N-CSR
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number            811-08510                    

                             Matthews International Funds                            

(Exact name of registrant as specified in charter)

Four Embarcadero Center, Suite 550

                             San Francisco, CA 94111                            

(Address of principal executive offices) (Zip code)

William J. Hackett, President

Four Embarcadero Center, Suite 550

                          San Francisco, CA 94111                            

(Name and address of agent for service)

Registrant’s telephone number, including area code: 415-788-7553

Date of fiscal year end:  December 31

Date of reporting period: December 31, 2015

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Table of Contents

Item 1. Reports to Stockholders.

The Report to Shareholders is attached herewith.


Table of Contents

Matthews Asia Funds  |  Annual Report

December 31, 2015  |  matthewsasia.com

 

ASIA FIXED INCOME STRATEGY

Matthews Asia Strategic Income Fund

ASIA GROWTH AND INCOME STRATEGIES

Matthews Asian Growth and Income Fund

Matthews Asia Dividend Fund

Matthews China Dividend Fund

ASIA VALUE STRATEGY

Matthews Asia Value Fund

ASIA GROWTH STRATEGIES

Matthews Asia Focus Fund

Matthews Asia Growth Fund

Matthews Pacific Tiger Fund

Matthews Asia ESG Fund

Matthews Emerging Asia Fund

Matthews China Fund

Matthews India Fund

Matthews Japan Fund

Matthews Korea Fund

ASIA SMALL COMPANY STRATEGIES

Matthews Asia Small Companies Fund

Matthews China Small Companies Fund

ASIA SPECIALTY STRATEGY

Matthews Asia Science and Technology Fund

 

 

LOGO

 

'15

 

LOGO


Table of Contents

LOGO


Table of Contents

Contents

 

Message from the President of the Matthews Asia Funds     4   
Message to Shareholders from the Investment Advisor     5   
Manager Commentaries, Fund Characteristics and Schedules of Investments:  
ASIA FIXED INCOME STRATEGY  
Matthews Asia Strategic Income Fund     6   
ASIA GROWTH AND INCOME STRATEGIES  
Matthews Asian Growth and Income Fund     11   
Matthews Asia Dividend Fund     16   
Matthews China Dividend Fund     21   
ASIA VALUE STRATEGY  
Matthews Asia Value Fund     26   
ASIA GROWTH STRATEGIES  
Matthews Asia Focus Fund     29   
Matthews Asia Growth Fund     33   
Matthews Pacific Tiger Fund     38   
Matthews Asia ESG Fund     43   
Matthews Emerging Asia Fund     48   
Matthews China Fund     53   
Matthews India Fund     58   
Matthews Japan Fund     63   
Matthews Korea Fund     68   
ASIA SMALL COMPANY STRATEGIES  
Matthews Asia Small Companies Fund     73   
Matthews China Small Companies Fund     78   
ASIA SPECIALTY STRATEGY  
Matthews Asia Science and Technology Fund     83   
Disclosures     87   
Index Definitions     87   
Disclosure of Fund Expenses     88   
Statements of Assets and Liabilities     92   
Statements of Operations     100   
Statements of Changes in Net Assets     104   
Financial Highlights     113   
Notes to Financial Statements     130   
Report of Independent Registered Public Accounting Firm     149   
Tax Information     150   
Approval of Investment Advisory Agreements     153   
Trustees and Officers of the Funds     159   

Cover photo: Karaweik palace in Yangon, Myanmar

 

 

This report has been prepared for Matthews Asia Funds shareholders. It is not authorized for distribution to prospective investors unless accompanied or preceded by a current Matthews Asia Funds prospectus, which contains more complete information about the Funds’ investment objectives, risks and expenses. Additional copies of the prospectus or summary prospectus may be obtained at matthewsasia.com. Please read the prospectus carefully before you invest or send money.

The views and opinions in this report were current as of December 31, 2015. 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 a Fund’s future investment intent. Current and future portfolio holdings are subject to risk.

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.

Investment Risk: Mutual fund shares are not deposits or obligations of, or guaranteed by, any depositary institution. Shares are not insured by the FDIC, Federal Reserve Board or any government agency and are subject to investment risks, including possible loss of principal amount invested. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. In addition, single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific industry, sector or geographic location. Investing in small and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than larger companies. Please see the Funds’ prospectus and Statement of Additional Information for more risk disclosure.


Table of Contents

Investor Class Performance and Expenses (December 31, 2015)

 

Investor Class   Average Annual Total Return    

Inception
Date

    2015
Annual
Operating
Expenses
    2015 Annual
Operating Expenses
after Fee Waiver
and Expense
Reimbursement
    Prospectus
Expense
Ratios*
    Prospectus
Expense Ratios
after Fee Waiver
and Expense
Reimbursement*
 
  1 year     5 years     10 years     Since
Inception
           

ASIA FIXED INCOME STRATEGY

                 

Asia Strategic Income Fund (MAINX)

    -0.58%        n.a.        n.a.        3.41%        11/30/11        1.28%        1.12% 1      1.27%        1.10% 1 

ASIA GROWTH AND INCOME STRATEGIES

                 

Asian Growth and Income Fund (MACSX)

    -4.50%        2.44%        6.84%        9.42%        9/12/94        1.09%        1.09% 2,3      1.08%        n.a.   

Asia Dividend Fund (MAPIX)

    3.86%        4.75%        n.a.        8.74%        10/31/06        1.06%        1.05% 3      1.06%        1.05% 3 

China Dividend Fund (MCDFX)

    9.54%        6.50%        n.a.        9.21%        11/30/09        1.19%        n.a.        1.19%        n.a.   

ASIA VALUE STRATEGY

                 

Asia Value Fund (MAVRX)

    n.a.        n.a.        n.a.        -1.35%        11/30/15        36.42% 6      1.50% 4,6      2.11%        1.45% 4 

ASIA GROWTH STRATEGIES

                 

Asia Focus Fund (MAFSX)

    -12.07%        n.a.        n.a.        -4.12%        4/30/13        2.07%        1.50% 4      2.16%        1.50% 4 

Asia Growth Fund (MPACX)

    -0.05%        4.42%        6.48%        8.87%        10/31/03        1.11%        n.a.        1.11%        n.a.   

Pacific Tiger Fund (MAPTX)

    -1.30%        4.15%        9.19%        8.52%        9/12/94        1.09%        1.07% 3      1.09%        1.08% 3 

Asia ESG Fund (MASGX)

    n.a.        n.a.        n.a.        -7.30%        4/30/15        9.09% 6      1.44% 4,6      2.11%        1.45% 4 

Emerging Asia Fund (MEASX)

    -2.56%        n.a.        n.a.        4.92%        4/30/13        1.75%        1.50% 4      1.78%        1.48% 4 

China Fund (MCHFX)

    2.41%        -1.04%        10.86%        9.37%        2/19/98        1.14%        n.a.        1.13%        n.a.   

India Fund (MINDX)

    0.90%        5.37%        11.10%        12.27%        10/31/05        1.11%        n.a.        1.12%        n.a.   

Japan Fund (MJFOX)

    20.83%        9.53%        2.16%        5.88%        12/31/98        0.99%        n.a.        1.03%        n.a.   

Korea Fund (MAKOX)

    15.16%        7.87%        6.31%        6.29%        1/3/95        1.10%        n.a.        1.11%        n.a.   

ASIA SMALL COMPANY STRATEGIES

                 

Asia Small Companies Fund (MSMLX)

    -9.43%        1.39%        n.a.        12.29%        9/15/08        1.48%        1.47% 4      1.47%        n.a.   

China Small Companies Fund (MCSMX)

    4.07%        n.a.        n.a.        0.21%        5/31/11        2.10%        1.50% 5      1.90%        1.50% 5 

ASIA SPECIALTY STRATEGY

                 

Asia Science and Technology Fund (MATFX)

    4.48%        7.88%        8.29%        2.69%        12/27/99        1.18%        n.a.        1.16%        n.a.   

 

* These figures are from the fund’s prospectus dated as of April 30, 2015, and may differ from the actual expense ratios for fiscal year 2015, as shown in the financial highlights section of this report.

 

1 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90% first by waiving class specific expenses (i.e., Rule 12b-1 fees or shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 0.90% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 0.90%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

 

2 Reimbursement was below 0.01%.

 

3 Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time (i) by the Trust on behalf of the Fund or by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty.

 

4 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.25% first by waiving class specific expenses (i.e., Rule 12b-1 fees or shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 1.25% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 1.25%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017 for the Asia Focus Fund, Emerging Asia Fund, Asia Small Companies Fund and Asia ESG Fund, and until April 30, 2018 for the Asia Value Fund, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

 

5 Matthews has contractually agreed to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) to 1.50%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees or the Trust on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
6 Annualized expense ratios.

 

2    MATTHEWS ASIA FUNDS


Table of Contents

Institutional Class Performance and Expenses (December 31, 2015)

 

Institutional Class   Average Annual Total Return     Inception
Date
    2015
Annual
Operating
Expenses
    2015 Annual
Operating Expenses
after Fee Waiver
and Expense
Reimbursement
   

Prospectus

Expense
Ratios*

   

Prospectus
Expense Ratios
after Fee Waiver

and Expense
Reimbursement*

 
  1 year     5 years     10 years     Since
Inception
           

ASIA FIXED INCOME STRATEGY

                 

Asia Strategic Income Fund (MINCX)

    -0.27%        n.a.        n.a.        3.61%        11/30/11        1.09%        0.90% 1      1.07%        0.90% 1 

ASIA GROWTH AND INCOME STRATEGIES

                 

Asian Growth and Income Fund (MICSX)

    -4.33%        2.60%        n.a.        3.00%        10/29/10        0.92%        0.92% 2,4      0.92%        n.a.   

Asia Dividend Fund (MIPIX)

    3.93%        4.85%        n.a.        5.28%        10/29/10        0.93%        0.92% 4      0.93%        n.a.   

China Dividend Fund (MICDX)

    9.71%        6.72%        n.a.        7.28%        10/29/10        1.00%        n.a.        1.01%        n.a.   

ASIA VALUE STRATEGY

                 

Asia Value Fund (MAVAX)

    n.a.        n.a.        n.a.        -1.30%        11/30/15        36.17% 5      1.25% 3,5      1.95%        1.25% 3 

ASIA GROWTH STRATEGIES

                 

Asia Focus Fund (MIFSX)

    -11.96%        n.a.        n.a.        -3.89%        4/30/13        1.91%        1.25% 3      1.94%        1.25% 3 

Asia Growth Fund (MIAPX)

    0.24%        4.62%        n.a.        5.01%        10/29/10        0.91%        n.a.        0.91%        n.a.   

Pacific Tiger Fund (MIPTX)

    -1.15%        4.33%        n.a.        4.32%        10/29/10        0.91%        0.89% 4      0.92%        0.91% 4 

Asia ESG Fund (MISFX)

    n.a.        n.a.        n.a.        -7.14%        4/30/15        8.90% 5      1.25% 3,5      1.95%        1.25% 3 

Emerging Asia Fund (MIASX)

    -2.33%        n.a.        n.a.        5.14%        4/30/13        1.57%        1.25% 3      1.59%        1.25% 3 

China Fund (MICFX)

    2.50%        -0.88%        n.a.        -1.16%        10/29/10        0.99%        n.a.        0.97%        n.a.   

India Fund (MIDNX)

    1.12%        5.55%        n.a.        4.95%        10/29/10        0.90%        n.a.        0.94%        n.a.   

Japan Fund (MIJFX)

    20.94%        9.65%        n.a.        11.59%        10/29/10        0.87%        n.a.        0.90%        n.a.   

Korea Fund (MIKOX)

    15.27%        8.04%        n.a.        9.47%        10/29/10        0.93%        n.a.        0.93%        n.a.   

ASIA SMALL COMPANY STRATEGY

                 

Asia Small Companies Fund (MISMX)

    -9.23%        n.a.        n.a.        0.55%        4/30/13        1.30%        1.25% 3      1.25%        n.a.   

ASIA SPECIALTY STRATEGY

                 

Asia Science and Technology Fund (MITEX)

    4.63%        n.a.        n.a.        14.40%        4/30/13        0.97%        n.a.        0.95%        n.a.   

 

* These figures are from the fund’s prospectus dated as of April 30, 2015, and may differ from the actual expense ratios for fiscal year 2015, as shown in the financial highlights section of this report.

 

1 Matthews has contractually agreed to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

 

2 Reimbursement was below 0.01%.

 

3 Matthews has contractually agreed to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.25%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017 for the Asia Focus Fund, Emerging Asia Fund, Asia Small Companies Fund and Asia ESG Fund, and until April 30, 2018 for the Asia Value Fund, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.

 

4 Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time (i) by the Trust on behalf of the Fund or by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty.
5 Annualized expense ratios.

Past Performance: All performance quoted in this report is past performance and is no guarantee of future results. Investment return and principal value will fluctuate with changing market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the returns quoted. If certain of the Funds’ fees and expenses had not been waived, returns would have been lower. For the Funds’ most recent month-end performance, please call 800.789.ASIA (2742) or visit matthewsasia.com.

 

matthewsasia.com  |  800.789.ASIA      3   


Table of Contents

LOGO

Message to Shareholders from the President of the Matthews Asia Funds

Dear Fellow Shareholders,

As President of the Matthews Asia Funds and CEO of Matthews International Capital Management, LLC (“Matthews Asia”), Advisor to the Matthews Asia Funds, I am delighted to offer an annual review of the Funds for the year ending 2015.

Long-Term Investing

Following a more challenging year in Asia’s financial markets, we are reminded of the volatility that is inherent in economies that are undertaking significant structural shifts. We also continue to see how monetary policy decisions that are taken far from Asia can impact the region’s economy. However, while the transformations that are taking place in the region’s economy will result in short-term volatility and drastic swings in sentiment, we firmly believe that the patient investor with conviction will be rewarded over the long term.

As we enter a new year with markets remaining volatile, I believe that we will begin to see a return to fundamental investing, and with it, a divergence between companies that will prosper and those that will struggle. It is in this environment that active managers such as ourselves have the potential to add value by seeking to identify the best opportunities for our portfolios over the long term. Taking this into account, as I look back on 2015, I can be proud of the strong relative performance that many of our portfolios achieved.

New Fund Launches

As the financial markets in Asia continue to grow and deepen, we see new opportunities to invest in the region by focusing on different styles of investing or on narrower themes that are becoming increasingly important. With this in mind, we were excited to launch two new strategies for our shareholders in 2015. The Matthews Asia ESG and Matthews Asia Value Funds were launched on April 30 and November 30, 2015, respectively. Both Funds offer a distinctive investment approach. The Matthews Asia Value Fund seeks companies that we believe trade at a discount to their intrinsic value, and are also oriented to create value for shareholders. The Matthews Asia ESG Fund is notable in that it expands on the governance aspect of our investment approach at Matthews Asia by also emphasizing environmental and social practices as part of the investment process. In a region that will benefit greatly from companies that adopt more sustainable and responsible practices, we are pleased to have launched a Fund that will place such issues front and center.

Welcoming New Trustees and a New Minority Owner

2015 also proved to be a busy and important year on the governance front. Firstly, in February I was very pleased to join the Board of Trustees for the Funds and we welcomed two new independent members to the Board of Trustees. Having spent some time this year working with Gale Caruso and Christopher Lee, I believe their knowledge of the industry and financial markets will help to ensure the interests of our shareholders always remain paramount.

In September 2015, Matthews Asia announced a new minority owner of its business. This was an exciting development that we believe will help ensure the continued long-term stability of ownership and independence for the Advisor.

Finally, I would like to thank you once again for your continued confidence in the Matthews Asia Funds, especially during what can be at times challenging markets. As always, we welcome your comments.

LOGO

William J. Hackett

President of the Matthews Asia Funds

Chief Executive Officer, Matthews Asia

 

 

4    MATTHEWS ASIA FUNDS


Table of Contents

Message to Shareholders from the Investment Advisor

Dear Valued Investors,

A couple years ago, I expressed a concern over the chase for yield in markets and remarked, “There are times when there is actually safety in growth!” Such has been the story this year. Higher-yielding equities have struggled somewhat. Companies with faster growth profiles have done well. “Developing Asia” has outperformed “Developed Asia” and small-capitalization stocks have outperformed large-caps. In our dividend-focused portfolios, these have largely concentrated in growth in dividends, rather than yield and that has helped deal with the headwinds for such strategies. Elsewhere, our focus on high return-on-capital businesses with secular (if not always remarkable) growth has done well. Of course, we are not trying to rotate across different styles—we are convinced that both ways of looking at the region can provide good long-term, risk-adjusted returns. But the volatilities inherent in the portfolios are different, and they can suit different periods in the markets. But what is common across all our portfolios is a belief that Asia’s long-term growth prospects remain strong, and investing in businesses that grow with the development of the region’s middle-class lifestyles provides a good backdrop for returns. This year, despite all the concerns over slowing headline growth rates in China and a strengthening U.S. dollar, our conviction that Asia will continue to press for growth-oriented reforms has been further buttressed.

This has certainly been India’s year—at least according to the short-term verdict of the markets. There has been plenty of excitement generated by, first, the appointment in September of 2013, of Raghuram Rajan to be the Governor of India’s central bank. Part of India’s Achilles heel, in the eyes of foreign investors at least, has been fiscal and monetary irresponsibility. Governor Rajan, as a Chicago Booth School of Business economist, exudes the kind of sensible, apolitical expertise that reassures foreign investors. In addition, India’s politics have often appeared hopelessly divided and a clear political “win” for a single candidate has given investors further reassurance. The fact that the winner was the reform candidate has added further spice to the story. And if that wasn’t enough, India began the year at what appeared to be the turning point, i.e., the trough of a credit and earnings cycle.

All of this means that the main India market benchmarks are up about 30% year-to-date. There has surely been some earnings growth, but valuations have risen quickly. None of which is to say that the rise in India is unjustified. If we are going to be able to look back on Prime Minister Narendra Modi’s reforms as a success in about a decade’s time, the markets have not yet fully reflected this. Current valuations are surely not discounting much more than a strong rebound in short-term earnings and at least a successful start to the reform process. India remains a country where much can be achieved over the next decade to improve people’s standards of living, spending power and productivity. If it can achieve better rates of savings and more efficient mobilization of those savings into much-needed infrastructure projects, why can’t it mimic the growth of its giant neighbor China?

But it is still an open question. Now more than ever, investors interested in India should decide if they are in it for the long haul. There may be plenty of opportunities for disappointment either on the political front or in terms of short-run earnings momentum.

These days, the media would have us believe China is not for the faint of heart. Yet, China has initiated its own reform process. Its leaders have also become comfortable with the slower rates of real GDP growth demanded by the markets as a sign of responsible economic management. Have earnings in China not compounded at 12% in U.S. dollar terms since December 2010 as the markets have derated? All of this leaves China trading at the lows last seen during crises past.

Japan has also impressed with its aggressive monetary easing. There are plenty of Abenomics critics in financial circles, but for those that believe economies “can get stuck in a rut” when policy rates are at or near zero, aggressive central banking is what is needed to set the economy back on course. Neither has Abenomics always achieved great popularity in Japan, but the recent snap election seems to have boosted Abe’s mandate and at least been a vote of confidence in the monetary and other reforms that appear to be starting to show results in an improved labor market and strong profitability in corporate Japan.

The one cloud this year has been the strengthening U.S. dollar. But, as we wrote earlier this year, this does seem to have been a case of dollar strength, not Asian weakness. So, we reach the end of the year with the momentum still behind the U.S. markets in terms of rising prices and rising valuations. Asia, on the other hand, has been more listless, but has started to see better operational results as margins have stabilized and sales growth remains robust. Who knows what will happen next year, but the momentum still seems to be behind the “growthier” elements of the markets in Asia. But there is real relative value emerging in Asia, where portfolios with growth far in excess of the broad market indices in the U.S. and Europe can be had for the same valuations or even discounts of 20% or 30%. Periods of tighter money (a strong U.S. dollar) and weaker growth (e.g. China, Europe) have typically been harder times for Asia’s stock markets—and this is what we have been facing for the past year or more. But Asia’s markets have been resilient and, furthermore, continue to lay the groundwork for future growth in its reform plans. I remain optimistic based on the region’s long-term growth that can still be accessed at reasonable valuations.

It is a privilege to serve as your advisor for Asia investments.

 

LOGO

Robert Horrocks, PhD

Chief Investment Officer

Matthews International Capital Management, LLC

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Teresa Kong, CFA    

Lead Manager

   
Gerald M. Hwang, CFA   Satya Patel

Co-Manager

   

Co-Manager

FUND FACTS
    Investor   Institutional

Ticker

  MAINX   MINCX

CUSIP

  577125503   577125602

Inception

  11/30/11   11/30/11

NAV

  $9.96   $9.96

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

  1.28%   1.09%

After Fee Waiver and Reimbursement2

  1.12%   0.90%

Portfolio Statistics

   

Total # of Positions

  42

Net Assets

  $62.1 million

Modified Duration3

  3.6

Portfolio Turnover4

  50.09%

Benchmark

 

HSBC Asian Local Bond Index

OBJECTIVE

 

 

Total return over the long term with an emphasis on income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total assets, which include borrowings for investment purposes, in income-producing securities including, but not limited to, debt and debt-related instruments issued by governments, quasi-governmental entities, supra-national institutions, and companies in Asia. Asia consists of all countries and markets in Asia and includes developed, emerging, and frontier countries and markets in the Asian region. Investments may be denominated in any currency, and may represent any part of a company’s capital structure from debt to equity or with features of both.

Matthews Asia Strategic Income Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Asia Strategic Income Fund returned –0.58% (Investor Class) and –0.27% (Institutional Class), while its benchmark, the HSBC Asian Bond Index (ALBI) returned –3.17%. For the fourth quarter, the Fund returned 2.61% (Investor Class), and 2.78% (Institutional Class) versus 2.32% for the benchmark.

Market Environment:

2015 was a challenging year in Asian fixed income. Currencies depreciated—in some cases dramatically—across the board. Commodity-linked currencies like the Malaysian ringgit, Australian dollar and Indonesian rupiah were hardest hit. Credit spreads also widened during the year, although credit markets were still positive on the back of high coupon returns. The top performers were, surprisingly, the frontier markets of Bangladesh and Pakistan, followed by China. There were three defaults, Kaisa Group and Shanshui Cement in China, and Berau Coal in Indonesia. This brings high yield Asia default rates slightly up from 2.0% to 2.3%. This compares favorably to U.S. high yield default rates, which have gone from 1.5% to 3.4% over the same period. Following the widest levels seen at the end of September, Asia’s credit spreads tightened to 283 basis points (2.83%) versus U.S. Treasuries at the end of the year.

