For the quarter ending September 30, 2021, the

Matthews Japan Fund (Trades, Portfolio) returned 5.37% (Investor category) and 5.40% (Institutional category), while its benchmark, the MSCI Japan Index, returned 4.70 %.

Market environment:

Japanese stock markets continued to lag behind their global counterparts at the start of the third quarter, as the country’s vaccination rate fell behind developed markets in the United States and Europe and the state of emergency continued. Additionally, Prime Minister Yoshihide Suga’s approval rating, despite his efforts to secure the vaccine supply, continued to decline amid rising COVID cases over the summer.

However, as the vaccination rate reached a level comparable to that of the United States and Europe, and with the resignation of Prime Minister Suga in early September, the Japanese stock market experienced a brief but strong recovery and a certain reversal of the flow of global investors towards the end of the neighborhood.

Fumio Kishida has been appointed to replace Suga as chairman of the Liberal Democratic Party and holds the post of outgoing Prime Minister until the next general election on October 31. Prime Minister Kishida is seen as a consensus choice, and no policy or economic policy changes are expected.

Contributors and detractors of performance:


Matthews Japan Fund (Trades, Portfolio) is a quality core growth portfolio focused on high return on assets and invested capital, cash flow generation and medium term (3 months) earnings dynamics. As a result, the companies in our portfolio naturally tend to trade at a higher valuation than the overall market average and are vulnerable to a sudden change in equity risk premiums. This happened during the first quarter against a backdrop of rapidly rising bond yields, resulting in a difficult quarter for the portfolio. Since then, the Fund has outperformed the benchmark in the second and third quarters of the year, in a context of a persistent performance gap between growth and value.

From a sector perspective, the portfolio changes we implemented in Healthcare and Industrials contributed the most to the Fund’s relative performance for the quarter. On the other hand, the information technology sector, which was previously the largest overweighted sector, continued to be a drag despite our efforts to reduce weightings as we took profits on companies in the region. growth trading at high valuations.

When it comes to individual titles, leading human resources and media marketing solutions provider Recruit Holdings (IS: 6098, Financial) was the main contributor to the Fund, as the company benefited from the reopening of economic activity in Japan. Recruit’s human resources technology companies (Indeed Inc. and Glassdoor, Inc.), its crown jewels, have driven 40-50% revenue growth for the current fiscal year.

The technology conglomerate Sony Group (SONY, financial) was also a major contributor. In an age where content such as movies, music and games are consumed through digital downloads, Sony’s value as a key holder of intellectual property (IP) has increased in our view. Sony’s current management has also been proactive in securing intellectual property assets through mergers and acquisitions (M&A), which we see as a prudent allocation decision in the additional capital investment.

On the other hand, the Softbank group (EST: 9984, Financial), a telecommunications and venture capital firm. Softbank’s share price struggled amid sluggish initial public offerings (IPOs) performance and the general pattern of risk reduction in China weighed on sentiment as the group invests in companies in the market. key growth of the country.

PeptiDream biopharmaceutical and drug discovery platform company (EST: 4587, financial) also detracted from performance during the quarter. As the company continues to collaborate with drugmakers and authorize drug discovery technologies as well as in-house development, PeptiDream’s underperformance has continued to come from multiple contractions of a very high range.

Notable changes to the portfolio:

Looking ahead, our baseline scenario is that the global economy will continue to recover to pre-COVID levels and bond yields normalize. As a result, we continued to shift our portfolio during the quarter towards a cyclical earnings recovery, increasing our exposure to cyclical growth companies as economic activity began to bottom out and improve.

During the quarter, we participated in an IPO, Simplex Holdings (IS: 4373, Financial), an I solutions and service management company. The Japanese workforce is starting to peak and is expected to accelerate over the next 10 years. It remains one of the lowest labor productivity countries among the Organization for Economic Co-operation and Development (OECD) and technology to improve e ciency is imminent. Japanese companies now have a record amount of liquidity on their balance sheets and we believe Simplex is poised to benefit from the digital transformation of Japanese companies, many of which lack internal resources.

We also initiated a position on Mitsui High-Tec (EST: 6966, Financial), a manufacturer of “engine core,” which is a key component of a powertrain engine in electric vehicles (EVs). Comprised of around 300 to 500 layers of electrical steel sheet to create a stator / rotor, the company holds around 70% of the global market share. We believe that tighter environmental regulations bode well for electric vehicle penetration, and we chose to invest in a niche, but key, EV component maker. The company has a deep divide in materials science, which is difficult to replicate with just a large-scale investment.

To fund these positions and other new names, we liquidated seven positions including Sumitomo Mitsui Financial Group (SMFG, Financial), Marui Group (EST: 8252, Financial) and Fanuc Corp. (EST: 6954, Financial).


From a structural point of view, we continue to believe that the earning capacity of Japanese companies has improved considerably over the last economic cycle, thanks to better corporate governance and a greater focus on business efficiency. capital. Multi-year trends such as productivity growth, healthcare, technology and materials science innovation where Japanese companies have historically excelled relative to their global peers not only remain intact, but we believe the pace of change will accelerate as this COVID-19 situation becomes the stress test on the healthcare system and costs, as well as labor productivity issues in white-collar workers as more and more people are working from a distance.

For many years, Japanese stocks were not seen as a place of investment, but rather a place of exchange. Investors tend to buy Japan when things are bottoming out and improve, then exit when things start to peak. However, the momentum has changed dramatically since 2010, as Japanese companies have generated improving profit levels at each bottom of the cycle. 2020 showed another resiliency in Japanese corporate earnings. We believe the fundamentals of the Japanese equity market have shifted from pure value to cyclical growth, and many global investors remain skeptical of this shift. We will continue to seek investment opportunities in high quality companies that can perform well. At the same time, we will also seek opportunities in cyclical areas that have high growth potential through weaker and easier competition.

As of September 30, 2021, the titles mentioned included

Matthews Japan Fund (trades, portfolio) in the following percentages: Recruit Holdings Co. Ltd. 1.52%; Sony Corp. 3.24%; Softbank Group Corp. 1.45%; PeptiDream Inc.
2.07%; Simplex Holdings, Inc., 0.7%; and Mitsui High-Tec., 0.9%. The Fund held no position in Sumitomo Mitsui
Financial Group, Marui Group or Fanuc Corp.

The current and future holdings of the portfolio are subject to change and risk.

All performances quoted are past performances and do not guarantee future results. Return on investment and principal
the value fluctuates with changing market conditions so that the shares, when redeemed, may be worth more or less than
their initial cost. Actual performance may be below or above the performance figures shown. Returns would have
was less if certain fees and expenses of the Fund had not been waived. Please consult the most recent of the Fund
end of month performance.

The information contained in this document comes from sources believed to be reliable and accurate at the time of publication.
compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of
none of this information. Neither the funds nor the investment advisor accept responsibility for direct losses or losses.
resulting from the use of this information.

The views and opinions expressed in the commentary were as of the date of the report, subject to change and may not reflect current events.
views. They do not constitute guarantees of performance or investment results and should not be considered as investment advice.
Investment decisions reflect a variety of factors, and the managers reserve the right to change their perspective on
individual stocks, sectors and markets at all times. Therefore, the opinions expressed should not be taken as
a forecast of the Fund’s future investment intention. It should not be assumed that any investment will be profitable or
will equal the performance of any security or sector mentioned herein. The information does not constitute a
recommendation to buy or sell the securities mentioned.


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