ben Yearsley_director_Fairview Investing
‘Unlike traditional income funds, this fund takes a total return approach and focuses on a company’s ability and willingness to pay and grow dividends over time. Another differentiating aspect is that it seeks to identify attractive long-term opportunities across the market capitalisation spectrum. Most income funds typically invest in only large caps. The income component of the total return will likely be smaller compared with other Asian income peers, but the fund has compensated for this through stronger capital appreciation. Yu Zhang has a strong track record where he has outperformed in both rising and falling markets. He has even added value in environments unfavourable for dividend/income strategies through superior stock selection over time.’
Zach Ryan_fund analyst_FE Investments
‘Asia offers a unique opportunity for income seekers. Income and dividends from investments is part of the culture of many countries just like it is in the UK, but comes with the added bonus of faster growth rates from the region and especially the younger populations. The Matthews Asia ex Japan Dividend Fund exploits this opportunity with a focus on quality, low debt and high return on equity. The focus on smaller market cap companies gives the potential for both income and capital growth as well as income growth.’
Adrian Lowcock_independent commentator
‘We have been recommending the Dividend fund since 2013, and Matthews Asia more recently launched the Asia ex Japan version of its long-term core Asia-Pacific strategy. The fund is managed by the same team at Matthews, following the same investment philosophy and process, seeking companies that are paying high dividends or are well positioned to do so. The result is a portfolio with high-yielding and fast-growing dividend yield companies. The portfolio might be tilted towards one or the other category depending on opportunities and the market environment, but it tends to have a bias towards fast-growing dividend companies and relatively large exposure to small and mid-caps companies, which has proven to be highly alpha generative.’
Anais Gfeller_emerging markets
analyst_Allfunds
Portfolio Adviser
perspective
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Fund
manager
perspective
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Square Mile
perspective
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Fund buyer perspective
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Growth cycle
Proven quality
Consistency of approach
Rather than sector or country allocations, the biggest driver of the fund’s relative return since launch has come from stock selection. Zhang says approximately 60% of the fund’s total return can be attributed to stock selection within small caps (data as of 30 April 2021). “Small-cap businesses offer an interesting overlap between delivering growth and returning this growth in the form of rising dividend payments,” says Zhang. The end result is that while the fund has not owned many of the mega-cap Asian tech names, it has consistently been overweight in smaller cap Asian companies.
When it comes to assessing this strategy with other Asian offerings, Zhang believes investors should compare it with Asian growth, as well as income funds, and consider it as part of their core Asia exposure. “What we have ultimately proved with the strategy since launch is that it is not mutually exclusive to have income and growth in Asia,” says Zhang. “We think that by sticking to a dividend approach, we have a better chance of accessing high-quality growth businesses, with dividends being that stamp of proven quality.”
For investors placing importance on ESG, Zhang says that as a dividend strategy corporate governance has always been embedded into its fundamental research process. During the past five years, as the investment community has become more aware of the comprehensive ESG investing implications, he says the team developed a more systematic way to look at the environmental and social – the ‘E’ and ’S’ factors within ESG – when identifying opportunities as well as assessing any potential risks.
“To help us integrate these factors into the portfolio, we have a dedicated ESG analyst at Matthews Asia,” he says. “She provides us with a useful set of analytical tools as well as in-house proprietary data, to help us monitor the existing holdings within our portfolio and assess new investment opportunities. With her assistance, we have become more active and vocal in engaging with our portfolio companies to discuss how they can improve their ESG standing.”
‘What we have ultimately proved with the strategy since launch is that it is not mutually exclusive to have income and growth in Asia’
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Click for DISCLAIMER
30/11/15
Launch date_
Fund size_
as of 31 May ’21
$460.19m
177.1%
Growth of fund_
since inception
106.8%
59
1.43%
Growth of IA Asia Pacific ex Japan sector_
Number of holdings_
as of 31 May ’21
Dividend yield_
as of 31 May ’21
since fund’s inception
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. There is no guarantee that the Fund or the companies in its portfolio will pay or continue to pay dividends. These and other risks associated with investing in the Fund can be found in the Prospectus.
The Fund is a sub-fund of Matthews Asia Funds SICAV, an umbrella fund, with segregated liability between
sub-funds, established as an open-ended investment company with variable capital and incorporated with limited liability under the laws of Luxembourg. Investment involves risk. Past performance is no guarantee of future results. The value of an investment in the Fund can go down as well as up.
This document is not a Prospectus/Offering Document and does not constitute an offer to the public.
No public offering or advertising of investment services or securities is intended to have taken effect through the provision of these materials. This is not intended for distribution or use in any jurisdiction in which such distribution, publication, issue or use is not lawful. Investors should not invest in a Fund solely based on the information in this document.
An investment in Matthews Asia Funds may be subject to risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The current prospectus, Key Investor Information Document or other offering documents (“Offering Documents”) contain this and other information and can be obtained by visiting global.matthewsasia.com. Please read the Offering Documents carefully before investing as they explain the risks associated with invest-ing in international and emerging markets. It is the responsibility of any persons wishing to subscribe for shares to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdictions. Prospective investors should inform themselves as to the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares, and any foreign exchange restrictions that may be relevant thereto. An investment in the Matthews Asia Funds is not available in all jurisdictions. The Fund’s shares may not be sold to citizens or residents of the United States or in any other state, country or jurisdiction where it would be unlawful to offer, solicit an offer for, or sell the shares. No securities commission or regulatory authority has in any way passed upon the merits of an investment in the Fund or the accuracy or adequacy of this information or the material contained herein or otherwise.
The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
The views and information discussed herein are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles.
Matthews Asia is the brand for Matthews International Capital Management, LLC and its direct and indirect subsidiaries.
Matthews International Capital Management is the Investment Manager to the Matthews Asia Funds, and is a U.S.-based investment adviser registered with the U.S. Securities and Exchange Commission who has not represented and will not represent that it is otherwise registered with any other regulator or regulatory body.
In Singapore, this document is available to, and intended for Institutional Investors under Section 304 of the Securities and Futures Act. It should not be circulated or distributed to the retail public in Singapore. Issued in Singapore by Matthews Global Investors (Singapore) Pte. Ltd. (Co. Reg. No. 201807631D).
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Risk Considerations
For Institutional/Professional Investors Only.