The fourth quarter was one of milestone events and a modest recovery from a challenging summer. After years of debate and speculation, the U.S. Federal Reserve raised interest rates, ending its zero interest rate policy. Investors continued to debate the potential implications of policy normalization in the U.S. on Asia. The Chinese renminbi was added to the International Monetary Fund’s special drawing rights (SDR) basket, moving it closer to becoming an international reserve currency. China’s central bank also announced that it would manage the renminbi versus a basket of currencies of its largest trading partners.

Finally, as risk-aversion faded, credit spreads rebounded in the quarter. Commodity-linked corporates continued to underperform, though fundamentally strong companies performed well.

Performance Contributors and Detractors:

The biggest contributors to Fund performance for both the full year and the fourth quarter of the year were our holdings in U.S. dollar-denominated (USD) bonds. We made a deliberate reallocation away from local currency bonds into USD-denominated debt, and this allowed us to isolate attractive credit exposure while minimizing currency and interest rate risk. Within USD-denominated debt, convertible bonds, in particular, performed well. As risk aversion faded, company-specific performance drove the underlying equities of these convertible bonds higher, resulting in strong performance of our bonds.

Our investment in Ctrip.com International convertible bonds was the top contributor to Fund performance for both the fourth quarter and the year. Ctrip is a leading online travel agency in China, and the industry consolidated throughout 2015. With expectations that aggressive competition and heavy discounting will fade, Ctrip shares doubled over the course of the year, leading to strong convertible bond performance.

The biggest detractor to Fund performance was our allocation to local currency bonds. Overall, our local currency sovereign bonds performed poorly. Currencies depreciated and the outflow of capital from emerging markets led to higher rates in a number of countries, thereby dampening returns. Indonesian and South Korean bonds were the biggest detractors to local currency bond performance as coupon returns were overshadowed by negative currency and price returns in both countries.

All sectors posted gains in the fourth quarter. The biggest detractors to our performance were issuer-specific. Yum! Brands posed the largest drag on Fund performance following plans for a major corporate restructuring to involve a spin-off of its international assets and increase in debt in the U.S. entity. Sri Lankan government bonds also performed poorly given concerns about external challenges and lack of fiscal commitment. The country’s balance of payments position weakened as softer demand from Europe

(continued)

 
1 Actual 2015 expense ratios.
2 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 0.90% first by waiving class specific expenses (i.e., Rule 12b-1 fees or shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 0.90% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 0.90%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
3 Modified duration measures the percent change in value of the fixed income portion of the portfolio in response to a 1% change in interest rates. In a multi-currency denominated portfolio with sensitivities to different interest rate regimes, modified duration will not accurately reflect the change in value of the overall portfolio from a change in any one interest rate regime.
4 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

6    MATTHEWS ASIA FUNDS


Table of Contents
           
PERFORMANCE AS OF DECEMBER 31, 2015                                   
 

 

    

 

      

 

     Average Annual
Total Returns
      

 

 
    

3 Months

    

1 Year

    

3 Years

    

Since
Inception

    

Inception
Date

 

Investor Class (MAINX)

     2.61%         -0.58%         0.48%         3.41%         11/30/11   

Institutional Class (MINCX)

     2.78%         -0.27%         0.72%         3.61%         11/30/11   

HSBC Asian Local Bond Index5

     2.32%         -3.17%         -1.60%         1.10%      

Lipper Emerging Markets Hard Currency Debt Category Average6

     0.68%         -2.98%         -2.33%         2.73%      

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares 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. For the Fund’s most recent month-end performance visit matthewsasia.com.

 

             
INCOME DISTRIBUTION HISTORY                                        
    2015         2014  
  Q1      Q2      Q3      Q4      Total         Q1      Q2      Q3      Q4      Total  

Investor (MAINX)

  $ 0.00       $ 0.10       $ 0.08       $ 0.11       $ 0.29        $ 0.10       $ 0.09       $ 0.07       $ 0.10       $ 0.38   

Inst’l (MINCX)

  $ 0.01       $ 0.10       $ 0.09       $ 0.11       $ 0.31        $ 0.11       $ 0.10       $ 0.08       $ 0.11       $ 0.40   

Note: This table does not include capital gains distributions. Totals may differ by $0.02 due to rounding. For income distribution history, visit matthewsasia.com.

 

30-DAY YIELD:

Investor Class: 5.45% (5.31% excluding expense waiver)

Inst’l Class: 5.67% (5.46% excluding expense waiver)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 12/31/15, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

YIELD TO WORST: 6.81%

Yield to worst is the lowest yield that can be received on a bond assuming that the issuer does not default. It is calculated by utilizing the worst case assumptions for a bond with respect to certain income-reducing factors, including prepayment, call or sinking fund provisions. It does not represent the yield that an investor should expect to receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  5 It is not possible to invest directly in an index. Source: Index data from HSBC, and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definitions.

 

  6 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS                     
     Sector      Currency      % of Net Assets  
Longfor Properties Co., Ltd., 6.875%, 10/18/2019    Financials      U.S. Dollar        4.6%   
DFCC Bank PLC, 9.625%, 10/31/2018    Financials      U.S. Dollar        4.5%   
Shimao Property Holdings, Ltd., 6.625%, 01/14/2020    Financials      U.S. Dollar        3.3%   
Bank of Baroda, 6.625%, 05/25/2022    Financials      U.S. Dollar        3.3%   
Ctrip.com International, Ltd., Cnv., 1.000%, 07/01/2020    Consumer Discretionary      U.S. Dollar        3.3%   
TML Holdings Pte, Ltd., 5.750%, 05/07/2021    Consumer Discretionary      U.S. Dollar        3.3%   
ICICI Bank, Ltd., 6.375%, 04/30/2022    Financials      U.S. Dollar        3.3%   
PT Perusahaan Listrik Negara, 5.250%, 10/24/2042    Utilities      U.S. Dollar        3.2%   
E-House China Holdings, Ltd., Cnv., 2.750%, 12/15/2018    Financials      U.S. Dollar        3.1%   
Global Logistic Properties, Ltd., 3.375%, 05/11/2016    Financials      Chinese Renminbi        3.0%   
% OF ASSETS IN TOP TEN                34.9%   

 

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Table of Contents
 
CURRENCY ALLOCATION (%)7,8  
U.S. Dollar (USD)     65.7   
Indian Rupee (INR)     10.2   
Chinese Renminbi (CNY)     8.5   
Indonesia Rupiah (IDR)     2.8   
Hong Kong Dollar (HKD)     2.7   
South Korean Won (KRW)     2.0   
Singapore Dollar (SGD)     0.8   
Philippine Peso (PHP)     0.4   
Cash and Other Assets, Less Liabilities     6.9   

 

 
COUNTRY ALLOCATION (%)7,8,9,10  

China/Hong Kong

    32.4   

India

    22.7   

Indonesia

    14.9   

Sri Lanka

    10.3   

Singapore

    3.8   

Philippines

    2.2   

South Korea

    2.0   

Australia

    2.0   

Vietnam

    1.6   

Supranational

    1.2   
Cash and Other Assets, Less Liabilities     6.9   

 

 
SECTOR ALLOCATION (%)7,8  

Financials

    50.4   

Consumer Discretionary

    14.7   

Foreign Government Bonds

    9.1   

Industrials

    7.8   

Utilities

    4.5   

Consumer Staples

    2.7   

Information Technology

    2.3   

Telecommunication Services

    1.6   

Cash and Other Assets, Less Liabilities

    6.9   

Please note: Foreign Government Bonds category includes Supranationals.

 

 
ASSET TYPE BREAKDOWN (%)7,8  

Non-Convertible Corporate Bonds

    68.7   

Convertible Corporate Bonds

    14.1   

Government Bonds

    9.1   

Common Equities and ADRs

    1.2   

Cash and Other Assets, Less Liabilities

    6.9   

 

7 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

 

8 Cash and other assets may include forward currency exchange contracts and certain derivative instruments that have been marked-to-market.

 

9 Not all countries where the Fund may invest are included in the benchmark index.

 

10 Supranational is an international organization in which member states transcend national boundaries (ex. IMF).

Matthews Asia Strategic Income Fund

Portfolio Manager Commentary (unaudited) (continued)

constrained exports and motor vehicle imports surged amidst growing private sector credit. The 2016 budget showcased the government’s populist leanings, leading to a higher projected budget deficit and a push back of medium-term fiscal targets.

Notable Portfolio Changes:

We made several notable changes to the portfolio in 2015. We increased our exposure to convertible bonds by investing in convertibles trading below their intrinsic bond value and whose equity options were deep out of the money. With companies like E-House China Holdings and China Singyes Solar Technologies, we found that the market was focused on the effects of a macro slowdown while overlooking the strength of their operations. We also sold out of our Sri Lankan rupee-denominated bonds. Sri Lanka’s long-serving president was unexpectedly defeated by a more populist candidate in his bid for a third term. Following the election, the currency was allowed to depreciate and the government transitioned from a presidential to a parliamentary system.

In the fourth quarter, the most notable change to our portfolio was the reduction in our underweight to select Asian currencies. Emerging market countries globally have seen their currencies depreciate significantly since 2013. While we think countries that are large commodity exporters have seen a real erosion in their terms of trade, we do not think many of the Asian countries deserve such severe depreciation. This includes the Indonesian rupiah, the Korean won and the Malaysian ringgit. As such, we added to our exposure to these currencies through currency forward contracts.

Outlook:

In 2016, we expect further volatility and significant tail risks.* First, there is the risk of further Asian currency weakness. In the past, rate hikes in the U.S. often marked a bottom for Asian currencies, but with rate differentials narrowing after the Fed’s hike, the U.S. dollar could continue to appreciate versus Asian currencies. This would likely unfold if the U.S. economy strengthens more, relative to the rest of the world, allowing the Fed to hike rates faster than expected.

The second major source of volatility and tail risk is China. While current data points indicate an orderly re-allocation of capital from renminbi-denominated assets to USD-denominated assets, the tail risks have increased. We think the newly adopted managed-float regime will result in substantially higher volatility than what Chinese and international investors are used to. Instead of having a fixed target (the U.S. dollar), the Chinese renminbi now needs to be managed to a moving target. This moving target can be self-reinforcing, both positively and negatively. For example, the inclusion of the Australian dollar, the Russian ruble and the Canadian dollar in the basket will induce correlation to factors like commodities, which were previously immaterial to movements in the renminbi.

Another major tail risk is the commodity cycle. Asian countries have largely benefited from lower agricultural prices as most are net importers of commodities. This is especially true of South Asia (India, Sri Lanka, Bangladesh and Pakistan), whose current and fiscal accounts have benefited substantially from low oil prices. Should the commodity cycle turn, this region, which has done remarkably well in the last year, could see weakness in its credit and currencies.

Last, and certainly not least, we are concerned about the credit cycle. Default rates have been inching up, and the macro backdrop has decidedly turned to tightening in the U.S. The U.S. dollar continues to be a material source of funding for Asian countries, so financing from this channel will likely continue to inch up for these companies. A higher base rate, in combination with wider credit spreads will increase the cost of leverage and potentially push marginal companies into distress. We believe credit spreads will likely continue to be very volatile. The good news is that while business cycles in the U.S. and Europe once drove Asia, the region is now more closely linked to China, which is slowing. In 2016, we could see policy easing in a number of countries, including China, India, Indonesia, Thailand, South Korea and Malaysia.

The silver lining here is that USD-denominated debt of Asian countries can still provide solid returns to investors with a long investment horizon. Historical data has shown that during similar spread levels buying USD-denominated debt of Asian companies had resulted in positive returns when investors had a holding period of over two years. This may mean that despite uncertainty around where we are in the credit cycle, current spreads offer a return sufficient to offset losses from defaults over the full cycle. While history may not be indicative of the future, we think U.S. dollar credit still offers good opportunities.

Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. Investing in emerging markets involves different and greater risks, as these countries are substantially smaller, less liquid and more volatile than securities markets in more developed markets.

 

* Tail Risk: The small statistical probability that an asset price will move more than three standard deviations from its current and/or average price level.
 

 

8    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Strategic Income Fund

December 31, 2015

Schedule of Investmentsa

NON-CONVERTIBLE CORPORATE BONDS: 68.7%

 

     Face Amount*     Value  
INDIA: 22.7%    

Bank of Baroda
6.625%b, 05/25/22

    2,000,000        $2,061,238   

TML Holdings Pte, Ltd.
5.750%, 05/07/21

    2,000,000        2,058,942   

ICICI Bank, Ltd.
6.375%b, 04/30/22

    2,000,000        2,043,978   

Housing Development Finance Corp., Ltd.

  

 

9.240%, 06/24/24

    INR 100,000,000        1,571,613   

Housing Development Finance Corp., Ltd.

  

 

8.950%, 03/21/23

    INR 100,000,000        1,545,825   

Delhi International Airport, Ltd.
6.125%, 02/03/22

    1,400,000        1,373,788   

Axis Bank, Ltd.
7.250%b, 08/12/21

    1,000,000        1,016,460   

Rural Electrification Corp., Ltd.
9.340%, 08/25/24

    INR 52,000,000        834,536   

Power Grid Corp. of India, Ltd., Series B
9.300%, 09/04/24

    INR 52,000,000        829,427   

Rural Electrification Corp., Ltd.
9.020%, 06/18/19

    INR 50,000,000        778,416   
   

 

 

 

Total India

      14,114,223   
   

 

 

 
   
CHINA/HONG KONG: 18.3%           

Longfor Properties Co., Ltd.
6.875%, 10/18/19

    2,700,000        2,848,500   

Shimao Property Holdings, Ltd.
6.625%, 01/14/20

    2,000,000        2,079,322   

MCE Finance, Ltd.
5.000%, 02/15/21

    2,000,000        1,820,000   

Value Success International, Ltd.
4.750%, 11/04/18

    CNY 12,000,000        1,804,395   

Yum! Brands, Inc.
5.350%, 11/01/43

    2,000,000        1,526,628   

Wynn Macau, Ltd.
5.250%, 10/15/21

    1,480,000        1,302,400   
   

 

 

 

Total China/Hong Kong

      11,381,245   
   

 

 

 
   
INDONESIA: 12.6%                

PT Perusahaan Listrik Negara
5.250%, 10/24/42

    2,500,000        1,965,750   

Theta Capital Pte, Ltd.
7.000%, 05/16/19

    1,500,000        1,484,540   

Jababeka International BV
7.500%, 09/24/19

    1,400,000        1,322,588   

Alam Synergy Pte, Ltd.
6.950%, 03/27/20c

    1,500,000        1,260,000   

TBG Global Pte, Ltd.
4.625%, 04/03/18c

    1,000,000        975,000   

Alam Synergy Pte, Ltd.
6.950%, 03/27/20

    500,000        420,000   

PT Astra Sedaya Finance
8.600%, 02/21/17

    IDR 5,000,000,000        359,485   
   

 

 

 

Total Indonesia

      7,787,363   
   

 

 

 
   
SRI LANKA: 8.3%                

DFCC Bank PLC
9.625%, 10/31/18

    2,650,000        2,779,956   

National Savings Bank
5.150%, 09/10/19

    2,000,000        1,865,000   

National Savings Bank
8.875%, 09/18/18

    500,000        514,400   
   

 

 

 

Total Sri Lanka

      5,159,356   
   

 

 

 
     Face Amount*     Value  
SINGAPORE: 3.0%    

Global Logistic Properties, Ltd.
3.375%, 05/11/16

    CNY 12,500,000        $1,884,336   
   

 

 

 

Total Singapore

      1,884,336   
   

 

 

 
   
AUSTRALIA: 2.0%                

Macquarie Bank, Ltd.
6.625%, 04/07/21

    1,100,000        1,232,954   
   

 

 

 

Total Australia

      1,232,954   
   

 

 

 
   
PHILIPPINES: 1.8%                

Alliance Global Group Cayman Islands, Inc.

  

 

6.500%, 08/18/17

    1,050,000        1,094,625   
   

 

 

 

Total Philippines

      1,094,625   
   

 

 

 
   
TOTAL NON-CONVERTIBLE CORPORATE BONDS        42,654,102   
   

 

 

 

(Cost $45,383,565)

   
   

CONVERTIBLE CORPORATE BONDS: 14.1%

  

 
CHINA/HONG KONG: 14.1%                

Ctrip.com International, Ltd., Cnv.
1.000%, 07/01/20c

    1,850,000        2,059,281   

E-House China Holdings, Ltd., Cnv.

  

2.750%, 12/15/18c

    2,010,000        1,950,956   

Biostime International Holdings, Ltd., Cnv.

  

 

0.000%, 02/20/19

    HKD 14,000,000        1,689,021   

China Singyes Solar Technologies Holdings, Ltd., Cnv.

  

 

5.000%, 08/08/19

    CNY 12,000,000        1,581,929   

Qihoo 360 Technology Co., Ltd., Cnv.
1.750%, 08/15/21

    1,500,000        1,450,312   
   

 

 

 

Total China/Hong Kong

      8,731,499   
   

 

 

 
   
TOTAL CONVERTIBLE CORPORATE BONDS        8,731,499   
   

 

 

 

(Cost $8,702,041)

   
   

FOREIGN GOVERNMENT OBLIGATIONS: 9.1%

  

 
INDONESIA: 2.3%                

Indonesia Treasury Bond
7.875%, 04/15/19

    IDR 20,000,000,000        1,410,780   
   

 

 

 

Total Indonesia

      1,410,780   
   

 

 

 
   
SRI LANKA: 2.0%                

Sri Lanka Government Bond
6.125%, 06/03/25

    1,400,000        1,243,372   
   

 

 

 

Total Sri Lanka

      1,243,372   
   

 

 

 
   
SOUTH KOREA: 2.0%                

Korea Treasury Bond
3.500%, 09/10/16

    KRW 1,000,000,000        863,708   

Korea Treasury Bond
3.500%, 03/10/24

    KRW 400,000,000        377,776   
   

 

 

 

Total South Korea

      1,241,484   
   

 

 

 
   
 

 

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Table of Contents

Matthews Asia Strategic Income Fund

December 31, 2015

Schedule of Investmentsa (continued)

 

FOREIGN GOVERNMENT OBLIGATIONS (continued)   COMMON EQUITIES: 1.2%

 

     Face Amount*     Value  
VIETNAM: 1.6%    

Socialist Republic of Vietnam
4.800%, 11/19/24

    1,055,000        $1,013,201   
   

 

 

 

Total Vietnam

      1,013,201   
   

 

 

 
   
SUPRANATIONAL: 1.2%                

International Finance Corp.
7.750%, 12/03/16

    INR 50,000,000        758,755   
   

 

 

 

Total Supranational

      758,755   
   

 

 

 
   
TOTAL FOREIGN GOVERNMENT OBLIGATIONS        5,667,592   
   

 

 

 

(Cost $6,253,594)

   
     Shares     Value  
SINGAPORE: 0.8%    

Vicom, Ltd.

    118,000        $500,994   
   

 

 

 

Total Singapore

      500,994   
   

 

 

 
   
PHILIPPINES: 0.4%    

Alliance Global Group, Inc.

    780,000        265,861   
   

 

 

 

Total Philippines

      265,861   
   

 

 

 
   
TOTAL COMMON EQUITIES             766,855   
   

 

 

 

(Cost $1,039,054)

   
   
TOTAL INVESTMENTS: 93.1%             57,820,048   

(Cost $61,378,254d)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 6.9%
      4,310,555   
   

 

 

 

NET ASSETS: 100.0%

      $62,130,603   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Variable rate security. The rate represents the rate in effect at December 31, 2015.

 

c Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. The security may be resold in transactions exempt from registration normally to qualified institutional buyers. The security has been determined to be liquid in accordance with procedures adopted by the Fund’s Board of Directors.

 

d Cost for federal income tax purposes is $61,378,254 and net unrealized depreciation consists of:

 

Gross unrealized appreciation

    $791,009   

Gross unrealized depreciation

    (4,349,215
 

 

 

 

Net unrealized depreciation

    ($3,558,206
 

 

 

 

 

* All values are in USD unless otherwise noted.

 

Cnv. Convertible

 

CNY Chinese Renminbi (Yuan)

 

IDR Indonesian Rupiah

 

INR Indian Rupee

 

HKD Hong Kong Dollar

 

KRW Korean Won

 

USD U.S. Dollar
 

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS:

 

    

Currency
Purchased

  Currency Sold        Counterparty   Settlement
Date
       Unrealized
Appreciation
(Depreciation)
 

LONG

 

IDR 55,822,000,000

    USD 3,800,000         Deutsche Banc Alex Brown, Inc.     01/08/16           $233,735   
 

MYR 24,068,000

    USD 5,500,000         Deutsche Banc Alex Brown, Inc.     01/08/16           101,112   
 

KRW 6,890,020,000

    USD 5,900,000         Deutsche Banc Alex Brown, Inc.     01/08/16           (38,273
               

 

 

 
                  $296,574   
               

 

 

 

See accompanying notes to financial statements.

 

10    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Robert J. Horrocks, PhD  

Lead Manager

 
Kenneth Lowe, CFA  

Lead Manager

   
FUND FACTS
    Investor   Institutional

Ticker

  MACSX   MICSX

CUSIP

  577130206   577130842

Inception

  9/12/94   10/29/10

NAV

  $16.03   $16.02

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

  1.09%   0.92%

After Fee Waiver and Reimbursement2

  1.09%   0.92%

Portfolio Statistics

   

Total # of Positions

  57

Net Assets

  $2.9 billion

Weighted Average Market Cap

  $32.1 billion

Portfolio Turnover3

  16.48%

Benchmark

 

MSCI AC Asia ex Japan Index

OBJECTIVE

 

 

Long-term capital appreciation. The Fund also seeks to provide some current income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in dividend-paying common stock, preferred stock and other equity securities, and convertible securities as well as fixed-income securities, of any duration or quality, of companies located in Asia, which consists of all countries and markets in Asia, including developed, emerging and frontier countries and markets in the Asian region.

Matthews Asian Growth and Income Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Asian Growth and Income Fund fell –4.50% (Investor Class) and –4.33% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Index, fell –8.90%. For the fourth quarter of the year, the Fund returned 2.87% (Investor Class) and 2.97% (Institutional Class) versus 3.87% for the Index.

Market Environment:

During 2015, the influence of central bankers and policymakers grew frustratingly ever more apparent. In the fourth quarter, the U.S. Federal Reserve finally undertook its first rate hike in over nine years, having delayed it by three months due to weakening global growth offsetting some reasonable domestic wage rises and employment data. The possibility of this rate hike has plagued emerging markets for some time, weighing on sentiment and driving capital flows out of the region. Alongside this headwind were volatile Chinese financial markets. The world’s second-largest economy has been undergoing a challenging transition from a traditional model of fixed asset investment, export and credit-led growth to one that is more “sustainable” and consumer-based. From an equity market standpoint, the year witnessed not only an astounding rally promoted by state media and fueled by retail investors and margin financing, but also a vicious pullback. This resulted in some poorly advised government-led attempts to stop the drop through stock suspensions, IPO suspensions and a state-sponsored purchase of equities. In August, there was yet more bungled policy from China as the party poorly communicated its decision to alter its exchange rate mechanism. The move to a more market-oriented structure that resulted in an instant 1.9% devaluation of the currency to the U.S. dollar, should allow the government more monetary easing firepower to support growth given the macroeconomic conundrum of the “impossible trinity.” Soft Chinese demand, as well as rising supply in many instances, has also resulted in a collapse in prices across the commodity complex.

With this backdrop of diverging growth patterns and rate cycles between the U.S. and emerging markets, we saw very poor performance from most indices in Asia for the year. Weak sentiment, plunging commodity prices and aggressive currency devaluations led geographies across Southeast Asia to be the region’s weakest performers. North Asia fared slightly better through the year as currencies provided greater support, but there was little cheer to be had even as markets rebounded from their lows into the festive season.

Performance Contributors and Detractors:

Despite being a challenging year across equity markets, the fourth quarter did produce some positive returns. The largest contributors for both time periods came from our holdings within consumer staples, with Vietnam Dairy Products at the top for both time periods. The leading dairy producer and brand owner within the frontier market has seen strong earnings growth from volume expansion as incomes rise, and it pushes newer high-margin categories, such as powdered milk and yogurt. Declining input costs have also helped to boost margins and the stock has been further helped by the proposed increase of a foreign ownership limit from 49%.

Hong Kong-based Vitasoy also rose as the soymilk and tea producer witnessed strong growth in China—now its largest market on account of its “go deep, go wide” strategy. A combination of execution, product innovation and declining raw material costs has helped earnings. Other Japanese consumer staples, such as Japan Tobacco and Lawson, also had solid returns through 2015.

(continued)

 

 

1 Actual 2015 expense ratios.
2 Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time (i) by the Trust on behalf of the Fund or by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty. Reimbursement was below 0.01%
3 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

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Table of Contents
     
PERFORMANCE AS OF DECEMBER 31, 2015                
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
    

3 Months

    

1 Year

    

3 Years

    

5 Years

    

10 Years

    

Since
Inception

    

Inception
Date

 

Investor Class (MACSX)

     2.87%         -4.50%         -0.18%         2.44%         6.84%         9.42%         9/12/94   

Institutional Class (MICSX)

     2.97%         -4.33%         0.00%         2.60%         n.a.         3.00%         10/29/10   

MSCI AC Asia ex Japan Index3

     3.87%         -8.90%         -0.35%         0.14%         6.46%         3.50% 4    

Lipper Pacific Region Funds Category Average5

     5.29%         -3.12%         1.96%         2.37%         3.88%         3.65%      

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

               
INCOME DISTRIBUTION HISTORY                                                       
       2015         2014  
      

June

      

December

      

Total

       

June

      

December

      

Total

 
Investor (MACSX)      $ 0.21         $ 0.21         $ 0.42        $ 0.15         $ 0.20         $ 0.35   
Inst’l (MICSX)      $ 0.23         $ 0.22         $ 0.45        $ 0.16         $ 0.21         $ 0.38   

Note: This table does not include capital gains distributions. Totals may differ by $0.01 due to rounding. For income distribution history, visit matthewsasia.com.

 

30-DAY YIELD:

1.75% (Investor Class) 1.88% (Institutional Class)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 12/31/15, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

DIVIDEND YIELD: 3.54%

 

The dividend yield (trailing) for the portfolio is the weighted average sum of the dividends paid by each equity security held by the Fund over the 12 months ended 12/31/15 divided by the current price of each equity as of 12/31/15. The annualized dividend yield for the Fund is for the equity-only portion of the portfolio. Please note that this is based on gross equity portfolio holdings and does not reflect the actual yield an investor in the Fund would receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems, Bloomberg, MICM

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  4 Calculated from 8/31/94.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector      Country      % of Net Assets  

Taiwan Semiconductor Manufacturing Co., Ltd.

   Information Technology      Taiwan        3.3%   

AIA Group, Ltd.

   Financials      China/Hong Kong        3.1%   

Jardine Matheson Holdings, Ltd.

   Industrials      China/Hong Kong        2.8%   

CapitaLand, Ltd., Cnv., 1.950%, 10/17/2023

   Financials      Singapore        2.8%   

Yum! Brands, Inc.

   Consumer Discretionary      China/Hong Kong        2.7%   

Japan Tobacco, Inc.

   Consumer Staples      Japan        2.5%   

Vietnam Dairy Products JSC

   Consumer Staples      Vietnam        2.5%   

Ascendas REIT

   Financials      Singapore        2.4%   

Genting Malaysia BHD

   Consumer Discretionary      Malaysia        2.4%   

Guangdong Investment, Ltd.

   Utilities      China/Hong Kong        2.3%   

% OF ASSETS IN TOP TEN

               26.8%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

12    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asian Growth and Income Fund

Portfolio Manager Commentary (unaudited) (continued)

Beyond these, a few of our Hong Kong holdings were also positive contributors for the full year, including our position in the convertible bond of Hong Kong Exchanges & Clearing. The underlying stock was up strongly through the second quarter on increasing average daily turnover as markets rose and participation increased. We used this as an opportunity to exit our position as valuations had become stretched at about 38x price-to-earnings ratio (P/E).

The largest detractors to performance for the fourth quarter came from two of our telecommunications holdings, and unfortunately, for similar reasons of increasing competition. Globe Telecom in the Philippines suffered as it appears that the largest telecom player in Australia is likely to enter the market in conjunction with a local industrial conglomerate to form a third player. Advanced Info Services in Thailand was hurt as it encountered disastrous auctions for additional spectrum, with a new competitor winning these with an unpalatably high bid. This will likely structurally alter the return profile for this market.

For the full year, many of our holdings in Southeast Asia delivered poor performance, partially driven by the downward lurch in currencies. We did, however, also suffer from some stock-specific challenges. Perusahaan Gas Negara Persero was the weakest of these as the Indonesian natural gas distribution company had poor results, and also faces the prospect of a gas aggregator agency being established and favoring the company’s competition. Additionally, Thailand’s free-to-air T.V. operator BEC World Public struggled as it started to lose audience share upon the national rollout of digital channels, hurting revenues and increasing content costs.

Notable Portfolio Changes:

During the quarter, we added Norwegian-listed, but global, telecom company Telenor. The firm is now generating the majority of its earnings from Asia, and we believe it has many quality assets in countries such as Malaysia, Thailand, Bangladesh, Myanmar and India. This emerging market exposure is likely to provide above-industry growth and we expect to see improving cash flow generation. Further, the stock is attractively priced at around 13x P/E and almost a 5% dividend yield. We funded this through exiting our positions in SKY Network TV in New Zealand and BHP Billiton of Australia as we held declining conviction in both.

Outlook:

Entering 2016, there are a multitude of factors that make it challenging to become particularly constructive on equity markets. Whilst the U.S. economy appears to be reasonably resilient, growth in both real and nominal terms is hardly conducive to driving world trade volumes up to the growth rates of the preceding 20 years. In Europe, deflationary hurdles remain despite a more outspoken central banker in Mario Draghi. For Asia, this lack of export growth is accompanied by private sector debt levels that have mushroomed since the Global Financial Crisis of 2008, and debt service ratios that are continuing to spike as earnings contract and capital is removed from the region. This difficult environment has caused a structural decline in the ROE for listed businesses as competition has increased and disinflation takes hold.

All of this leads us to earnings expectations that have been cut so dramatically the market now expects a mere 5% earnings growth in 2016. Although this helps to create continued pessimism over Asian markets, it is in these environments where stock picking often bears fruit. The Matthews Asian Growth and Income portfolio has consistently attempted to provide attractive risk adjusted returns through investing in businesses that can wade through these cycles, and we remain confident that the high quality businesses within our portfolio will be able to do just that. Further, valuations for the Fund remain supportive at approximately 14x P/E.

 

The Impossible Trinity—also known as the Trilemma or Unholy Trinity—is the hypothesis in international economics that a country may choose any two, but not all of the following three policy goals—monetary independence, exchange rate stability and free movement of capital.
Price-to-Earnings Ratio (P/E Ratio) is a valuation ratio of a company’s current share price compared to its per-share earnings and is calculated as the market value per share divided by the Earnings per Share (EPS).
 
COUNTRY ALLOCATION (%)7,8  
China/Hong Kong     35.7   
Singapore     16.6   
South Korea     11.4   
Malaysia     6.9   
Japan     6.4   
Taiwan     5.0   
Australia     3.7   
Thailand     3.3   
Indonesia     2.8   
Vietnam     2.5   
New Zealand     2.0   
Norway     1.5   
Philippines     1.2   
Cash and Other Assets, Less Liabilities     1.0   

 

 
SECTOR ALLOCATION (%)8  
Financials     17.8   
Consumer Discretionary     17.2   
Industrials     16.8   
Telecommunication Services     16.3   
Consumer Staples     15.4   
Information Technology     6.9   
Utilities     6.5   
Health Care     2.1   
Cash and Other Assets, Less Liabilities     1.0   

 

 
MARKET CAP EXPOSURE (%)8  

Mega Cap (over $25B)

    33.0   

Large Cap ($10B–$25B)

    19.9   

Mid Cap ($3B–10B)

    29.9   

Small Cap (under $3B)

    16.2   

Cash and Other Assets, Less Liabilities

    1.0   

 

 
ASSET TYPE BREAKDOWN (%)8,9  

Common Equities and ADRs

    86.2   

Convertible Corporate Bonds

    8.9   

Preferred Equities

    3.9   

Cash and Other Assets, Less Liabilities

    1.0   

 

7 Not all countries where the Fund may invest are included in the benchmark index.

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

 

9 Bonds are not included in the MSCI All Country Asia ex Japan Index.
 

 

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Table of Contents

Matthews Asian Growth and Income Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 86.2%

 

     Shares     Value  
CHINA/HONG KONG: 29.6%    

AIA Group, Ltd.

    14,876,000        $88,885,339   

Jardine Matheson Holdings, Ltd.

    1,671,900        80,966,001   

Yum! Brands, Inc.

    1,045,400        76,366,470   

Guangdong Investment, Ltd.

    47,348,000        66,866,180   

Techtronic Industries Co., Ltd.

    16,399,500        66,389,187   

China Mobile, Ltd. ADR

    1,125,500        63,399,415   

CK Hutchison Holdings, Ltd.

    4,400,172        59,146,797   

HSBC Holdings PLC ADR

    1,472,033        58,101,143   

CLP Holdings, Ltd.

    6,725,200        57,002,830   

VTech Holdings, Ltd.

    5,454,500        56,474,881   

Vitasoy International Holdings, Ltd.

    26,227,000        53,646,689   

Hang Lung Properties, Ltd.

    22,260,920        50,440,093   

Café de Coral Holdings, Ltd.

    14,582,000        42,733,182   

Cheung Kong Property Holdings, Ltd.

    4,400,172        28,464,646   
   

 

 

 

Total China/Hong Kong

      848,882,853   
   

 

 

 
   
SINGAPORE: 13.8%                

Ascendas REIT

    43,232,800        69,287,491   

United Overseas Bank, Ltd.

    4,274,500        58,931,741   

Singapore Technologies Engineering, Ltd.

    27,351,925        57,818,910   

Singapore Telecommunications, Ltd.

    21,686,400        55,913,287   

Singapore Post, Ltd.

    38,209,000        44,111,494   

SIA Engineering Co., Ltd.

    15,928,900        41,495,048   

Keppel Corp., Ltd.

    8,410,900        38,422,467   

ARA Asset Management, Ltd.

    36,838,667        30,515,298   
   

 

 

 

Total Singapore

      396,495,736   
   

 

 

 
   
SOUTH KOREA: 7.5%                

Kangwon Land, Inc.

    1,810,693        59,098,126   

KT&G Corp.

    559,754        49,742,613   

Samsung Electronics Co., Ltd.

    43,412        46,302,470   

GS Home Shopping, Inc.

    227,544        32,300,026   

KEPCO Plant Service & Engineering Co., Ltd.

    386,300        29,221,170   
   

 

 

 

Total South Korea

      216,664,405   
   

 

 

 
   
MALAYSIA: 6.9%                

Genting Malaysia BHD

    67,607,200        68,874,046   

Axiata Group BHD

    33,570,123        50,027,411   

British American Tobacco Malaysia BHD

    3,606,800        47,042,983   

Telekom Malaysia BHD

    20,245,551        31,902,726   
   

 

 

 

Total Malaysia

      197,847,166   
   

 

 

 
   
JAPAN: 6.4%                

Japan Tobacco, Inc.

    1,962,700        72,058,119   

KDDI Corp.

    2,270,600        58,967,925   

Lawson, Inc.

    634,700        51,519,222   
   

 

 

 

Total Japan

      182,545,266   
   

 

 

 
   
TAIWAN: 5.0%                

Taiwan Semiconductor Manufacturing Co., Ltd.

    11,282,187        48,674,077   

Chunghwa Telecom Co., Ltd. ADR

    1,596,225        47,934,637   

Taiwan Semiconductor Manufacturing
Co., Ltd. ADR

    2,064,424        46,965,646   
   

 

 

 

Total Taiwan

      143,574,360   
   

 

 

 
   
     Shares     Value  
AUSTRALIA: 3.7%    

CSL, Ltd.

    781,477        $59,579,403   

Insurance Australia Group, Ltd.

    11,324,603        45,479,627   
   

 

 

 

Total Australia

      105,059,030   
   

 

 

 
   
THAILAND: 3.3%                

Glow Energy Public Co., Ltd.

    18,076,500        36,917,351   

BEC World Public Co., Ltd.

    35,030,100        29,538,863   

Advanced Info Service Public Co., Ltd.

    6,869,700        28,905,164   
   

 

 

 

Total Thailand

      95,361,378   
   

 

 

 
   
INDONESIA: 2.8%                

PT Telekomunikasi Indonesia Persero ADR

    1,169,800        51,939,120   

PT Perusahaan Gas Negara Persero

    139,319,300        27,468,842   
   

 

 

 

Total Indonesia

      79,407,962   
   

 

 

 
   
VIETNAM: 2.5%                

Vietnam Dairy Products JSC

    12,596,761        71,610,012   
   

 

 

 

Total Vietnam

      71,610,012   
   

 

 

 
   
NEW ZEALAND: 2.0%                

SKYCITY Entertainment Group, Ltd.

    19,139,923        57,859,979   
   

 

 

 

Total New Zealand

      57,859,979   
   

 

 

 
   
NORWAY: 1.5%                

Telenor ASA

    2,669,498        44,496,720   
   

 

 

 

Total Norway

      44,496,720   
   

 

 

 
   
PHILIPPINES: 1.2%                

Globe Telecom, Inc.

    868,230        34,106,645   
   

 

 

 

Total Philippines

      34,106,645   
   

 

 

 
   
TOTAL COMMON EQUITIES             2,473,911,512   
   

 

 

 

(Cost $2,318,708,480)

   
   

CONVERTIBLE CORPORATE BONDS: 8.9%

  

 
     Face Amount*         
CHINA/HONG KONG: 6.1%    

Shine Power International, Ltd., Cnv.
0.000%, 07/28/19

    HKD 446,000,000        55,677,705   

Johnson Electric Holdings, Ltd., Cnv.
1.000%, 04/02/21

    49,750,000        53,730,000   

Hengan International Group Co., Ltd., Cnv.

  

 

0.000%, 06/27/18

    HKD 339,000,000        45,710,028   

PB Issuer No. 2, Ltd., Cnv.
1.750%, 04/12/16

    21,820,000        21,465,425   
   

 

 

 

Total China/Hong Kong

      176,583,158   
   

 

 

 
   
SINGAPORE: 2.8%                

CapitaLand, Ltd., Cnv.
1.950%, 10/17/23

    SGD 110,250,000        79,505,342   
   

 

 

 

Total Singapore

      79,505,342   
   

 

 

 
   
TOTAL CONVERTIBLE CORPORATE BONDS        256,088,500   
   

 

 

 

(Cost $266,495,743)

   
 

 

14    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asian Growth and Income Fund

December 31, 2015

Schedule of Investmentsa (continued)

PREFERRED EQUITIES: 3.9%

 

     Shares     Value  
SOUTH KOREA: 3.9%    

LG Household & Health Care, Ltd., Pfd.

    109,088        $50,395,225   

Hyundai Motor Co., Ltd., Pfd.

    355,983        31,126,445   

Hyundai Motor Co., Ltd., 2nd Pfd.

    318,246        28,326,236   
   

 

 

 

Total South Korea

      109,847,906   
   

 

 

 
   
TOTAL PREFERRED EQUITIES             109,847,906   
   

 

 

 

(Cost $38,339,132)

   
   

RIGHTS: 0.0%

   
SINGAPORE: 0.0%                

Ascendas REIT, expires 1/13/16

    1,621,230        62,215   
   

 

 

 

Total Singapore

      62,215   
   

 

 

 
   
TOTAL RIGHTS             62,215   
   

 

 

 

(Cost $0)

   
   
TOTAL INVESTMENTS: 99.0%             2,839,910,133   

(Cost $2,623,543,355b)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 1.0%
      29,144,236   
   

 

 

 

NET ASSETS: 100.0%

      $2,869,054,369   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Cost for federal income tax purposes is $2,633,461,269 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $455,482,353   

Gross unrealized depreciation

    (249,033,489
 

 

 

 

Net unrealized appreciation

    $206,448,864   
 

 

 

 

 

* All values are in USD unless otherwise noted.

 

ADR American Depositary Receipt

 

BHD Berhad

 

Cnv. Convertible

 

HKD Hong Kong Dollar

 

JSC Joint Stock Co.

 

Pfd. Preferred

 

REIT Real Estate Investment Trust

 

SGD Singapore Dollar

 

USD U.S. Dollar

See accompanying notes to financial statements.

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Yu Zhang, CFA   Robert Horrocks, PhD

Lead Manager

  Lead Manager
Vivek Tanneeru  

Co-Manager

   
FUND FACTS
    Investor   Institutional

Ticker

  MAPIX   MIPIX

CUSIP

  577125107   577130750

Inception

  10/31/06   10/29/10

NAV

  $15.36   $15.35

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.06%

 

0.93%

After Fee Waiver and Reimbursement2

 

1.05%

 

0.92%

Portfolio Statistics

Total # of Positions

  66

Net Assets

  $4.8 billion

Weighted Average Market Cap

 

$28.9 billion

Portfolio Turnover3

 

35.98%

Benchmark

   

MSCI AC Asia Pacific Index

OBJECTIVE

 

 

Total return with an emphasis on providing current income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in Asia. Asia consists of all countries and markets in Asia, and includes developed, emerging and frontier countries and markets in the Asian region. The Fund may also invest in convertible debt and equity securities.

 

Matthews Asia Dividend Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Asia Dividend Fund returned 3.86% (Investor Class) and 3.93% (Institutional Class) while its benchmark, the MSCI All Country Asia Pacific Index, returned –1.68%. For the fourth quarter of the year, the Fund returned 4.85% (Investor Class) and 4.81% (Institutional Class) versus 6.99% for the Index.

The Fund began 2015 with a share price of US$15.26 for both the Investor and Institutional Classes, and shareholders who were invested throughout the year would have received total distributions of approximately 0.50 cents (Investor Class) or 0.52 cents (Institutional Class) per share.

Market Environment:

Asia equity investors faced strong macroeconomic headwinds during 2015. Two events that have been unfolding—a prolonged slowing Chinese economy and a U.S. Fed interest rate hike—put significant downward pressure on both the region’s equity markets and currencies. Within the region, Japan was among the few bright spots that delivered positive U.S. dollar-adjusted market returns. A government-led, top-down push for better corporate governance standards, focused on return on equity improvements, coupled with a more aggressive asset allocation into domestic equities from Japanese pension funds and trust banks, provided support to Japan’s stock market. On the other hand, Southeast Asian stock markets, marred by weak domestic consumption, steep currency depreciation, and, in certain cases, political impasses and policy mismanagement were among the worst-performing. Markets in certain countries, such as Indonesia, Malaysia and Thailand, fell by more than 20% on a U.S. dollar-adjusted basis. Finally, as China pushed ahead with structural reforms amid a meaningful slowdown in its economy, reaction to the movements of both China A-shares and the renminbi currency increasingly became meaningful drivers behind global market volatility.

Performance Contributors and Detractors:

Among the top contributors to Fund performance during both the fourth quarter and the year were the preferred shares of lithium-ion battery maker LG Chem. This firm, a global major petrochemical producer and a tier-one battery supplier, spotted an opportunity in the electric vehicle battery market early on, and in recent years has steadily invested in new electric vehicle (EV) battery capacity. It has also done well in cultivating new relationships with global automakers. As electric vehicles become ever more critical to many global automakers, the outlook for LG Chem’s EV battery business is turning more positive and has driven its share price higher. We were initially attracted to LG Chem’s balanced business portfolio, which holds both petrochemical and non-petrochemical businesses, as we believe the firm was well-positioned with an earnings stream that was less cyclical compared with that of its peers. Furthermore, we bought the preferred share class, which was trading at a meaningful discount to common shares, giving us a significant pickup in dividend yield.

On the flip side, the Fund’s holding in Total Access Communications, a wireless telecom carrier in Thailand, was among the portfolio’s top detractors. The competitive landscape in the Thai telecom sector deteriorated significantly during the year. True Corp., the number three player by market share, was backed by a fresh injection of capital from China Mobile, which took a minority stake in the company. True became more aggressive in grabbing subscriber market share against

(continued)

 
1 Actual 2015 expense ratios.
2 Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time (i) by the Trust on behalf of the Fund or by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty.
3 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

16    MATTHEWS ASIA FUNDS


Table of Contents
             
PERFORMANCE AS OF DECEMBER 31, 2015                                          
 

 

    

 

      

 

     Average Annual Total Returns  
     3 Months      1 Year      3 Years      5 Years      Since
Inception
     Inception
Date
 
Investor Class (MAPIX)      4.85%         3.86%         4.83%         4.75%         8.74%         10/31/06   
Institutional Class (MIPIX)      4.81%         3.93%         4.95%         4.85%         5.28%         10/29/10   
MSCI AC Asia Pacific Index4      6.99%         -1.68%         3.42%         1.96%         2.63% 5    
Lipper Pacific Region Funds Category Average6      5.29%         -3.12%         1.96%         2.37%         3.33% 5    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

                 

INCOME DISTRIBUTION HISTORY

                                                     
    2015         2014  
    Q1      Q2      Q3      Q4      Total         Q1      Q2      Q3      Q4      Total  
Investor (MAPIX)   $ 0.02       $ 0.18       $ 0.03       $ 0.04       $ 0.27        $ 0.03       $ 0.11       $ 0.17       $ 0.00       $ 0.30   
Inst’l (MIPIX)   $ 0.02       $ 0.19       $ 0.04       $ 0.04       $ 0.29        $ 0.03       $ 0.11       $ 0.17       $ 0.00       $ 0.32   

Note: This table does not include capital gains distributions but does include return of capital totaling $0.065 (Investor Class) and $0.068 (Institutional Class) for 2014. Totals may differ by $0.01 due to rounding. For distribution history please visit matthewsasia.com.

 

30-DAY YIELD:

1.55% (Investor Class) 1.66% (Institutional Class)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 12/31/15, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

DIVIDEND YIELD: 3.04%

 

The dividend yield (trailing) for the portfolio is the weighted average sum of the dividends paid by each equity security held by the Fund over the 12 months ended 12/31/15 divided by the current price of each equity as of 12/31/15. The annualized dividend yield for the Fund is for the equity-only portion of the portfolio. Please note that this is based on gross equity portfolio holdings and does not reflect the actual yield an investor in the Fund would receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems, Bloomberg, MICM.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  4 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  5 Calculated from 10/31/06.

 

  6 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS7                     
     Sector      Country      % of Net Assets  

LG Chem, Ltd., Pfd.

   Materials      South Korea        3.4%   
Japan Tobacco, Inc.    Consumer Staples      Japan        3.4%   
Shenzhou International Group Holdings, Ltd.    Consumer Discretionary      China/Hong Kong        3.3%   
Suntory Beverage & Food, Ltd.    Consumer Staples      Japan        3.3%   
Hoya Corp.    Health Care      Japan        3.1%   
Bridgestone Corp.    Consumer Discretionary      Japan        2.9%   
Kao Corp.    Consumer Staples      Japan        2.6%   
Minth Group, Ltd.    Consumer Discretionary      China/Hong Kong        2.5%   
Sumitomo Mitsui Financial Group, Inc.    Financials      Japan        2.4%   
NTT DoCoMo, Inc.    Telecommunication Services      Japan        2.4%   
% OF ASSETS IN TOP TEN                29.3%   

 

  7 Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
 
COUNTRY ALLOCATION (%)8,9  

China/Hong Kong

    33.7   

Japan

    30.7   

South Korea

    7.8   

Taiwan

    5.3   

Indonesia

    4.3   

Singapore

    4.0   

India

    2.6   

Thailand

    2.2   

Australia

    2.0   

Vietnam

    1.6   

Luxembourg

    1.5   

Philippines

    1.2   

New Zealand

    1.1   
Cash and Other Assets, Less Liabilities     2.0   

 

 
SECTOR ALLOCATION (%)9  

Consumer Staples

    27.9   

Consumer Discretionary

    16.2   

Telecommunication Services

    12.7   

Industrials

    12.1   

Financials

    11.8   

Information Technology

    5.5   

Materials

    4.4   

Health Care

    4.1   

Utilities

    3.3   

Cash and Other Assets, Less Liabilities

    2.0   

 

 
MARKET CAP EXPOSURE (%)9  

Mega Cap (over $25B)

    27.8   

Large Cap ($10B–$25B)

    24.5   

Mid Cap ($3B–10B)

    23.5   

Small Cap (under $3B)

    22.2   

Cash and Other Assets, Less Liabilities

    2.0   

 

8 Not all countries where the Fund may invest are included in the benchmark index.

 

9 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

Matthews Asia Dividend Fund

Portfolio Manager Commentary (unaudited) (continued)

larger players, including Total Access. To make matters worse, the latest 4G spectrum auctions, completed in December, saw a new entrant break into the wireless telecom business, disrupting Thailand’s three-player market structure. Total Access’ stock was severely de-rated, and we are currently monitoring the situation to assess whether the company is still able to sustain an ongoing dividend payment.

Notable Portfolio Changes:

During the last quarter, the Fund initiated a few new positions, including PT Hanjaya Mandala Sampoerna, Indonesia’s largest tobacco company, which is closely held by its parent company Philip Morris International (PMI). Regarded as the crown-jewel asset within PMI, the firm has delivered consistent market share gains with strong financial results in recent years. Because of its solid balance sheet and strong cash flow generation, PMI has also been extracting substantial cash flow from Sampoerna by adopting a maximum dividend payout policy. In November, when PMI was forced to sell down its stake in Sampoerna to comply with the local listing requirement in Indonesia, we decided to participate in this liquidity event and initiated a position in the stock.

During the fourth quarter, we also exited Primary Health Care of Australia. While our initial investment thesis rested on a potential margin uplift from Primary’s medical center business, the company’s overall business faced strong regulatory headwinds involving the curtailment of medical payments from the government. At the same time, heated competition within the medical center industry also caused more difficulties for Primary to retain and grow its doctor workforce—an essential part of the company’s growth strategy. With limited visibility for a turnaround in the business, we decided to take the loss on the stock and re-deploy capital elsewhere.

Outlook:

The market outlook for Asia today seems murky, in part as the real impact of the recent U.S. Federal Reserve rate hike on Asia is still unclear. In contrast to the U.S., Asia’s monetary policies are generally moving in the opposite direction, toward more easing. China’s headline growth figures continue to struggle and the movements of the renminbi still hold important implications to the stability of Asia’s markets. Against such a backdrop, a dividend-investing approach that balances both the yield and growth components in the underlying dividends, in our view, is an effective tool to filter out short-term market noise. Our focus is on what we consider a crucial factor for long-term investing: a company’s ability not only to generate sustainable cash flow but also its willingness to distribute it to minority shareholders in the form of stable or rising dividends.

 

 

18    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Dividend Fund

December 31, 2015

Consolidated Schedule of Investmentsa

COMMON EQUITIES: 94.6%

 

     Shares     Value  
CHINA/HONG KONG: 33.7%    

Shenzhou International Group Holdings, Ltd.

    27,810,000        $159,373,011   

Minth Group, Ltd.†

    59,535,000        118,275,877   

China Construction Bank Corp. H Shares

    150,798,000        102,866,571   

AIA Group, Ltd.

    17,110,800        102,238,455   

Guangdong Investment, Ltd.

    66,566,000        94,006,381   

China Mobile, Ltd. ADR

    1,574,225        88,676,094   

Kweichow Moutai Co., Ltd. A Shares

    2,462,935        81,565,414   

Qualcomm, Inc.

    1,569,800        78,466,453   

Far East Horizon, Ltd.

    75,288,000        69,752,736   

Yuexiu Transport Infrastructure, Ltd.†

    109,322,000        68,286,284   

Shanghai Lujiazui Finance & Trade Zone Development Co., Ltd. B Shares

    16,413,323        66,589,820   

China Power International Development, Ltd.

    113,710,000        65,455,353   

Shanghai International Airport Co., Ltd. A Sharesb

    12,098,309        54,786,077   

HKBN, Ltd.

    41,566,123        53,485,199   

Daqin Railway Co., Ltd. A Shares

    40,506,372        52,941,772   

Café de Coral Holdings, Ltd.

    18,014,000        52,790,807   

Fuyao Glass Industry Group Co., Ltd. H Sharesc

    21,248,000        51,031,851   

Greatview Aseptic Packaging Co., Ltd.†

    109,030,000        49,294,621   

Jiangsu Expressway Co., Ltd. H Shares

    35,370,000        47,470,455   

Hopewell Holdings, Ltd.

    12,233,500        43,827,132   

Henan Shuanghui Investment & Development Co., Ltd. A Sharesb

    12,972,979        40,689,776   

China Machinery Engineering Corp. H Shares†

    53,811,000        39,262,849   

Haitian International Holdings, Ltd.

    16,566,000        24,034,963   

China Mobile, Ltd.

    1,248,500        14,053,248   
   

 

 

 

Total China/Hong Kong

      1,619,221,199   
   

 

 

 
   
JAPAN: 30.7%                

Japan Tobacco, Inc.

    4,403,200        161,658,077   

Suntory Beverage & Food, Ltd.

    3,610,600        158,058,146   

Hoya Corp.

    3,676,300        150,333,400   

Bridgestone Corp.

    4,096,100        140,502,037   

Kao Corp.

    2,454,600        126,138,820   

Sumitomo Mitsui Financial Group, Inc.

    3,107,200        117,268,989   

NTT DoCoMo, Inc.

    5,677,200        116,448,460   

ITOCHU Corp.

    8,498,200        100,520,536   

Toyo Suisan Kaisha, Ltd.

    2,656,200        92,575,352   

Pigeon Corp.

    3,806,100        92,336,334   

Skylark Co., Ltd.

    5,978,700        77,251,309   

Lawson, Inc.

    755,300        61,308,443   

Anritsu Corp.†

    7,564,500        49,563,094   

Dexerials Corp.

    2,594,400        27,790,971   
   

 

 

 

Total Japan

      1,471,753,968   
   

 

 

 
   
TAIWAN: 5.3%                

Chunghwa Telecom Co., Ltd. ADR

    3,324,301        99,828,759   

Taiwan Semiconductor Manufacturing Co., Ltd. ADR

    3,027,940        68,885,635   

St. Shine Optical Co., Ltd.

    2,383,000        47,693,895   

Sercomm Corp.

    11,111,000        29,204,348   

Taiwan Semiconductor Manufacturing Co., Ltd.

    2,336,469        10,080,091   
   

 

 

 

Total Taiwan

      255,692,728   
   

 

 

 
     Shares     Value  
SOUTH KOREA: 4.4%    

KT&G Corp.

    1,235,189        $109,765,233   

BGF Retail Co., Ltd.

    712,460        103,143,930   
   

 

 

 

Total South Korea

      212,909,163   
   

 

 

 
   
INDONESIA: 4.3%                

PT Hanjaya Mandala Sampoerna

    9,048,400        61,592,150   

PT United Tractors

    41,221,900        50,192,321   

PT Telekomunikasi Indonesia Persero ADR

    1,090,634        48,424,150   

PT Telekomunikasi Indonesia Persero

    213,210,000        47,754,174   
   

 

 

 

Total Indonesia

      207,962,795   
   

 

 

 
   
SINGAPORE: 4.0%                

Singapore Technologies Engineering, Ltd.

    28,460,000        60,161,256   

CapitaLand Retail China Trust, REIT†

    43,232,400        45,342,034   

Ascendas India Trust†

    53,470,700        32,808,738   

ARA Asset Management, Ltd.

    34,749,418        28,784,669   

Super Group, Ltd.

    43,809,700        25,830,328   
   

 

 

 

Total Singapore

      192,927,025   
   

 

 

 
   
INDIA: 2.6%                

ITC, Ltd.

    13,801,000        68,243,437   

Bharti Infratel, Ltd.

    8,846,586        57,077,345   
   

 

 

 

Total India

      125,320,782   
   

 

 

 
   
THAILAND: 2.2%                

Thai Beverage Public Co., Ltd.

    161,322,100        78,315,571   

Total Access Communication Public Co., Ltd.

    24,734,100        20,646,004   

Total Access Communication Public Co., Ltd. NVDR

    5,939,700        4,957,976   
   

 

 

 

Total Thailand

      103,919,551   
   

 

 

 
   
AUSTRALIA: 2.0%                

Breville Group, Ltd.†

    10,644,019        57,515,357   

Spotless Group Holdings, Ltd.

    48,823,125        38,254,933   
   

 

 

 

Total Australia

      95,770,290   
   

 

 

 
   
VIETNAM: 1.6%                

Vietnam Dairy Products JSC

    13,680,740        77,772,211   
   

 

 

 

Total Vietnam

      77,772,211   
   

 

 

 
   
LUXEMBOURG: 1.5%                

L’Occitane International SA

    36,976,500        71,353,674   
   

 

 

 

Total Luxembourg

      71,353,674   
   

 

 

 
   
PHILIPPINES: 1.2%                

Globe Telecom, Inc.

    1,447,730        56,871,121   
   

 

 

 

Total Philippines

      56,871,121   
   

 

 

 
   
NEW ZEALAND: 1.1%                

SKY Network Television, Ltd.

    16,242,251        50,879,701   
   

 

 

 

Total New Zealand

      50,879,701   
   

 

 

 
   
TOTAL COMMON EQUITIES             4,542,354,208   
   

 

 

 

(Cost $4,136,762,599)

   
 

 

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Table of Contents

Matthews Asia Dividend Fund

December 31, 2015

Consolidated Schedule of Investmentsa (continued)

PREFERRED EQUITIES: 3.4%

 

     Shares     Value  
SOUTH KOREA: 3.4%    

LG Chem, Ltd., Pfd.

    786,292        $164,273,347   
   

 

 

 

Total South Korea

      164,273,347   
   

 

 

 
   
TOTAL PREFERRED EQUITIES             164,273,347   
   

 

 

 

(Cost $69,008,863)

   
   
TOTAL INVESTMENTS: 98.0%             4,706,627,555   

(Cost $4,205,771,462d)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 2.0%
      96,996,128   
   

 

 

 

NET ASSETS: 100.0%

      $4,803,623,683   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Security held by Matthews ADF-U Series. See note 2-C.

 

c Non-income producing security.

 

d Cost for federal income tax purposes is $4,217,995,827 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $919,079,953   

Gross unrealized depreciation

    (430,448,225
 

 

 

 

Net unrealized appreciation

    $488,631,728   
 

 

 

 

 

Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

 

ADR American Depositary Receipt

 

JSC Joint Stock Co.

 

NVDR Non-voting Depositary Receipt

 

Pfd. Preferred

 

REIT Real Estate Investment Trust

See accompanying notes to financial statements.

 

 

20    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Yu Zhang, CFA  

Lead Manager

   
Sherwood Zhang, CFA  

Co-Manager

   
FUND FACTS        
    Investor   Institutional

Ticker

  MCDFX   MICDX

CUSIP

  577125305   577130735

Inception

  11/30/09   10/29/10

NAV

  $13.79   $13.79

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.19%

 

1.00%

Portfolio Statistics

 

Total # of Positions

  45

Net Assets

  $180.9 million

Weighted Average Market Cap

 

$23.1 billion

Portfolio Turnover2

 

79.91%

Benchmark

   

MSCI China Index

OBJECTIVE

 

 

Total return with an emphasis on providing current income.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in dividend-paying equity securities of companies located in China. China includes its administrative and other districts, such as Hong Kong. The Fund may also invest in convertible debt and equity securities.

Matthews China Dividend Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews China Dividend Fund returned 9.54% (Investor Class) and 9.71% (Institutional Class) while its benchmark, the MSCI China Index, returned –7.62%. For the fourth quarter of the year, the Fund returned 8.46% (Investor Class) and 8.58% (Institutional Class) versus 4.03% for the Index.

The Fund began 2015 with a share price of US$13.37 for both the Investor and Institutional Classes, and shareholders who were invested throughout the year would have received total distributions of approximately 0.88 cents (Investor Class) or 0.90 cents (Institutional Class) per share.

Market Environment:

Chinese equities staged a turnaround during the fourth quarter of 2015. To the surprise of many investors, the domestic A-share market, which trades at higher valuations, recovered more quickly than less expensive Chinese equities listed overseas. This phenomenon may be explained by the different liquidity environments among China’s domestic market and the global market, as its central bank continued to loosen monetary policy—cutting both interest rates (by 0.25%) and its required reserve rate of bank deposits by 50 basis points (0.50%) in late October.

In late November, the International Monetary Fund (IMF) announced its decision to include the Chinese currency, the renminbi, to the basket of currencies that make up the special drawing rights (SDR) starting in 2016. Although this is generally viewed as a symbolic move by the IMF, it is also taken as recognition of government reform efforts to further liberalize its financial markets to global investors.

Later in the year, 14 Chinese companies with American Depository Receipts (ADRs) listed on U.S. exchanges were added to the Fund’s benchmark, the MSCI China Index. This change brings unique challenges to us as the majority of these companies do not pay regular dividends. We expect to ask these companies to take notice of their broadened investor base and to consider regular dividends as part of their shareholder return policies.

Performance Contributors and Detractors:

In 2015, the Fund benefited from its multi-capitalization approach, as the portfolio’s small and mid-cap exposure significantly outperformed its large cap peers in the benchmark—a reversal of our experience last year. Among the remaining positions at year-end, our long-time holding Shenzhou International Group was a top performance contributor for the year. The company completed its initial capacity expansion in Vietnam, and is well-positioned to take advantage of a reduced import tariff should the Trans-Pacific Partnership agreement receive approval. New Oriental Education & Technology Group was another large contributor to Fund performance. The company can finally move past earlier concerns over its corporate governance as it has shown consistent returns to shareholders through dividends and buybacks in recent years. Another positive contributor during the year was Voltronic Power Technology, the leading OEM maker of uninterruptible power supplies.

On the flip side, Hilong Holding, an oil field equipment and service provider, was the largest detractor to Fund performance for the year. We are carefully monitoring whether it can sustain its cost advantage relative to its competitors amid this downturn. Qualcomm, a major 3G and next-generation mobile technologies firm, also posed a drag on Fund performance for the year as the company’s technology licensing practice has again been challenged in various jurisdictions. However, we believe the company has unparalleled leadership in smartphone technology.

(continued)

 
1 Actual 2015 expense ratios.
2 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long- term securities.

 

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Table of Contents
     
PERFORMANCE AS OF DECEMBER 31, 2015                
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      1 Year      3 Year      5 Year      Since
Inception
     Inception
Date
 
Investor Class (MCDFX)      8.46%         9.54%         7.82%         6.50%         9.21%         11/30/09   
Institutional Class (MICDX)      8.58%         9.71%         8.05%         6.72%         7.28%         10/29/10   
MSCI China Index3      4.03%         -7.62%         1.31%         0.91%         1.61% 4    
Lipper China Region Funds Category Average5      7.29%         -3.02%         2.98%         0.36%         2.86% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

               
INCOME DISTRIBUTION HISTORY                                                       
       2015         2014  
       June        December        Total         June        December        Total  
Investor (MCDFX)      $ 0.27         $ 0.01         $ 0.28        $ 0.16         $ 0.20         $ 0.36   
Inst’l (MICDX)      $ 0.28         $ 0.03         $ 0.30        $ 0.17         $ 0.21         $ 0.38   

Note: This table does not include capital gains distributions. Totals may differ by $0.01 due to rounding. For income distribution history, visit matthewsasia.com.

 

30-DAY YIELD:

0.97% (Investor Class) 1.25% (Institutional Class)

 

The 30-Day Yield represents net investment income earned by the Fund over the 30-day period ended 12/31/15, expressed as an annual percentage rate based on the Fund’s share price at the end of the 30-day period. The 30-Day Yield should be regarded as an estimate of the Fund’s rate of investment income, and it may not equal the Fund’s actual income distribution rate.

 

Source: BNY Mellon Investment Servicing (US) Inc.

   

DIVIDEND YIELD: 2.84%

 

The dividend yield (trailing) for the portfolio is the weighted average sum of the dividends paid by each equity security held by the Fund over the 12 months ended 12/31/15 divided by the current price of each equity as of 12/31/15. The annualized dividend yield for the Fund is for the equity-only portion of the portfolio. Please note that this is based on gross equity portfolio holdings and does not reflect the actual yield an investor in the Fund would receive. Past yields are no guarantee of future yields.

 

Source: FactSet Research Systems, Bloomberg, MICM.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data does not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  4 Calculated from 11/30/09.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                   
     Sector           % of Net Assets  
New Oriental Education & Technology Group, Inc.    Consumer Discretionary           3.7%   
Sercomm Corp.    Information Technology           3.3%   
China Construction Bank Corp.    Financials           3.3%   
AIA Group, Ltd.    Financials           3.1%   
HKBN, Ltd.    Telecommunication Services           3.1%   
China Merchants Bank Co., Ltd.    Financials           3.0%   
Kweichow Moutai Co., Ltd.    Consumer Staples           2.9%   
China Mobile, Ltd.    Telecommunication Services           2.9%   
China Medical System Holdings, Ltd.    Health Care           2.7%   
China Power International Development, Ltd.    Utilities           2.7%   
% OF ASSETS IN TOP TEN              30.7%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

22    MATTHEWS ASIA FUNDS


Table of Contents

Matthews China Dividend Fund

Portfolio Manager Commentary (unaudited) (continued)

Notable Portfolio Changes:

During the quarter, we added to our educational firm holdings. China Maple Leaf Educational Systems is one of the largest private K-12 school operators in China, and has a popular and unique dual diploma it offers from both China and Canada. Its program boasts affordable tuition compared with international schools, making it attractive to Chinese families seeking a premium educational experience for their children at reasonable costs. China Distance Education Holdings is a provider of online professional education. Although its traditional area of accounting training has become more saturated and mature, the company continues to expand in areas such as law, health care and construction engineering. More importantly for us, its management is committed to paying high levels of dividends from its free cash flow.

During the fourth quarter of the year, we exited our position in energy firm PetroChina as we believed its production costs were not favorable in the current low oil price environment.

Outlook:

For those expecting a strong recovery of headline growth data, 2016 could be another challenging year for investing in Chinese equities. However, due to signs of resilient domestic consumption, Chinese policymakers can continue to focus on reforms rather than major stimulus programs. This year, we saw reform progress in China’s financial sector, such as that for domestic A-share initial public offerings (IPOs), and we expect it to continue in 2016. In addition, the current administration seems more determined than ever to clamp down on the overcapacity of many heavy industries that became bloated during the period when growth was driven by fixed asset investments.

Although investor sentiment toward China could remain lukewarm, the resulting low valuations continue to present long-term investors with great opportunities to uncover high quality businesses that are well-positioned amid the growth of China’s consumption and service sectors.

   
COUNTRY ALLOCATION (%)7,8      

China/Hong Kong

    90.9   

Taiwan

    5.3   

Singapore

    1.6   

Cash and Other Assets, Less Liabilities

    2.2   

 

   
SECTOR ALLOCATION (%)8      

Consumer Discretionary

    21.9   

Financials

    21.0   

Industrials

    18.1   

Telecommunication Services

    8.6   

Information Technology

    8.0   

Consumer Staples

    7.2   

Utilities

    4.7   

Health Care

    4.7   

Materials

    2.2   

Energy

    1.4   

Cash and Other Assets, Less Liabilities

    2.2   

 

   
MARKET CAP EXPOSURE (%)8      

Mega Cap (over $25B)

    17.7   

Large Cap ($10B–$25B)

    2.3   

Mid Cap ($3B–10B)

    38.3   

Small Cap (under $3B)

    39.5   

Cash and Other Assets, Less Liabilities

    2.2   

 

7 Not all countries where the Fund may invest are included in the benchmark index.

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.
 

 

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Table of Contents

Matthews China Dividend Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 97.8%

 

     Shares     Value  
CONSUMER DISCRETIONARY: 21.9%    

Diversified Consumer Services: 7.8%

   

New Oriental Education & Technology Group, Inc. ADR

    216,000        $6,775,920   

China Maple Leaf Educational Systems, Ltd.

    9,482,000        4,649,703   

China Distance Education Holdings, Ltd. ADR

    184,300        2,707,367   
   

 

 

 
      14,132,990   
   

 

 

 
   

Auto Components: 6.7%

   

Fuyao Glass Industry Group Co., Ltd. H Sharesb

    1,787,600        4,293,323   

Minth Group, Ltd.

    1,980,000        3,933,589   

Weifu High-Technology Group Co., Ltd.
B Shares

    824,759        2,118,773   

Changzhou Xingyu Automotive Lighting Systems Co., Ltd. A Shares

    309,451        1,766,561   
   

 

 

 
      12,112,246   
   

 

 

 
   

Hotels, Restaurants & Leisure: 2.8%

   

Café de Coral Holdings, Ltd.

    1,216,000        3,563,541   

Xiao Nan Guo Restaurants Holdings, Ltd.b

    19,060,000        1,470,862   
   

 

 

 
      5,034,403   
   

 

 

 
   

Textiles, Apparel & Luxury Goods: 2.6%

   

Shenzhou International Group Holdings, Ltd.

    813,000        4,659,125   
   

 

 

 
   

Automobiles: 2.0%

   

BAIC Motor Corp., Ltd. H Shares

    3,613,000        3,608,225   
   

 

 

 

Total Consumer Discretionary

      39,546,989   
   

 

 

 
   
FINANCIALS: 21.0%                

Banks: 8.1%

   

China Construction Bank Corp. H Shares

    8,705,000        5,938,099   

China Merchants Bank Co., Ltd. H Shares

    2,306,500        5,399,148   

Huishang Bank Corp., Ltd. H Shares

    7,058,000        3,187,925   
   

 

 

 
      14,525,172   
   

 

 

 
   

Real Estate Management & Development: 4.8%

  

 

Red Star Macalline Group Corp., Ltd. H Sharesb

    3,711,200        4,513,270   

Shanghai Lujiazui Finance & Trade Zone Development Co., Ltd. B Shares

    1,025,379        4,160,023   
   

 

 

 
      8,673,293   
   

 

 

 
   

Capital Markets: 3.4%

   

China Everbright, Ltd.

    1,392,000        3,179,363   

China International Capital Corp., Ltd. H Sharesb

    1,852,798        3,017,053   
   

 

 

 
      6,196,416   
   

 

 

 
   

Insurance: 3.1%

   

AIA Group, Ltd.

    941,400        5,624,943   
   

 

 

 
   

Real Estate Investment Trusts (REITS): 1.6%

   

CapitaLand Retail China Trust, REIT

    2,766,700        2,901,708   
   

 

 

 

Total Financials

      37,921,532   
   

 

 

 
   
     Shares     Value  
INDUSTRIALS: 18.1%    

Transportation Infrastructure: 5.3%

   

Yuexiu Transport Infrastructure, Ltd.

    6,606,000        $4,126,335   

Qingdao Port International Co., Ltd. H Shares

    8,361,000        3,723,159   

Shanghai International Airport Co., Ltd.
A Shares

    403,264        1,805,650   
   

 

 

 
      9,655,144   
   

 

 

 
   

Marine: 2.5%

   

SITC International Holdings Co., Ltd.

    8,502,000        4,494,235   
   

 

 

 
   

Machinery: 2.3%

   

Shanghai Mechanical and Electrical Industry Co., Ltd. B Shares

    1,362,460        4,202,082   
   

 

 

 
   

Road & Rail: 2.1%

   

Guangshen Railway Co., Ltd. H Shares

    6,484,000        3,222,116   

Guangshen Railway Co., Ltd. ADR

    21,400        529,008   
   

 

 

 
      3,751,124   
   

 

 

 
   

Construction & Engineering: 2.0%

   

China Machinery Engineering Corp. H Shares

    4,964,000        3,621,951   
   

 

 

 
   

Electrical Equipment: 2.0%

   

Voltronic Power Technology Corp.

    244,049        3,619,465   
   

 

 

 
   

Industrial Conglomerates: 1.9%

   

Hopewell Holdings, Ltd.

    972,500        3,484,030   
   

 

 

 

Total Industrials

      32,828,031   
   

 

 

 
   
TELECOMMUNICATION SERVICES: 8.6%                

Diversified Telecommunication Services: 5.7%

   

HKBN, Ltd.

    4,332,957        5,575,431   

CITIC Telecom International Holdings, Ltd.

    12,437,000        4,738,511   
   

 

 

 
      10,313,942   
   

 

 

 
   

Wireless Telecommunication Services: 2.9%

   

China Mobile, Ltd. ADR

    93,730        5,279,811   
   

 

 

 

Total Telecommunication Services

      15,593,753   
   

 

 

 
   
INFORMATION TECHNOLOGY: 8.0%                

Communications Equipment: 5.8%

   

Sercomm Corp.

    2,285,000        6,005,934   

Qualcomm, Inc.

    89,500        4,473,658   
   

 

 

 
      10,479,592   
   

 

 

 
   

Electronic Equipment, Instruments & Components: 2.2%

   

Sunny Optical Technology Group Co., Ltd.

    1,716,000        3,913,781   
   

 

 

 

Total Information Technology

      14,393,373   
   

 

 

 
   
CONSUMER STAPLES: 7.2%                

Beverages: 2.9%

   

Kweichow Moutai Co., Ltd. A Shares

    160,803        5,325,339   
   

 

 

 
   

Food Products: 2.3%

   

Vitasoy International Holdings, Ltd.

    2,018,000        4,127,770   
   

 

 

 
   

Food & Staples Retailing: 2.0%

   

Shanghai Bailian Group Co., Ltd. B Shares

    1,876,677        3,651,021   
   

 

 

 

Total Consumer Staples

      13,104,130   
   

 

 

 
   
 

 

24    MATTHEWS ASIA FUNDS


Table of Contents

Matthews China Dividend Fund

December 31, 2015

Schedule of Investmentsa (continued)

COMMON EQUITIES (continued)

 

    Shares     Value  
UTILITIES: 4.7%                

Independent Power and Renewable Electricity Producers: 2.6%

   

China Power International Development, Ltd.

    8,349,000        $4,805,969   
   

 

 

 
   

Water Utilities: 2.1%

   

Guangdong Investment, Ltd.

    2,684,000        3,790,420   
   

 

 

 

Total Utilities

      8,596,389   
   

 

 

 
   
HEALTH CARE: 4.7%                

Pharmaceuticals: 4.7%

   

China Medical System Holdings, Ltd.

    3,319,000        4,864,208   

Tianjin ZhongXin Pharmaceutical Group Corp., Ltd. S Shares

    3,333,300        3,584,991   
   

 

 

 

Total Health Care

      8,449,199   
   

 

 

 
   
MATERIALS: 2.2%                

Containers & Packaging: 2.2%

   

Greatview Aseptic Packaging Co., Ltd.

    8,688,000        3,928,017   
   

 

 

 

Total Materials

      3,928,017   
   

 

 

 
   
ENERGY: 1.4%                

Energy Equipment & Services: 1.4%

   

Hilong Holding, Ltd.

    14,814,000        2,554,135   
   

 

 

 

Total Energy

      2,554,135   
   

 

 

 
   
TOTAL INVESTMENTS: 97.8%             176,915,548   

(Cost $171,804,467c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 2.2%
      4,004,443   
   

 

 

 

NET ASSETS: 100.0%

      $180,919,991   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $172,213,696 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $19,870,867   

Gross unrealized depreciation

    (15,169,015
 

 

 

 

Net unrealized appreciation

    $4,701,852   
 

 

 

 

 

ADR American Depositary Receipt

 

REIT Real Estate Investment Trust

See accompanying notes to financial statements.

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS

Beini Zhou, CFA

   

Lead Manager

   

Michael B. Han, CFA

 

Robert Harvey, CFA

Co-Manager

 

Co-Manager

 
FUND FACTS        
    Investor   Institutional

Ticker

 

MAVRX

 

MAVAX

CUSIP

 

577130693

 

577130685

Inception

 

11/30/15

 

11/30/15

NAV

 

$9.85

 

$9.83

Initial Investment

 

$2,500

 

$3 million

Gross Expense Ratio1

 

36.42%

 

36.17%

After fee waiver and Reimbursement2

 

1.50%

 

1.25%

Portfolio Statistics

   

Total # of Positions

    42

Net Assets

    $1.7million

Weighted Average Market Cap

 

$22.4 billion

Portfolio Turnover3

     

10.80%

Benchmark

   

MSCI AC Asia ex Japan Index

   

OBJECTIVE

 

 

Long term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets, which include borrowings for investment purposes, in common stock, preferred stock and other equity securities, and convertible securities of companies located in Asia. The Fund seeks to create an investable universe of value companies that it believes trade at market values with discounts to their intrinsic value, have strong financial and market positions, have strong management and are oriented to creating value for their shareholders. Matthews assesses companies within this universe according to each of these factors.

Matthews Asia Value Fund

Portfolio Manager Commentary (unaudited)

The Matthews Asia Value Fund was launched on November 30, 2015. A full commentary for the Fund will be published after a complete quarter of performance is available.

We started to see two phenomena emerging in Asia in recent years. First, equity markets in the region have matured over the years with decelerating growth across a broad swath of industries—partly driven by slowing growth in China. Such occasions may allow investors to capitalize on companies with valuation multiples that no longer reflect a high-growth stage. Second, we believe that corporate governance in Asia has generally been improving in recent years—although, perhaps still not at a pace that some foreign investors would prefer. And controlling shareholders are now more willing than ever to embrace minority shareholder-friendly corporate actions such as asset disposals or share buybacks to unlock value.

Four key attributes we seek in our portfolio holdings are: quality businesses with high incremental return on capital, shareholder-friendly management, solid balance sheets with no excessive financial leverage, and a substantially undervalued share price.

As with all our funds, we consider downside risks and permanent capital impairment. We believe that buying a collection of undervalued stocks with sound balance sheets that are run by prudent capital stewards can afford us a bigger margin of safety. We appreciate your support, and look forward to adding value to the Fund and its shareholders.

 

 

1 Annualized expense ratio.
2 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.25% first by waiving class specific expenses (i.e., Rule 12b-1 fees or shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 1.25% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 1.25%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2018, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
3 Not annualized. The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

26    MATTHEWS ASIA FUNDS


Table of Contents
     
PERFORMANCE AS OF DECEMBER 31, 2015              
 

 

   Actual 1 Month
Total Return
      

 

 
     Since
Inception
     Inception
Date
 

Investor Class (MAVRX)

     -1.35%         11/30/15   

Institutional Class (MAVAX)

     -1.30%         11/30/15   

MSCI AC Asia ex Japan Index4

     -0.42%      

Lipper Pacific Region Funds Category Average5

     -0.28%      

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares 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. For the Fund’s most recent month-end performance visit matthewsasia.com.

The performance data does not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of Fund shares. Values are in US$.

 

  4 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector      Country      % of Net Assets  

Kweichow Moutai Co., Ltd.

   Consumer Staples      China/Hong Kong        5.0%   

Samsung Electronics Co., Ltd., Pfd.

   Information Technology      South Korea        4.5%   

Shandong Weigao Group Medical Polymer Co., Ltd.

   Health Care      China/Hong Kong        3.8%   

CK Hutchison Holdings, Ltd.

   Industrials      China/Hong Kong        3.5%   

Hyundai Motor Co., Ltd., 2nd Pfd.

   Consumer Discretionary      South Korea        3.0%   

Daqin Railway Co., Ltd.

   Industrials      China/Hong Kong        2.9%   

Qualcomm, Inc.

   Information Technology      China/Hong Kong        2.6%   

DGB Financial Group, Inc.

   Financials      South Korea        2.5%   

Power Mate Technology Co., Ltd.

   Industrials      Taiwan        2.2%   

Genting BHD

   Consumer Discretionary      Malaysia        2.1%   

% OF ASSETS IN TOP TEN

               32.1%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

   
COUNTRY ALLOCATION (%)7      

China/Hong Kong

    26.2   

South Korea

    22.9   

Japan

    5.1   

United States

    4.9   

Singapore

    4.4   

Taiwan

    4.1   

Malaysia

    4.0   

United Kingdom

    1.9   

Israel

    1.8   

Thailand

    0.9   

Cash and Other Assets, Less Liabilities

    23.8   
   
SECTOR ALLOCATION (%)      

Consumer Discretionary

    17.6   

Information Technology

    16.6   

Industrials

    12.8   

Financials

    12.5   

Consumer Staples

    8.1   

Health Care

    5.6   

Materials

    3.0   

Cash and Other Assets, Less Liabilities

    23.8   
 

 

   
MARKET CAP EXPOSURE (%)8      

Mega Cap (over $25B)

    20.4   

Large Cap ($10B-$25B)

    3.9   

Mid Cap ($3B-10B)

    12.2   

Small Cap (under $3B)

    39.7   

Cash and Other Assets, Less Liabilities

    23.8   
 

 

7 Not all countries where the Fund may invest are included in the benchmark index.

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

 

matthewsasia.com  |  800.789.ASIA      27   


Table of Contents

Matthews Asia Value Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 66.9%

 

     Shares     Value  
CHINA/HONG KONG: 26.2%    

Kweichow Moutai Co., Ltd. A Shares

    2,600        $86,105   

Shandong Weigao Group Medical Polymer Co., Ltd. H Shares

    96,000        65,643   

CK Hutchison Holdings, Ltd.

    4,500        60,488   

Daqin Railway Co., Ltd. A Shares

    38,100        49,796   

Qualcomm, Inc.

    900        44,987   

Goldlion Holdings, Ltd.

    85,000        34,497   

Clear Media, Ltd.

    32,000        32,980   

Fairwood Holdings, Ltd.

    8,000        25,136   

Greatview Aseptic Packaging Co., Ltd.

    45,000        20,345   

Pico Far East Holdings, Ltd.

    66,000        17,884   

Future Bright Holdings, Ltd.

    168,000        16,831   
   

 

 

 

Total China/Hong Kong

      454,692   
   

 

 

 
   
SOUTH KOREA: 13.6%                

DGB Financial Group, Inc.

    5,042        42,953   

Shinyoung Securities Co., Ltd.

    836        36,097   

Kwangju Bankb

    5,317        34,657   

Samyung ENC Co., Ltd.

    4,616        32,507   

Kukbo Design Co., Ltd.

    1,633        26,685   

Kunsul Chemical Industrial Co., Ltd.

    495        16,788   

Binggrae Co., Ltd.

    278        16,161   

Saeron Automotive Corp.

    2,227        16,069   

Hy-Lok Corp.

    654        13,799   
   

 

 

 

Total South Korea

      235,716   
   

 

 

 
   
JAPAN: 5.1%                

Broadleaf Co., Ltd.

    3,000        29,525   

San-A Co., Ltd.

    500        22,434   

Trancom Co., Ltd.

    400        22,237   

Doshisha Co., Ltd.

    700        14,119   
   

 

 

 

Total Japan

      88,315   
   

 

 

 
   
UNITED STATES: 4.9%                

News Corp. B Shares

    2,400        33,504   

Knowles Corp.b

    1,600        21,328   

Micron Technology, Inc.b

    1,200        16,992   

Expeditors International of Washington, Inc.

    300        13,530   
   

 

 

 

Total United States

      85,354   
   

 

 

 
   
SINGAPORE: 4.4%                

ARA Asset Management, Ltd.

    43,800        36,282   

Vicom, Ltd.

    5,400        22,927   

Kulicke & Soffa Industries, Inc.b

    1,400        16,338   
   

 

 

 

Total Singapore

      75,547   
   

 

 

 
   
TAIWAN: 4.1%                

Power Mate Technology Co., Ltd.

    21,000        38,207   

Lumax International Corp., Ltd.

    13,000        17,163   

Yung Chi Paint & Varnish Manufacturing Co., Ltd.

    7,000        14,977   
   

 

 

 

Total Taiwan

      70,347   
   

 

 

 
   
MALAYSIA: 4.0%                

Genting BHD

    21,600        36,839   

MPHB Capital BHDb

    88,500        32,701   
   

 

 

 

Total Malaysia

      69,540   
   

 

 

 
     Shares     Value  
UNITED KINGDOM: 1.9%    

Standard Chartered PLC

    4,000        $33,523   
   

 

 

 

Total United Kingdom

      33,523   
   

 

 

 
   
ISRAEL: 1.8%                

Taro Pharmaceutical Industries, Ltd.b

    200        30,910   
   

 

 

 

Total Israel

      30,910   
   

 

 

 
   
THAILAND: 0.9%                

Premier Marketing Public Co., Ltd.

    54,800        15,956   
   

 

 

 

Total Thailand

      15,956   
   

 

 

 
   
TOTAL COMMON EQUITIES             1,159,900   
   

 

 

 

(Cost $1,171,412)

   
   

PREFERRED EQUITIES: 9.3%

   
SOUTH KOREA: 9.3%                

Samsung Electronics Co., Ltd., Pfd.

    84        77,649   

Hyundai Motor Co., Ltd., 2nd Pfd.

    576        51,268   

Samsung SDI Co., Ltd., Pfd.

    505        31,560   
   

 

 

 

Total South Korea

      160,477   
   

 

 

 
   
TOTAL PREFERRED EQUITIES             160,477   
   

 

 

 

(Cost $165,728)

   
   
TOTAL INVESTMENTS: 76.2%             1,320,377   

(Cost $1,337,140c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 23.8%
      412,218   
   

 

 

 

NET ASSETS: 100.0%

      $1,732,595   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $1,345,754 and net unrealized depreciation consists of:

 

Gross unrealized appreciation

    $11,395   

Gross unrealized depreciation

    (36,772
 

 

 

 

Net unrealized depreciation

    ($25,377
 

 

 

 

 

BHD Berhad

See accompanying notes to financial statements.

 

 

28    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Kenneth Lowe, CFA    

Lead Manager

   
Michael J. Oh, CFA   Sharat Shroff, CFA

Co-Manager

  Co-Manager  
FUND FACTS        
    Investor   Institutional

Ticker

  MAFSX   MIFSX

CUSIP

  577125701   577125800

Inception

  4/30/13   4/30/13

NAV

  $8.69   $8.69

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

2.07%

 

1.91%

After Fee Waiver and Reimbursement2

 

1.50%

 

1.25%

Portfolio Statistics

   

Total # of Positions

  31

Net Assets

  $11.2 million

Weighted Average Market Cap

 

$37.5 billion

Portfolio Turnover3

 

23.60%

Benchmark

   

MSCI AC Asia ex Japan Index

OBJECTIVE

 

 

Long term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Asia excluding Japan, but including all other developed, emerging and frontier countries and markets in the Asian region. The Fund is currently expected to hold stocks of between 25 and 35 companies under normal market conditions.

Matthews Asia Focus Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Asia Focus Fund returned –12.07% (Investor Class) and –11.96% (Institutional Class) while its benchmark, the MSCI All Country Asia ex Japan Index, returned –8.90%. For the fourth quarter of the year, the Fund returned 4.79% (Investor Class) and 4.85% (Institutional Class) versus 3.87% for the Index.

Market Environment:

2015 was a year characterized by volatility and pessimism. Emerging markets were at the forefront of this, whilst the influence of central bankers and policymakers became ever more frustrating. The year was dominated by monetary policy decisions, the continued collapse in prices across the commodity complex, an aggressive downward lurch in a number of emerging market currencies and a somewhat challenging slowdown underway in the world’s second-largest economy, China. On this first point, the fourth quarter saw the first interest rate increase by the U.S. Federal Reserve in over nine years. Despite a three-month delay (due to concerns about growth overseas and sluggish domestic inflation), reasonable employment data and a need to produce some future policy firepower gave Fed Chairwoman Janet Yellen the comfort to hike rates. Although arguably priced into markets, the continued capital outflow from regions including Asia still poses a threat worth monitoring.

Alongside this dollar strength, China continued its challenging transition toward a more consumer-led economy. Equity markets saw an aggressive rally during the early parts of the year, promoted by state media and fueled by retail investors and margin financing. However, like all rallies that are not based upon fundamentals, this inevitably suffered a vicious pullback and resulted in some poorly advised policy from the state. In August, the Communist Party also poorly communicated an alteration in its exchange rate mechanism, making it more driven by market moves. This resulted in a 1.9% currency devaluation relative to the U.S. dollar and is emblematic of the issues faced by the macroeconomic conundrum of the “impossible trinity.”*

The above factors meant that there was little joy for Asian investors as growth and earnings expectations were continually revised down and capital outflows caused markets across the region to perform poorly. Southeast Asia was the weakest set of geographies given plunges in currencies, but North Asia fared only slightly better during a tough year for the asset class.

Performance Contributors and Detractors:

Although returns for the full year were disappointing, the fourth quarter did provide some relief as markets recovered slightly. The largest contributor to returns during the quarter came from our holdings in the financials sector. Although Indonesia’s economy has suffered from weak leadership and the collapse in commodity prices, Bank Rakyat Indonesia (BRI) was particularly strong as prior concerns around the extent of nonperforming loans for BRI appear to have been misplaced as the weakening in asset quality may have peaked. Management has also done a strong job in reducing funding costs to maintain margins. The Fund’s largest holding, AIA Group, also delivered solid performance as underlying performance has been less hindered by the slowdown in China and FX movements across Southeast Asia than initially feared.

On an individual stock basis, Chinese search engine Baidu was the largest contributor to returns over the quarter, recovering some losses from earlier in the year. The stock reacted positively to news that management decided to sell their majority stake in online travel company Qunar to rival Ctrip.com International at

 

* The Impossible Trinity—also known as the Trilemma or Unholy Trinity—is the hypothesis in international economics that a country may choose any two, but not all of the following three policy goals—monetary independence, exchange rate stability and free movement of capital.

(continued)

 

 

matthewsasia.com  |  800.789.ASIA      29   
1 Actual 2015 expense ratios.
2 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.25% first by waiving class specific expenses (i.e., Rule 12b-1 fees or shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 1.25% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 1.25%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
3 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.


Table of Contents
         
PERFORMANCE AS OF DECEMBER 31, 2015                            
 

 

    

 

      

 

     Average Annual
Total Returns
      

 

 
     3 Months      1 Year      Since
Inception
     Inception
Date
 
Investor Class (MAFSX)      4.79%         -12.07%         -4.12%         4/30/13   
Institutional Class (MIFSX)      4.85%         -11.96%         -3.89%         4/30/13   
MSCI AC Asia ex Japan Index4      3.87%         -8.90%         -0.89%      
Lipper Pacific ex Japan Funds Category Average5      4.37%         -6.61%         -1.60%      

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares 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. For the Fund’s most recent month-end performance visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data does not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of Fund shares. Values are in US$.

 

  4 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector      Country      % of Net Assets  
AIA Group, Ltd.    Financials      China/Hong Kong        6.0%   
Singapore Telecommunications, Ltd.    Telecommunication Services      Singapore        4.2%   
Techtronic Industries Co., Ltd.    Consumer Discretionary      China/Hong Kong        4.1%   
Jardine Matheson Holdings, Ltd.    Industrials      China/Hong Kong        4.1%   
Baidu, Inc.    Information Technology      China/Hong Kong        3.8%   
Samsonite International SA    Consumer Discretionary      China/Hong Kong        3.8%   
Taiwan Semiconductor Manufacturing Co., Ltd.    Information Technology      Taiwan        3.6%   
Mead Johnson Nutrition Co.    Consumer Staples      USA        3.4%   
CK Hutchison Holdings, Ltd.    Industrials      China/Hong Kong        3.3%   
Tata Motors, Ltd.    Consumer Discretionary      India        3.3%   
% OF ASSETS IN TOP TEN                39.6%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

30    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Focus Fund

Portfolio Manager Commentary (unaudited) (continued)

a premium. In the transaction, Baidu will maintain a 25% stake in the enlarged entity and end the price war between the two, restoring profitability. Further, consolidation in the online to offline market has also helped sentiment.

On a full-year basis, Hong Kong’s Hutchison Whampoa, an industrial conglomerate based in the city-state, was among the few outright positive contributors to Fund performance. The firm rose as it restructured the holding company in order to simplify and realize value. Power tool and floor care appliance manufacturer, Techtronic, also performed well as the company appears to still be gaining some market share due to its impressive technology within its tools. The depreciation of the renminbi also helped the stock as it likely lowers the company’s cost base and may allow further margin expansion.

During the quarter, and indeed for the full year, the largest detractors to performance came from our holdings in Thailand. Kasikornbank Public suffered as the company delivered weaker-than-expected earnings. This can be partially attributed to conservatism as management pared back loan growth amidst an environment of weakening asset quality, but it is also due to an asset impairment on IT software. More frustrating has been our holding in Intouch Holdings, the parent company of Advanced Info Services—a market leader in Thai telecoms. The stock was hurt as the firm encountered disastrous auctions for additional spectrum, with a new competitor winning these at an unpalatably high bid and Advanced missing out. This will likely structurally alter the return profile for this market.

Beyond Thailand, and as we’ve discussed throughout the year, the Fund’s holdings in Southeast Asia have been the largest detractors to performance. This can largely be attributed to currency depreciation and overall market weakness, although certain holdings such as Indofood Sukses Makmur and Jardine Matheson struggled as they failed to deliver on earnings.

Notable Portfolio Changes:

The Fund added one new name during the quarter—Korean casino Kangwon Land. The company runs the only casino that local Korean citizens can gamble in, providing it with a large and sustainable economic moat. Although restricted by the number of tables and slots that it can operate, Kangwon Land has been able to get an increase in both and this, alongside visitation increases through non-gaming activities on offer, should drive solid earnings and free cash flow growth. Further, the company maintains an incredibly strong net cash balance sheet and valuations are attractive at around 10x EV/EBITDA and a 2.8% dividend yield.

Outlook:

Looking ahead to 2016, equity markets are likely to remain volatile at best. In Europe, the deflationary challenges that are well-documented are still in place despite some further easing steps that have been taken by the European Central Bank. In the U.S., economic data has been reasonable, but it is unlikely that either geography will have strong enough aggregate demand to drive global trade volumes meaningfully higher and help Asian exports. It is also true that leverage has increased substantially throughout most of Asia and, although the currency mismatches of days gone by are no longer present to the same extent, we cannot ignore the risks involved with such change. Further, Asia’s historically strong driver of sustainable economic growth—productivity gains—has also been sputtering, with disappointment on this front throughout much of the region, including major economies China and India despite prior high hopes.

This somewhat gloomy backdrop has manifested itself in a contraction in the return profile for many Asian businesses, leading to a market that is now expecting just 5% growth in earnings. The other side of this equation is, of course, the valuations that one pays for this growth profile. Although bulls may argue that Asia is “cheap” at around 11x forward P/E, those of us that are scouting for quality companies to own over the long term find that many of these businesses still trade at much higher multiples and are, in fact, still fairly expensive. Despite these issues, the Fund has managed to assemble a collection of 31 companies that are currently trading at a very healthy 13.8x forward P/E for what we believe are high caliber businesses with true economic moats that can wade through such challenging times.

 

Enterprise Multiple (EV/EBITDA) is a ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account – an item which other multiples like the P/E ratio do not include.
The P/E figures represent the Weighted Harmonic Average P/E—which measures the price/earnings ratio of the Fund’s entire portfolio, excluding negative earners—weighted by the size of the company’s position within the portfolio. P/E estimates are forward looking. There is no guarantee that portfolio composition will remain unchanged or P/E estimates will be realized.
 
COUNTRY ALLOCATION (%)7  

China/Hong Kong

    38.0   
Singapore     9.7   
Malaysia     8.5   
United States     6.4   
South Korea     5.7   
Australia     5.7   
Indonesia     5.0   
Thailand     4.2   
Taiwan     3.6   
India     3.2   
Japan     3.1   
Switzerland     3.1   
Cash and Other Assets, Less Liabilities     3.8   

 

 
SECTOR ALLOCATION (%)  
Financials     24.0   
Consumer Discretionary     23.0   
Information Technology     13.5   
Consumer Staples     11.2   
Industrials     10.1   
Telecommunication Services     8.6   
Health Care     5.8   
Cash and Other Assets, Less Liabilities     3.8   

 

   
MARKET CAP EXPOSURE (%)8      
Mega Cap (over $25B)     42.3   
Large Cap ($10B–$25B)     17.6   
Mid Cap ($3B–10B)     27.8   
Small Cap (under $3B)     8.5   
Cash and Other Assets, Less Liabilities     3.8   

 

7 Not all countries where the Fund may invest are included in the benchmark index.

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.
 

 

matthewsasia.com  |  800.789.ASIA      31   


Table of Contents

Matthews Asia Focus Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 96.2%

 

     Shares     Value  
CHINA/HONG KONG: 38.0%    

AIA Group, Ltd.

    112,200        $670,404   

Techtronic Industries Co., Ltd.

    113,000        457,452   

Jardine Matheson Holdings, Ltd.

    9,400        455,219   

Baidu, Inc. ADRb

    2,237        422,882   

Samsonite International SA

    139,800        418,978   

CK Hutchison Holdings, Ltd.

    27,228        365,997   

Yum! Brands, Inc.

    4,950        361,597   

HSBC Holdings PLC

    42,400        335,240   

VTech Holdings, Ltd.

    31,800        329,251   

Hang Lung Group, Ltd.

    76,000        246,462   

Cheung Kong Property Holdings, Ltd.

    28,728        185,841   
   

 

 

 

Total China/Hong Kong

      4,249,323   
   

 

 

 
   
SINGAPORE: 9.7%                

Singapore Telecommunications, Ltd.

    183,000        471,823   

United Overseas Bank, Ltd.

    22,500        310,203   

Singapore Technologies Engineering, Ltd.

    144,500        305,457   
   

 

 

 

Total Singapore

      1,087,483   
   

 

 

 
   
MALAYSIA: 8.5%                

Genting Malaysia BHD

    333,100        339,342   

Guinness Anchor BHD

    100,200        308,375   

Axiata Group BHD

    199,100        296,706   
   

 

 

 

Total Malaysia

      944,423   
   

 

 

 
   
UNITED STATES: 6.4%                

Mead Johnson Nutrition Co.

    4,868        384,329   

ResMed, Inc.

    6,100        327,509   
   

 

 

 

Total United States

      711,838   
   

 

 

 
   
SOUTH KOREA: 5.7%                

Samsung Electronics Co., Ltd.

    329        350,905   

Kangwon Land, Inc.

    8,811        287,577   
   

 

 

 

Total South Korea

      638,482   
   

 

 

 
   
AUSTRALIA: 5.7%                

Insurance Australia Group, Ltd.

    78,798        316,453   

Ansell, Ltd.

    20,326        314,995   
   

 

 

 

Total Australia

      631,448   
   

 

 

 
   
INDONESIA: 5.0%                

PT Bank Rakyat Indonesia Persero

    421,400        345,843   

PT Indofood Sukses Makmur

    578,400        215,292   
   

 

 

 

Total Indonesia

      561,135   
   

 

 

 
   
THAILAND: 4.2%                

Kasikornbank Public Co., Ltd.

    65,500        271,848   

Intouch Holdings Public Co., Ltd. NVDR

    133,900        192,845   
   

 

 

 

Total Thailand

      464,693   
   

 

 

 
   
TAIWAN: 3.6%                

Taiwan Semiconductor Manufacturing Co., Ltd.

    94,000        405,539   
   

 

 

 

Total Taiwan

      405,539   
   

 

 

 
     Shares     Value  
INDIA: 3.2%    

Tata Motors, Ltd.b

    61,471        $363,328   
   

 

 

 

Total India

      363,328   
   

 

 

 
   
JAPAN: 3.1%                

Japan Tobacco, Inc.

    9,500        348,781   
   

 

 

 

Total Japan

      348,781   
   

 

 

 
   
SWITZERLAND: 3.1%                

Cie Financiere Richemont SA

    4,793        343,049   
   

 

 

 

Total Switzerland

      343,049   
   

 

 

 
   
TOTAL INVESTMENTS: 96.2%             10,749,522   

(Cost $12,210,811c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 3.8%
      425,326   
   

 

 

 

NET ASSETS: 100.0%

      $11,174,848   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $12,283,228 and net unrealized depreciation consists of:

 

Gross unrealized appreciation

    $361,319   

Gross unrealized depreciation

    (1,895,025
 

 

 

 

Net unrealized depreciation

    ($1,533,706
 

 

 

 

 

ADR American Depositary Receipt

 

BHD Berhad

 

NVDR Non-voting Depositary Receipt

See accompanying notes to financial statements.

 

 

32    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Taizo Ishida  

Lead Manager

 
Sharat Shroff, CFA  

Co-Manager

 
FUND FACTS
    Investor   Institutional

Ticker

  MPACX   MIAPX

CUSIP

  577130867   577130776

Inception

  10/31/03   10/29/10

NAV

  $21.09   $21.24

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

  1.11%   0.91%

Portfolio Statistics

Total # of Positions

    57

Net Assets

    $776.9 million

Weighted Average Market Cap

  $18.8 billion

Portfolio Turnover2

      29.51%

Benchmark

MSCI AC Asia Pacific Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Asia. Asia consists of all countries and markets in Asia, and includes developed, emerging and frontier countries and markets in the Asian region. The Fund may also invest in the convertible securities, of any duration or quality, of Asian companies.

Matthews Asia Growth Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Asia Growth Fund returned –0.05% (Investor Class) and 0.24% (Institutional Class) while its benchmark, the MSCI All Country Asia Pacific Index, returned –1.68%. For the fourth quarter of the year, the Fund returned 11.35% (Investor Class) and 11.50% (Institutional Class) versus 6.99% for the Index.

Market Environment:

From the beginning of the fourth quarter, Asia’s stock markets produced some positive returns with good macroeconomic data coming out of China, and with expectations over an “early” U.S. Federal Reserve rate hike having subsided. These factors relieved some concerns over global emerging markets. Indonesia, one of the hardest-hit markets, recovered strongly in October due in part to an improved perception of President Joko “Jokowi” Widodo’s administration. The president had struggled in his first year in office. The Indonesian rupiah also rallied 6.3% during the period. This strong market rally was not limited to emerging Asia. We also saw developed areas of Asia, such as Japan and Australia, do well.

Performance Contributors and Detractors:

In the fourth quarter, the top contributors to Fund performance were a mix of year-long laggards—Chinese e-commerce firms Baidu and Alibaba and in Indonesia, Bank Rakyat (Indonesian Bank) and Ace Hardware—alongside firms that performed solidly throughout 2015, such as Japanese medical device maker Sysmex.

Among the top detractors to Fund performance were some of our Indian holdings, including two major generic drug makers Sun Pharmaceutical Industries and Lupin. Both firms suffered after falling short of earnings expectations. They stumbled as a result of a deterioration in the U.S. market, the largest source of income for both companies. Another Indian holding, beauty and health care product maker Emami, also suffered a setback in the fourth quarter due to a slowdown in sales and rising operating cost. However, the firm benefited Fund performance for the one-year period.

Notable Portfolio Changes:

We initiated a position in Square Pharmaceuticals, Bangladesh’s largest pharmaceutical company, in the fourth quarter. In terms of growth and profitability, we believe the company is among the best drug companies in Asia with very reasonable valuations. Another notable portfolio change late in the year was our decision to exit Sands China, a developer and operator of resorts and casinos in Macau, which had been a portfolio holding since 2010. We had patiently awaited a turnaround in Macau as we expect it to transform from a market driven by VIP gamblers to one more driven by mass market tourists. While we do believe this is occurring and will continue to occur, the transition has been rocky in part due to mainland China’s swift and sudden anticorruption measures. Ultimately, we decided to exit the position to deploy funds for better opportunities elsewhere.

Outlook:

The negative macroeconomic forces held over from 2015—a strong U.S. dollar, weak commodity prices, slow global economy and rising debt—appear likely to continue into 2016. A silver lining could be cheap oil prices, which may continue to support trade balance for most Asian countries. Lower commodity and food prices should keep inflation low, while GDP could still rise in developing parts of Asia. Japan is still struggling to shed its decades-long deflation, yet the tight labor market with improved corporate profits is likely to push up wages and private capital spending. In the absence of strong growth anywhere, the focus once again

(continued)

 
1 Actual 2015 expense ratios.
2 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

matthewsasia.com  |  800.789.ASIA      33   


Table of Contents
               
PERFORMANCE AS OF DECEMBER 31, 2015                                                 
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      1 Year      3 Years      5 Years      10 Years      Since
Inception
     Inception
Date
 
Investor Class (MPACX)      11.35%         -0.05%         6.58%         4.42%         6.48%         8.87%         10/31/03   
Institutional Class (MIAPX)      11.50%         0.24%         6.81%         4.62%         n.a.         5.01%         10/29/10   
MSCI AC Asia Pacific Index3      6.99%         -1.68%         3.42%         1.96%         3.37%         6.44% 4    
Lipper Pacific Region Funds Category Average5      5.29%         -3.12%         1.96%         2.37%         3.88%         6.67% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.
  4 Calculated from 10/31/03.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector      Country      % of Net Assets  

Sysmex Corp.

   Health Care      Japan        4.5%   

Omron Corp.

   Information Technology      Japan        3.5%   

Shenzhou International Group Holdings, Ltd.

   Consumer Discretionary      China/Hong Kong        3.5%   

Baidu, Inc.

   Information Technology      China/Hong Kong        3.4%   

PT Bank Rakyat Indonesia Persero

   Financials      Indonesia        3.3%   

Emami, Ltd.

   Consumer Staples      India        3.0%   

Kakaku.com, Inc.

   Information Technology      Japan        3.0%   

ORIX Corp.

   Financials      Japan        2.7%   

M3, Inc.

   Health Care      Japan        2.6%   

Daikin Industries, Ltd.

   Industrials      Japan        2.6%   

% OF ASSETS IN TOP TEN

               32.1%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

34    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Growth Fund

Portfolio Manager Commentary (unaudited) (continued)

 

should be strictly on company fundamentals. One major trend we are seeing today—on both factory floors and in the service industry—is a move toward automation, which provides us with a good place to look for new growth areas for this strategy.

   
COUNTRY ALLOCATION (%)7,8      

Japan

    45.8   

China/Hong Kong

    11.4   

India

    11.2   

Indonesia

    9.6   

Philippines

    5.2   

Australia

    3.6   

Sri Lanka

    2.8   

Vietnam

    1.6   

Taiwan

    1.5   

Thailand

    1.5   

South Korea

    1.2   

Pakistan

    1.0   

Malaysia

    1.0   

Bangladesh

    0.5   
Cash and Other Assets, Less Liabilities     2.1   

 

   
SECTOR ALLOCATION (%)8      

Consumer Staples

    20.3   

Consumer Discretionary

    18.0   

Health Care

    15.6   

Financials

    14.4   

Information Technology

    13.7   

Industrials

    12.1   

Materials

    2.2   

Energy

    1.6   

Cash and Other Assets, Less Liabilities

    2.1   

 

   
MARKET CAP EXPOSURE (%)8      

Mega Cap (over $25B)

    16.7   

Large Cap ($10B–$25B)

    25.0   

Mid Cap ($3B–10B)

    30.7   

Small Cap (under $3B)

    25.5   

Cash and Other Assets, Less Liabilities

    2.1   

 

7 Not all countries where the Fund may invest are included in the benchmark index.

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.
 

 

matthewsasia.com  |  800.789.ASIA      35   


Table of Contents

Matthews Asia Growth Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 97.9%

 

     Shares     Value  
JAPAN: 45.8%    

Sysmex Corp.

    549,900        $35,273,163   

Omron Corp.

    824,800        27,504,534   

Kakaku.com, Inc.

    1,183,400        23,277,009   

ORIX Corp.

    1,497,500        21,007,625   

M3, Inc.

    966,900        20,047,883   

Daikin Industries, Ltd.

    274,000        19,953,141   

Toyota Motor Corp.

    302,900        18,652,285   

Nitto Denko Corp.

    233,500        17,046,827   

Nidec Corp.

    218,800        15,866,499   

Seven & I Holdings Co., Ltd.

    340,800        15,603,378   

Komatsu, Ltd.

    925,100        15,136,904   

Glory, Ltd.

    480,100        14,739,886   

Pigeon Corp.

    503,400        12,212,530   

COOKPAD, Inc.

    570,600        12,112,926   

Rinnai Corp.

    132,100        11,704,521   

Start Today Co., Ltd.

    358,300        11,534,113   

Ariake Japan Co., Ltd.

    201,700        11,158,782   

Calbee, Inc.

    263,500        11,127,354   

Benefit One, Inc.

    433,800        10,141,703   

FANUC Corp.

    53,000        9,131,363   

Unicharm Corp.

    384,800        7,858,260   

Daiken Medical Co., Ltd.

    911,500        7,764,108   

Dexerials Corp.

    631,700        6,766,712   
   

 

 

 

Total Japan

  

    355,621,506   
   

 

 

 
   
CHINA/HONG KONG: 11.4%                

Shenzhou International Group Holdings, Ltd.

    4,792,000        27,461,901   

Baidu, Inc. ADRb

    139,000        26,276,560   

China Lodging Group, Ltd. ADS

    366,800        11,466,168   

Luk Fook Holdings International, Ltd.

    3,713,000        7,842,876   

Autohome, Inc. ADRb

    202,400        7,067,808   

Shanghai Haohai Biological Technology Co., Ltd. H Sharesb

    734,500        4,811,513   

Alibaba Group Holding, Ltd. ADRb

    45,100        3,665,277   
   

 

 

 

Total China/Hong Kong

  

    88,592,103   
   

 

 

 
   
INDIA: 11.2%                

Emami, Ltd.

    1,551,001        23,366,154   

HDFC Bank, Ltd.

    1,102,893        18,013,151   

Lupin, Ltd.

    635,783        17,590,774   

ITC, Ltd.

    2,970,516        14,688,662   

Sun Pharmaceutical Industries, Ltd.

    666,500        8,244,756   

Multi Commodity Exchange of India, Ltd.

    342,565        4,775,030   
   

 

 

 

Total India

  

    86,678,527   
   

 

 

 
   
INDONESIA: 9.6%                

PT Bank Rakyat Indonesia Persero

    31,353,900        25,732,158   

PT Astra International

    43,107,700        18,568,752   

PT Indofood CBP Sukses Makmur

    14,320,100        13,853,380   

PT Ace Hardware Indonesia

    194,172,500        11,548,629   

PT Arwana Citramulia

    145,017,700        5,229,812   
   

 

 

 

Total Indonesia

  

    74,932,731   
   

 

 

 
   
     Shares     Value  
PHILIPPINES: 5.2%    

Vista Land & Lifescapes, Inc.

    117,224,100        $12,870,202   

Universal Robina Corp.

    2,873,600        11,339,325   

Jollibee Foods Corp.

    2,007,890        9,321,019   

Emperador, Inc.

    37,942,500        7,216,775   
   

 

 

 

Total Philippines

  

    40,747,321   
   

 

 

 
   
AUSTRALIA: 3.6%                

CSL, Ltd.

    203,098        15,484,087   

Oil Search, Ltd.

    2,632,693        12,814,215   
   

 

 

 

Total Australia

  

    28,298,302   
   

 

 

 
   
SRI LANKA: 2.8%                

Sampath Bank PLC

    7,897,235        13,577,222   

Lanka Orix Leasing Co. PLCb

    12,121,473        7,898,915   
   

 

 

 

Total Sri Lanka

  

    21,476,137   
   

 

 

 
   
VIETNAM: 1.6%                

Vietnam Dairy Products JSC

    2,164,300        12,303,603   
   

 

 

 

Total Vietnam

  

    12,303,603   
   

 

 

 
   
TAIWAN: 1.5%                

St. Shine Optical Co., Ltd.

    412,000        8,245,860   

Sinmag Equipment Corp.

    1,220,674        3,850,265   
   

 

 

 

Total Taiwan

  

    12,096,125   
   

 

 

 
   
THAILAND: 1.5%                

Major Cineplex Group Public Co., Ltd.

    11,921,000        11,641,461   
   

 

 

 

Total Thailand

  

    11,641,461   
   

 

 

 
   
SOUTH KOREA: 1.2%                

Orion Corp.

    9,402        9,286,943   
   

 

 

 

Total South Korea

  

    9,286,943   
   

 

 

 
   
PAKISTAN: 1.0%                

Habib Bank, Ltd.

    4,001,000        7,644,819   
   

 

 

 

Total Pakistan

  

    7,644,819   
   

 

 

 
   
MALAYSIA: 1.0%                

7-Eleven Malaysia Holdings BHD

    21,204,100        7,605,523   
   

 

 

 

Total Malaysia

  

    7,605,523   
   

 

 

 
   
BANGLADESH: 0.5%                

Square Pharmaceuticals, Ltd.

    1,200,000        3,879,776   
   

 

 

 

Total Bangladesh

  

    3,879,776   
   

 

 

 
   
TOTAL INVESTMENTS: 97.9%             760,804,877   

(Cost $625,650,734c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 2.1%
      16,050,886   
   

 

 

 

NET ASSETS: 100.0%

      $776,855,763   
   

 

 

 
 

 

36    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Growth Fund

December 31, 2015

Schedule of Investmentsa (continued)

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $631,416,920 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $184,661,011   

Gross unrealized depreciation

    (55,273,054
 

 

 

 

Net unrealized appreciation

    $129,387,957   
 

 

 

 

 

ADR American Depositary Receipt

 

ADS American Depositary Share

 

BHD Berhad

 

JSC Joint Stock Co.

See accompanying notes to financial statements.

 

 

matthewsasia.com  |  800.789.ASIA      37   


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Sharat Shroff, CFA  

Lead Manager

 
Rahul Gupta  

Co-Manager

 
FUND FACTS
    Investor   Institutional

Ticker

  MAPTX   MIPTX

CUSIP

  577130107   577130834

Inception

  9/12/94   10/29/10

NAV

  $23.54   $23.52

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.09%

 

0.91%

After Fee Waiver and Reimbursement2

 

1.07%

 

0.89%

Portfolio Statistics

   

Total # of Positions

    62

Net Assets

    $6.7 billion

Weighted Average Market Cap

 

$30.6 billion

Portfolio Turnover3

     

12.56%

Benchmark

MSCI AC Asia ex Japan Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Asia ex Japan, which consists of all countries and markets in Asia excluding Japan, but including all other developed, emerging and frontier countries and markets in the Asian region.

 

Matthews Pacific Tiger Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Pacific Tiger Fund returned –1.30% (Investor Class) and –1.15% (Institutional Class), outperforming its benchmark, the MSCI All Country Asia ex Japan Index, which returned –8.90%. For the fourth quarter of the year, performance rose 8.36% (Investor Class) and 8.39% (Institutional Class) versus 3.87% for the Index.

Market Environment:

The weak Asian equity performance in 2015 reflected growing investor concerns over leverage in the region, weak outlook for growth and the status of structural reforms by policymakers aiming to boost productivity. China continued to be the “poster child” for high levels of leverage—credit as a proportion of its economy has continued to increase, and while the pace of new loans is decelerating, it isn’t decelerating quickly enough. The decision by the People’s Bank of China (PBOC) to change the mechanism for setting the exchange rate for the renminbi ignited concerns over a widespread devaluation of other Asian currencies, and the resulting negative impact on the ability of corporations to meet their foreign currency liabilities.

As a consequence, the currencies of Malaysia, Indonesia, and Thailand depreciated significantly against the U.S. dollar. While Malaysia and Thailand face the brunt of slowing growth and high leverage, the Indonesian economy’s reliance on the U.S. dollar has not decreased in the past few years. And with slowing commodity exports, investors have raised concerns about the funding of its current account deficit.

Among the few Asian markets to finish the year on a positive note was Vietnam, led by an improving growth outlook, and efforts at structural reforms like privatizing some of the state owned enterprises (SOE).

Amid significant macro-induced volatility, the outcome of stocks seemed to be guided by fundamental factors. The returns on equity for the health care sector expanded and hence it saw some of the best-performing stocks in the region while energy-related stocks were among the worst performing.

Performance Contributors and Detractors:

Perhaps the most notable aspect of the operating performance of Asian companies in 2015 was the growing divergence in economic fortunes of companies across different countries and sectors—even between companies operating in the same country and sector. The Chinese consumption story continues to get better as it is starting to broaden out from the eastern seaboard to interior parts of the country, helped by sustained increases in income and better availability of goods through e-commerce. Some of the portfolio’s holdings, like South Korean cosmetics maker Amorepacific and confectionery maker Orion, are well-positioned to participate in this trend, and were among important contributors to Fund performance.

The portfolio also benefited from a trend of privatizations affecting holdings like Keppel Land and WuXi PharmaTech, which perhaps reflects the view that the market was not appropriately valuing these businesses.

By far, the biggest drag on Fund performance came from our utilities holdings in India and Indonesia. These firms were relatively more exposed to the drop in oil prices, and the uncertainty stemming from the regulatory tariff on natural gas.

(continued)

 
1 Actual 2015 expense ratios.
2 Matthews has contractually agreed to waive a portion of its advisory fee and administrative and shareholder services fee if the Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of the Fund that are over $3 billion, the advisory fee rate and the administrative and shareholder services fee rate for the Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%. Any amount waived by Matthews pursuant to this agreement may not be recouped by Matthews. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time (i) by the Trust on behalf of the Fund or by the Board of Trustees upon 60 days’ prior written notice to Matthews; or (ii) by Matthews upon 60 days’ prior written notice to the Trust, in each case without payment of any penalty.
3 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

38    MATTHEWS ASIA FUNDS


Table of Contents
 
PERFORMANCE AS OF DECEMBER 31, 2015  
 

 

   3 Months      1 Year      Average Annual Total Returns      Inception
Date
 
           3 Years      5 Years      10 Years      Since
Inception
    

Investor Class (MAPTX)

     8.36%         -1.30%         4.57%         4.15%         9.19%         8.52%         9/12/94   

Institutional Class (MIPTX)

     8.39%         -1.15%         4.74%         4.33%         n.a.         4.32%         10/29/10   

MSCI AC Asia ex Japan Index4

     3.87%         -8.90%         -0.35%         0.14%         6.46%         3.50% 5    

Lipper Pacific ex Japan Funds Category Average6

     4.37%         -6.61%         -0.13%         0.80%         6.06%         5.54% 5    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

 

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  4 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  5 Calculated from 8/31/94.

 

  6 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS7                     
     Sector      Country      % of Net Assets  

Naver Corp.

   Information Technology      South Korea        3.5%   

Baidu, Inc.

   Information Technology      China/Hong Kong        3.1%   

Orion Corp.

   Consumer Staples      South Korea        3.0%   

Dongbu Insurance Co., Ltd.

   Financials      South Korea        2.9%   

Kotak Mahindra Bank, Ltd.

   Financials      India        2.7%   

DKSH Holding, Ltd.

   Industrials      Switzerland        2.6%   

Central Pattana Public Co., Ltd.

   Financials      Thailand        2.6%   

Ping An Insurance Group Co. of China, Ltd.

   Financials      China/Hong Kong        2.5%   

Tata Power Co., Ltd.

   Utilities      India        2.5%   

Amorepacific Corp.

   Consumer Staples      South Korea        2.4%   

% OF ASSETS IN TOP TEN

               27.8%   

 

  7 Holdings may combine more than one security from same issuer and related depositary receipts.

 

matthewsasia.com  |  800.789.ASIA      39   


Table of Contents
   
COUNTRY ALLOCATION (%)8,9      

China/Hong Kong

    32.2   

India

    19.8   

South Korea

    17.0   

Indonesia

    6.4   

Taiwan

    5.8   

Thailand

    5.1   

Malaysia

    3.6   

Philippines

    2.8   

Switzerland

    2.6   

Vietnam

    2.4   

United States

    1.2   

Singapore

    0.3   

Cash and Other Assets, Less Liabilities

    0.8   

 

   
SECTOR ALLOCATION (%)9      

Financials

    27.5   

Consumer Staples

    20.4   

Information Technology

    18.4   

Health Care

    8.5   

Consumer Discretionary

    8.3   

Utilities

    5.5   

Industrials

    5.3   

Telecommunication Services

    3.6   

Materials

    1.7   

Cash and Other Assets, Less Liabilities

    0.8   

 

   
MARKET CAP EXPOSURE (%)9      

Mega Cap (over $25B)

    25.5   

Large Cap ($10B–$25B)

    31.3   

Mid Cap ($3B–10B)

    33.5   

Small Cap (under $3B)

    8.9   

Cash and Other Assets, Less Liabilities

    0.8   

 

8 Not all countries where the Fund may invest are included in the benchmark index.

 

9 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

Matthews Pacific Tiger Fund

Portfolio Manager Commentary (unaudited) (continued)

Notable Portfolio Changes:

The activity levels in the portfolio were a bit elevated in 2015, led by shareholder redemptions. In order to meet these redemptions, securities that had been long held in the portfolio had to be sold, generating distributions that are higher than is typical for the Fund. There were a few positions that were eliminated during the quarter for a variety of reasons. Some of the activity was dictated by privatizations, however in other cases, like that of Dongfeng Motors, we exited the holding in order to replace it with automotive glass supplier Fuyao Glass, which in our view has an opportunity to claim significant market share, both domestically and globally. In a similar vein, we decided to replace South Korea health care firm Yuhan with Tasly Pharmaceuticals, a firm that is trying to introduce traditional Chinese medicine in more contemporary forms to domestic and international markets.

Last year also marked a foray into A-share investment for the portfolio. While we acknowledge the higher volatility and uneven liquidity in the market, the range of businesses, especially in sectors like consumer services and health care, is much more. We anticipate that the portfolio’s exposure to A-shares is likely to be modest, and should be looked at as another means of accessing services-led growth in China.

Outlook:

The macro headwinds for Asian economies, especially for investment spending, have not yet begun to abate. Partly, this is reflective of weak global demand, which may not return in a hurry due to long-term structural changes in the global economy. Furthermore, the biggest economy in the region, China, is undoubtedly slowing. But the nature of that growth is also shifting as there is an attempt by the authorities to facilitate better allocation of capital, which will require a willingness by the authorities to further liberate its financial markets. After deregulation of land and labor, this is perhaps the final and most difficult frontier for the authorities in China. For all its gaffes, the PBOC has fully liberalized interest rates, and has also abandoned the U.S. dollar peg in favor of a more flexible trade-weighted basket. Even with good intentions, the country is bound to face considerable risks in managing the transition to free and open markets, which are further exacerbated by the poor communication from the Chinese regulators.

While the macro picture in China may remain unclear, our interaction with businesses in China causes us to be more optimistic. It has become ever more noticeable that the progressive management teams are starting to think about factors like management incentive plans, quality of products, branding, environmental safety and rising competition—all ingredients for building better service-oriented franchises. Unlike in the past, there is much more of a multidisciplinary approach to building stronger businesses that are exactly the sort of changes that we like to see.

Meanwhile in the rest of the region, several of the regulators and policymakers—especially in countries like India and Indonesia—have been trying to build the right kind of institutions and policy frameworks. Efforts to curb inflation at the expense of growth, for example, were much-desired and have achieved the right kind of results. Much more needs to be done, however. At current valuations, investors do not seem to be expecting a sharp recovery in growth or a huge upside from policymaking.

 

 

40    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Pacific Tiger Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 99.2%

 

     Shares     Value  
CHINA/HONG KONG: 32.2%    

Baidu, Inc. ADRb

    1,081,800        $204,503,472   

Ping An Insurance Group Co. of China, Ltd. H Shares

    30,743,000        169,538,574   

Hengan International Group Co., Ltd.

    16,483,500        154,749,309   

Sinopharm Group Co., Ltd. H Shares

    36,984,400        147,650,035   

Lenovo Group, Ltd.

    138,394,000        139,666,324   

China Resources Land, Ltd.

    47,814,000        138,359,478   

China Mobile, Ltd. ADR

    2,215,026        124,772,414   

Tencent Holdings, Ltd.

    5,886,500        115,257,589   

AIA Group, Ltd.

    18,640,800        111,380,332   

Alibaba Group Holding, Ltd. ADRb

    1,291,700        104,976,459   

Dairy Farm International Holdings, Ltd.

    15,954,946        96,800,620   

China Resources Beer Holdings Co., Ltd.

    43,802,000        93,459,685   

Yum! Brands, Inc.

    1,174,410        85,790,651   

China Vanke Co., Ltd. H Sharesc

    28,247,704        82,848,600   

Fuyao Glass Industry Group Co., Ltd. H Sharesb

    31,836,000        76,461,314   

Inner Mongolia Yili Industrial Group Co., Ltd. A Shares

    28,190,596        70,300,362   

Hang Lung Group, Ltd.

    21,553,000        69,894,596   

Hong Kong Exchanges and Clearing, Ltd.

    2,603,000        66,310,879   

Swire Pacific, Ltd. A Share Class

    4,513,000        50,410,760   

Tasly Pharmaceutical Group Co., Ltd. A Shares

    8,120,247        50,406,148   
   

 

 

 

Total China/Hong Kong

  

    2,153,537,601   
   

 

 

 
   
INDIA: 19.8%                

Kotak Mahindra Bank, Ltd.

    16,873,409        182,763,452   

Tata Power Co., Ltd.†

    165,620,436        169,173,116   

Sun Pharmaceutical Industries, Ltd.

    12,078,258        149,410,790   

Titan Co., Ltd.

    24,797,915        129,646,093   

GAIL India, Ltd.

    22,282,108        125,991,021   

Container Corp. of India, Ltd.

    5,471,996        108,455,075   

Housing Development Finance Corp., Ltd.

    5,435,685        103,385,866   

HDFC Bank, Ltd.

    6,223,409        101,644,678   

ITC, Ltd.

    18,735,000        92,641,170   

Dabur India, Ltd.

    21,117,482        88,233,214   

Thermax, Ltd.

    5,310,034        72,636,281   
   

 

 

 

Total India

  

    1,323,980,756   
   

 

 

 
   
SOUTH KOREA: 17.0%                

Naver Corp.

    417,316        232,711,838   

Orion Corp.

    203,080        200,594,798   

Dongbu Insurance Co., Ltd.

    3,249,119        194,399,593   

Amorepacific Corp.

    463,182        162,543,169   

Green Cross Corp.†

    846,872        131,010,777   

Samsung Electronics Co., Ltd.

    101,105        107,836,802   

Cheil Worldwide, Inc.b

    6,154,297        107,636,527   
   

 

 

 

Total South Korea

  

    1,136,733,504   
   

 

 

 
   
     Shares     Value  
INDONESIA: 6.4%    

PT Indofood CBP Sukses Makmur

    106,261,300        $102,798,035   

PT Telekomunikasi Indonesia Persero

    446,304,300        99,961,977   

PT Bank Central Asia

    100,580,000        96,363,608   

PT Astra International

    132,745,900        57,180,636   

PT Perusahaan Gas Negara Persero

    274,985,100        54,217,343   

PT Telekomunikasi Indonesia Persero ADR

    364,070        16,164,708   
   

 

 

 

Total Indonesia

  

    426,686,307   
   

 

 

 
   
TAIWAN: 5.8%                

Delta Electronics, Inc.

    31,251,182        146,992,518   

President Chain Store Corp.

    22,836,608        142,528,329   

Synnex Technology International Corp.†

    98,191,354        95,267,555   
   

 

 

 

Total Taiwan

  

    384,788,402   
   

 

 

 
   
THAILAND: 5.1%    

Central Pattana Public Co., Ltd.

    131,488,800        170,851,051   

The Siam Cement Public Co., Ltd.

    8,872,950        112,906,200   

Kasikornbank Public Co., Ltd.

    10,015,900        41,569,495   

Kasikornbank Public Co., Ltd. NVDR

    3,561,800        14,782,718   
   

 

 

 

Total Thailand

  

    340,109,464   
   

 

 

 
   
MALAYSIA: 3.6%                

Genting BHD

    54,370,200        92,729,209   

IHH Healthcare BHD

    47,676,300        73,066,276   

Public Bank BHD

    12,771,594        55,030,456   

IHH Healthcare BHD

    11,543,000        17,119,436   
   

 

 

 

Total Malaysia

  

    237,945,377   
   

 

 

 
   
PHILIPPINES: 2.8%                

GT Capital Holdings, Inc.

    3,897,540        109,191,837   

SM Prime Holdings, Inc.

    176,670,771        81,244,034   
   

 

 

 

Total Philippines

  

    190,435,871   
   

 

 

 
   
SWITZERLAND: 2.6%                

DKSH Holding, Ltd.

    2,738,062        172,209,114   
   

 

 

 

Total Switzerland

  

    172,209,114   
   

 

 

 
   
VIETNAM: 2.4%                

Vietnam Dairy Products JSC

    28,359,837        161,219,878   
   

 

 

 

Total Vietnam

  

    161,219,878   
   

 

 

 
   
UNITED STATES: 1.2%                

Cognizant Technology Solutions Corp. Class Ab

    1,382,600        82,983,652   
   

 

 

 

Total United States

  

    82,983,652   
   

 

 

 
   
SINGAPORE: 0.3%                

Hyflux, Ltd.†

    43,084,530        17,101,875   
   

 

 

 

Total Singapore

      17,101,875   
   

 

 

 
   
TOTAL COMMON EQUITIES             6,627,731,801   
   

 

 

 

(Cost $5,207,648,607)

   
   
 

 

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Table of Contents

Matthews Pacific Tiger Fund

December 31, 2015

Schedule of Investmentsa (continued)

WARRANTS: 0.0%

 

     Shares     Value  
MALAYSIA: 0.0%                

Genting BHD, expires 12/18/18

    12,253,875        $2,425,945   
   

 

 

 

Total Malaysia

      2,425,945   
   

 

 

 
   
TOTAL WARRANTS             2,425,945   
   

 

 

 

(Cost $5,593,674)

   
   
TOTAL INVESTMENTS: 99.2%             6,630,157,746   

(Cost $5,213,242,281d)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES : 0.8%
      55,257,608   
   

 

 

 

NET ASSETS: 100.0%

      $6,685,415,354   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Illiquid security, trading was halted at December 31, 2015.

 

d Cost for federal income tax purposes is $5,215,373,095 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $1,946,904,242   

Gross unrealized depreciation

    (532,119,591
 

 

 

 

Net unrealized appreciation

    $1,414,784,651   
 

 

 

 

 

Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

 

ADR American Depositary Receipt

 

BHD Berhad

 

JSC Joint Stock Co.

 

NVDR Non-voting Depositary Receipt

See accompanying notes to financial statements.

 

 

42    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Vivek Tanneeru    

Lead Manager

   
Winnie Chwang    

Co-Manager

   
FUND FACTS        
    Investor   Institutional

Ticker

  MASGX   MISFX

CUSIP

 

577130727

  577130719

Inception

  4/30/15   4/30/15

NAV

  $9.23   $9.17

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

9.09%

 

8.90%

After Fee Waiver and Reimbursement2

 

1.44%

 

1.25%

Portfolio Statistics

   

Total # of Positions

  54

Net Assets

  $4.9 million

Weighted Average Market Cap

 

$12.7 billion

Portfolio Turnover3

 

21.72%

Benchmark

   

MSCI AC Asia ex Japan Index

OBJECTIVE

 

 

Long term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total assets, which include borrowings for investment purposes, in the common and preferred stocks of companies of any market capitalization located in Asia that Matthews believes satisfy one or more of its environmental, social and governance (“ESG”) standards. Asia consists of all countries and markets in Asia and includes developed, emerging, and frontier countries and markets in the Asia region. The Fund may also invest in convertible securities and fixed-income securities, of any duration or quality, including high yield securities of Asian companies.

 

Matthews Asia ESG Fund

Portfolio Manager Commentary (unaudited)

The Matthews Asia ESG Fund was launched on April 30, 2015. From inception to December 31, 2015, the Fund returned –7.30% (Investor Class) and –7.14% (Institutional Class) while its benchmark, the MSCI All Country Asia ex Japan Index, returned –19.02%. For the fourth quarter of the year, the Fund returned 4.63% (Investor Class) and 4.69% (Institutional Class) versus 3.87% for the Index.

Market Environment:

Asia’s markets bounced sharply off the lows of the third quarter and posted positive returns in October, but ultimately “treaded water” for the remainder of 2015. Indonesia’s rupiah was the best-performing currency in the region in the fourth quarter, recouping some of the losses from earlier quarters in the year. Malaysia’s ringgit also recouped some of the losses toward the end of the year, but lost 17% since the Fund’s April inception, making it the worst-performing currency in Asia.

Both offshore and onshore renminbi were the worst-performing currencies during the fourth quarter in part due to renewed worries about the state of the Chinese economy and potential capital outflows. Market reaction was exacerbated by the inability of China’s central bank to effectively communicate its policy shift of measuring renminbi (RMB) against a trade-weighted currency basket of 13 currencies, and not solely against the U.S. dollar as has historically been done.

Performance Contributors and Detractors:

By country, China/Hong Kong was the biggest contributor to Fund performance during the fourth quarter while Thailand detracted most. Total Access Communication, which provides cellular mobile telephone services, was the biggest detractor during the quarter as an auction for cellular spectrum in December saw the entrance of a fourth player into the Thai telecom market. Industry dynamics have clearly deteriorated considering the increased competitive intensity along with the recapitalization of the industry’s number three player. The firm, commonly known as DTAC, has enough wireless spectrum to compete effectively for the next two years until its next spectrum renewal deadline. We believe current valuations more than adequately reflect this risk.

Korean company Hanon Systems was the biggest contributor to performance in the fourth quarter. The firm is the world’s third-largest climate control system company. In addition, the company has a fast-growing thermal management systems business, which addresses the growing need for increased vehicle fuel efficiency. In 2015, the company underwent a change in majority ownership, and its new private equity owner created a well-incentivized new management team with a strong focus on cost control that has potential upside for margins and dividend payout ratios.

Notable Portfolio Changes:

The Fund initiated a position in Phison Electronics, a Taiwanese fabless technology company that specializes in designing memory controllers. The company is benefiting from the trend of increased controller outsourcing from memory companies. The company is a strong cash flow generator with solid return metrics and offers a good

(continued)

 

 

1 Annualized expense ratios.
2 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.25%, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 1.25% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 1.25%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees or the Trust on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
3 Not annualized. The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

matthewsasia.com  |  800.789.ASIA      43   


Table of Contents
       
PERFORMANCE AS OF DECEMBER 31, 2015                     
 

 

   Actual Returns,
Not Annualized
      

 

 
     3 Months     

Since

Inception

     Inception
Date
 

Investor Class (MASGX)

     4.63%         -7.30%         4/30/15   

Institutional Class (MISFX)

     4.69%         -7.14%         4/30/15   

MSCI AC Asia ex Japan Index4

     3.87%         -19.02%      

Lipper Pacific Funds Category Average5

     5.29%         -17.22%      

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares 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. For the Fund’s most recent month-end performance visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted Monthly. The performance data does not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of Fund shares. Values are in US$.

 

  4 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector      Country      % of Net Assets  

Total Access Communication Public Co., Ltd. NVDR

   Telecommunication Services      Thailand        4.2%   

Taiwan Semiconductor Manufacturing Co., Ltd.

   Information Technology      Taiwan        3.9%   

Sino Biopharmaceutical, Ltd.

   Health Care      China/Hong Kong        3.2%   

Bharti Infratel, Ltd.

   Telecommunication Services      India        3.2%   

JD.com, Inc.

   Consumer Discretionary      China/Hong Kong        3.1%   

Bata India, Ltd.

   Consumer Discretionary      India        3.1%   

Inner Mongolia Yili Industrial Group Co., Ltd.

   Consumer Staples      China/Hong Kong        3.1%   

MTR Corp., Ltd.

   Industrials      China/Hong Kong        3.1%   

CSPC Pharmaceutical Group, Ltd.

   Health Care      China/Hong Kong        2.8%   

Puregold Price Club, Inc.

   Consumer Staples      Philippines        2.7%   

% OF ASSETS IN TOP TEN

               32.4%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

44    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia ESG Fund

Portfolio Manager Commentary (unaudited) (continued)

dividend yield. After a sell-off that came in the third quarter, the stock was attractively valued. Phison has improving ESG performance, driven by better human capital management, and is also improving its environmental and social disclosures.

The Fund exited two small positions during the fourth quarter. The first was Bumrungrad Hospital in Thailand, which grew expensive after a very good run. We also exited Sensata Technologies, a sensor company with strong exposure to increasing sensor content in diesel engines. Our expectations for the firm’s business outlook deteriorated after an emissions scandal involving Volkswagen Group.

Outlook:

Looking ahead, market volatility may continue amid an uncertain macroeconomic environment in China and the potential for sustained U.S. Federal Reserve rate hikes. But Asian consumers are increasingly focusing on products and services that have a positive environmental and social impact, while Asian governments and regulators are pushing companies to strive for better environmental and governance standards. Such a push provides an encouraging backdrop in which to pursue ESG-focused investing in Asia.

We employ a fundamental, bottom-up investment process in managing the portfolio of companies that make positive environmental, social and economic impact while generating profitable growth. Valuations in Asia appear attractive to us now and times like these often present the opportunity to buy very high-quality companies with best-in-class ESG attributes at reasonable prices. Therefore, we continue to remain very excited about the prospects of identifying and engaging attractive ESG investment opportunities in Asia.

   
COUNTRY ALLOCATION (%)7      

China/Hong Kong

    27.8   

India

    18.0   

Taiwan

    13.6   

South Korea

    8.5   

Japan

    6.1   

Philippines

    5.1   

Thailand

    4.2   

Singapore

    3.3   

Pakistan

    2.5   

Indonesia

    2.4   

Sri Lanka

    1.8   

Australia

    1.8   

Luxembourg

    1.8   

Bangladesh

    1.2   

Cash and Other Assets, Less Liabilities

    1.9   

 

   
SECTOR ALLOCATION (%)      

Health Care

    19.6   

Consumer Discretionary

    17.1   

Industrials

    15.4   

Information Technology

    10.2   

Financials

    10.1   

Telecommunication Services

    8.5   

Consumer Staples

    8.3   

Utilities

    7.6   

Materials

    1.3   

Cash and Other Assets, Less Liabilities

    1.9   

 

   
MARKET CAP EXPOSURE (%)8      

Mega Cap (over $25B)

    14.3   

Large Cap ($10B–$25B)

    14.1   

Mid Cap ($3B–10B)

    14.8   

Small Cap (under $3B)

    54.9   

Cash and Other Assets, Less Liabilities

    1.9   

 

7 Not all countries are included in the benchmark index.

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.
 

 

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Table of Contents

Matthews Asia ESG Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 98.1%

 

     Shares     Value  
CHINA/HONG KONG: 27.8%    

Sino Biopharmaceutical, Ltd.

    175,000        $158,220   

JD.com, Inc. ADRb

    4,800        154,872   

Inner Mongolia Yili Industrial Group Co., Ltd. A Shares

    61,900        154,363   

MTR Corp., Ltd.

    31,000        153,072   

CSPC Pharmaceutical Group, Ltd.

    134,000        136,614   

Beijing Urban Construction Design & Development Group Co., Ltd. H Shares

    150,000        96,817   

AIA Group, Ltd.

    16,000        95,601   

Haier Electronics Group Co., Ltd.

    47,000        94,870   

Towngas China Co., Ltd.

    159,000        92,115   

Guangdong Investment, Ltd.

    44,000        62,138   

China Conch Venture Holdings, Ltd.

    28,500        58,962   

HKBN, Ltd.

    41,500        53,400   

CIMC Enric Holdings, Ltd.

    54,000        31,461   

Weifu High-Technology Group Co., Ltd. B Shares

    11,100        28,515   
   

 

 

 

Total China/Hong Kong

      1,371,020   
   

 

 

 
   
INDIA: 18.0%                

Bharti Infratel, Ltd.

    24,157        155,859   

Bata India, Ltd.

    19,639        154,684   

Ipca Laboratories, Ltd.

    10,779        120,403   

Infosys, Ltd.

    6,516        108,580   

Lupin, Ltd.

    3,763        104,114   

Power Grid Corp. of India, Ltd.

    36,402        77,465   

Sanofi India, Ltd.

    1,010        66,651   

SKS Microfinance, Ltd.b

    7,343        55,208   

KPIT Technologies, Ltd.

    17,348        44,066   
   

 

 

 

Total India

      887,030   
   

 

 

 
   
TAIWAN: 13.6%                

Taiwan Semiconductor Manufacturing Co., Ltd.

    45,000        194,141   

Merida Industry Co., Ltd.

    13,000        69,721   

CHC Resources Corp.

    35,000        63,591   

KD Holding Corp.

    13,000        63,399   

Sporton International, Inc.

    10,077        61,482   

Greatek Electronics, Inc.

    56,000        60,815   

St. Shine Optical Co., Ltd.

    3,000        60,043   

Lumax International Corp., Ltd.

    41,000        54,130   

Phison Electronics Corp.

    6,000        42,138   
   

 

 

 

Total Taiwan

      669,460   
   

 

 

 
   
SOUTH KOREA: 8.5%                

Hanon Systems

    2,784        122,262   

iMarketKorea, Inc.

    4,900        105,140   

DGB Financial Group, Inc.

    11,265        95,967   

KT Skylife Co., Ltd.

    6,446        94,524   
   

 

 

 

Total South Korea

      417,893   
   

 

 

 
   
JAPAN: 6.1%                

Tsukui Corp.

    10,600        116,652   

Daikin Industries, Ltd.

    1,600        116,515   

Koito Manufacturing Co., Ltd.

    900        36,907   

Ain Holdings, Inc.

    700        33,375   
   

 

 

 

Total Japan

      303,449   
   

 

 

 
   
     Shares     Value  
PHILIPPINES: 5.1%    

Puregold Price Club, Inc.

    184,000        $135,688   

Energy Development Corp.

    864,300        113,525   
   

 

 

 

Total Philippines

      249,213   
   

 

 

 
   
THAILAND: 4.2%                

Total Access Communication Public Co., Ltd. NVDR

    251,200        209,681   
   

 

 

 

Total Thailand

      209,681   
   

 

 

 
   
SINGAPORE: 3.3%                

Parkway Life REIT

    67,600        110,956   

Vicom, Ltd.

    12,800        54,345   
   

 

 

 

Total Singapore

      165,301   
   

 

 

 
   
PAKISTAN: 2.5%                

Abbott Laboratories Pakistan, Ltd.

    11,800        71,542   

Bank Alfalah, Ltd.

    195,500        53,796   
   

 

 

 

Total Pakistan

      125,338   
   

 

 

 
   
INDONESIA: 2.4%                

PT Bank Rakyat Indonesia Persero

    104,300        85,599   

PT Perusahaan Gas Negara Persero

    166,400        32,808   
   

 

 

 

Total Indonesia

      118,407   
   

 

 

 
   
SRI LANKA: 1.8%                

Nestle Lanka PLC

    6,205        87,968   
   

 

 

 

Total Sri Lanka

      87,968   
   

 

 

 
   
AUSTRALIA: 1.8%                

Ansell, Ltd.

    4,505        69,815   

Tox Free Solutions, Ltd.

    8,829        17,919   
   

 

 

 

Total Australia

      87,734   
   

 

 

 
   
LUXEMBOURG: 1.8%                

L’Occitane International SA

    44,750        86,354   
   

 

 

 

Total Luxembourg

      86,354   
   

 

 

 
   
BANGLADESH: 1.2%                

Square Pharmaceuticals, Ltd.

    19,040        61,559   
   

 

 

 

Total Bangladesh

      61,559   
   

 

 

 
   
TOTAL INVESTMENTS: 98.1%             4,840,407   

(Cost $4,959,486c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 1.9%
      93,944   
   

 

 

 

NET ASSETS: 100.0%

      $4,934,351   
   

 

 

 
 

 

46    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia ESG Fund

December 31, 2015

Schedule of Investmentsa (continued)

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $4,982,515 and net unrealized depreciation consists of:

 

Gross unrealized appreciation

    $292,233   

Gross unrealized depreciation

    (434,341
 

 

 

 

Net unrealized depreciation

    ($142,108
 

 

 

 

 

ADR American Depositary Receipt

 

NVDR Non-voting Depositary Receipt

 

REIT Real Estate Investment Trust

See accompanying notes to financial statements.

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Taizo Ishida   Robert Harvey, CFA

Lead Manager

  Co-Manager
FUND FACTS
    Investor   Institutional

Ticker

  MEASX   MIASX

CUSIP

  577125883   577125875

Inception

  4/30/13   4/30/13

NAV

  $11.27   $11.29

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.75%

 

1.57%

After Fee Waiver and Reimbursement2

 

1.50%

 

1.25%

Portfolio Statistics

Total # of Positions

  81

Net Assets

  $169.9 million

Weighted Average Market Cap

 

$4.7 billion

Portfolio Turnover3

 

12.14%

Benchmark

MSCI Emerging Markets Asia Index

Redemption Fee

2% within first 90 calendar days of purchase

OBJECTIVE

 

 

Long term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Asia excluding Japan, South Korea, Hong Kong and Singapore. The Fund may also invest in the convertible securities, of any duration or quality of companies located in Asia excluding Japan, South Korea, Hong Kong and Singapore. Once fully invested and under normal market conditions, the Fund is expected to invest a substantial portion of its net assets in the emerging countries and markets in the Asian region, including, but not limited to, Bangladesh, Cambodia, China (including Taiwan, but excluding Hong Kong), India, Indonesia, Laos, Malaysia, Mongolia, Myanmar, Pakistan, Papua New Guinea, Philippines, Sri Lanka, Thailand, and Vietnam.

Matthews Emerging Asia Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Emerging Asia Fund returned –2.56% (Investor Class) and –2.33% (Institutional Class) while its benchmark, the MSCI Emerging Markets Asia Index returned –9.47%. For the fourth quarter of the year, the Fund advanced 4.76% (Investor Class) and 4.81% (Institutional Class) versus 3.53% for the benchmark.

Market Environment:

Looking back at 2015, it was a trying year for equity investors—especially for those invested in commodities and global emerging markets. A strong U.S. dollar, prospects of interest rates rising in the U.S. and feeble global growth weighed on investor sentiment. To add to this were concerns over a flagging China, weak emerging market currencies and continued declines in commodities including oil, which all ultimately impacted market returns. The year 2015 saw Asia’s emerging markets (expressed as the MSCI Emerging Markets Asia Index) initially rise early on by almost 15% (by late April)—driven by relatively strong performances from Chinese and Korean markets in response to European Central Bank commentary and the postponement of any U.S. Federal Reserve rate hike. Sentiment then broadly started to sour as investors grew concerned about faltering growth in China and once again about the prospects for a U.S. interest rate rise. The index declined from the April high to a low of –16% in late August—a swing from peak to trough of almost 30 percentage points in less than six months. Concerns over Chinese and global growth generally continued to weigh on emerging equity markets for the remainder of the year.

Performance Contributors and Detractors:

The single biggest contributor to Fund performance in the fourth quarter and for the year was Pakistan’s The Searle Company, which returned about 23% and 96%, respectively. For the first half of the year, the company delivered strong earnings growth on the back of increased volumes and new product launches. And in recent years its management team has worked to restructure and refocus the business, maximizing domestic opportunities. Given some drug policy reforms and a growing focus on export markets, we remain optimistic about the company’s prospects. The second-biggest contributor to Fund performance for the year was PC Jeweller of India, which rose sharply on the back of solid earnings growth, mainly driven by store expansions. Looking at the top five individual contributors in the year, they come from Pakistan, India, China, Bangladesh and Vietnam respectively. Geographically, Pakistan and Bangladesh were the two biggest contributors by country for the one-year period, realizing a total return of 11.8% and 13.6%, respectively against the MSCI Emerging Markets Asia Index return of –9.5%. The relatively heavier weighting in Pakistan made it our top contributor in the quarter.

The biggest detractor was China/Hong Kong with a –16.9% return for the year. In Hong Kong, weak tourist arrivals, especially among mainland Chinese travelers materially impacted local retail sales. The result was a collapse in many domestic share prices including our position in Luk Fook Holdings; a Hong Kong-based jewelry retailer with stores in Macau, Hong Kong and China. The only name to post even weaker returns was Future Bright, which ranked as our worst performer

(continued)

 

 

1 Actual 2015 expense ratios.
2 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.25% first by waiving class specific expenses (i.e., Rule 12b-1 fees or shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 1.25% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 1.25%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
3 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

 

48    MATTHEWS ASIA FUNDS


Table of Contents
         
PERFORMANCE AS OF DECEMBER 31, 2015                            
 

 

    

 

      

 

     Average Annual
Total Return
      

 

 
     3 Months      1 Year      Since
Inception
     Inception
Date
 

Investor Class (MEASX)

     4.76%         -2.56%         4.92%         4/30/13   

Institutional Class (MIASX)

     4.81%         -2.33%         5.14%         4/30/13   

MSCI Emerging Markets Asia Index4

     3.53%         -9.47%         -1.01%      

Lipper Emerging Markets Funds Category Average5

     0.54%         -14.08%         -7.13%      

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares 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. For the Fund’s most recent month-end performance visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data does not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of Fund shares. Values are in US$.

 

  4 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector      Country      % of Net Assets  

The Searle Company, Ltd.

   Health Care      Pakistan        5.1%   

British American Tobacco Bangladesh Co., Ltd.

   Consumer Staples      Bangladesh        2.9%   

Olympic Industries, Ltd.

   Consumer Staples      Bangladesh        2.8%   

PT Gudang Garam

   Consumer Staples      Indonesia        2.8%   

PC Jeweller, Ltd.

   Consumer Discretionary      India        2.8%   

Square Pharmaceuticals, Ltd.

   Health Care      Bangladesh        2.7%   

Sampath Bank PLC

   Financials      Sri Lanka        2.5%   

K-Electric, Ltd.

   Utilities      Pakistan        2.4%   

Shenzhou International Group Holdings, Ltd.

   Consumer Discretionary      China/Hong Kong        2.3%   

PT Matahari Department Store

   Consumer Discretionary      Indonesia        2.3%   

% OF ASSETS IN TOP TEN

               28.6%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
 
COUNTRY ALLOCATION (%)7,8  

Pakistan

    19.9   

Bangladesh

    13.9   

Vietnam

    12.5   

India

    11.2   

Indonesia

    9.8   

China/Hong Kong

    9.6   

Sri Lanka

    8.5   

Philippines

    5.9   

Thailand

    2.8   

Singapore

    1.1   

Cambodia

    1.1   

Australia

    1.0   

Cash and Other Assets, Less Liabilities

    2.7   

 

 
SECTOR ALLOCATION (%)8  

Consumer Staples

    25.4   

Consumer Discretionary

    20.7   

Financials

    17.5   

Health Care

    12.6   

Industrials

    9.6   

Materials

    4.6   

Information Technology

    2.5   

Utilities

    2.4   

Energy

    2.0   

Cash and Other Assets, Less Liabilities

    2.7   

 

 
MARKET CAP EXPOSURE (%)8  

Mega Cap (over $25B)

    1.5   

Large Cap ($10B–$25B)

    1.5   

Mid Cap ($3B–10B)

    13.5   

Small Cap (under $3B)

    80.8   

Cash and Other Assets, Less Liabilities

    2.7   

 

7 Not all countries where the Fund may invest are included in the benchmark index.

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

Matthews Emerging Asia Fund

Portfolio Manager Commentary (unaudited) (continued)

for the year, with its value declining almost 67%. Disappointingly since we first initiated a position, it has collapsed in line with VIP gambling activity in Macau. The lack of ‘high-rollers’ materially impacted profitability of the Group’s high end restaurants. They also incurred material startup costs on the new ‘souvenir food’ business along with extraordinary costs associated with closing a food-hall in a Zhuhai shopping mall. Needless to say, we believe the company is now very cheap and long-term prospects for the restaurants and properties in Macau are positive.

Notable Portfolio Changes:

Late in the year, we initiated a new position in Shifa International Hospitals in Pakistan. We like this business as it is one that balances its commitment to the community-at-large (offering pro-bono services to those in need) while also generating attractive returns on capital. Looking forward, the management team has an opportunity to expand capacity and offer new services. We also added to our position in Indonesian cigarette producer Gudang Garam after substantial price weakness earlier in the year following concerns over the weakness in Indonesia’s rupiah. We also disposed of RFM in the Philippines as we have been disappointed with the strategic direction of this diversified food and beverage firm, as well as its lack of tangible operational progress.

Outlook:

The outlook is always challenging and impossible to foretell, especially as fickle investor sentiment can drive the market in the shorter term. In the medium term, high debt levels globally remain a concern and a headwind to growth while ongoing tensions in the Middle East also remain a serious concern, especially as a sharp sustained rise in oil prices will be negative for Emerging Asian economies.

Looking ahead, it seems quite possible that as Asia’s frontier markets continue to attract foreign direct investment, create new manufacturing jobs, receive growing remittance flows and grow their share of global exports off a low base, a relatively bright future could be in store for patient investors.

 

 

50    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Emerging Asia Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 97.3%

 

     Shares     Value  
PAKISTAN: 19.9%    

The Searle Company, Ltd.

    2,304,593        $8,677,972   

K-Electric, Ltd.b

    56,269,000        3,992,544   

PAK Suzuki Motor Co., Ltd.

    688,600        3,250,634   

Habib Bank, Ltd.

    1,508,100        2,881,567   

GlaxoSmithKline Pakistan, Ltd.

    1,021,540        2,143,199   

Abbott Laboratories Pakistan, Ltd.

    347,100        2,104,440   

ICI Pakistan, Ltd.

    452,600        2,086,362   

Shifa International Hospitals, Ltd.

    689,800        2,013,017   

Hum Network, Ltd.

    15,552,000        1,943,016   

Pakistan Petroleum, Ltd.

    1,487,800        1,732,254   

Engro Foods, Ltd.b

    1,237,100        1,731,479   

National Foods, Ltd.

    429,700        1,300,526   
   

 

 

 

Total Pakistan

      33,857,010   
   

 

 

 
   
BANGLADESH: 13.9%                

British American Tobacco Bangladesh Co., Ltd.

    132,990        5,003,565   

Olympic Industries, Ltd.

    1,432,434        4,731,276   

Square Pharmaceuticals, Ltd.

    1,421,741        4,596,697   

United Commercial Bank, Ltd.

    11,765,239        3,193,368   

Marico Bangladesh, Ltd.

    161,759        2,944,127   

Berger Paints Bangladesh, Ltd.

    69,450        1,690,345   

Bata Shoe Co. Bangladesh, Ltd.

    75,700        1,271,104   

Apex Footwear, Ltd.

    55,836        247,037   
   

 

 

 

Total Bangladesh

      23,677,519   
   

 

 

 
   
VIETNAM: 12.5%                

Phu Nhuan Jewelry JSC

    2,007,863        3,830,879   

Tien Phong Plastic JSC

    1,292,517        3,460,508   

Vinh Hoan Corp.

    2,579,760        3,346,995   

National Seed JSC

    554,535        2,342,932   

Mobile World Investment Corp.b

    632,587        2,203,152   

Dinh Vu Port Investment & Development JSC

    517,550        1,438,598   

Nam Long Investment Corp.

    1,386,590        1,406,015   

DHG Pharmaceutical JSC

    436,320        1,290,428   

Masan Group Corp.b

    273,360        941,532   

Saigon Securities, Inc. b

    820,828        809,423   

Phuoc Hoa Rubber JSC

    304,000        220,378   
   

 

 

 

Total Vietnam

      21,290,840   
   

 

 

 
   
INDIA: 11.2%                

PC Jeweller, Ltd.

    801,621        4,689,501   

Supreme Industries, Ltd.

    223,468        2,296,000   

Emami, Ltd.

    126,978        1,912,950   

Praj Industries, Ltd.

    1,224,447        1,700,344   

Info Edge India, Ltd.

    124,174        1,599,986   

VST Industries, Ltd.

    49,694        1,270,563   

GRUH Finance, Ltd.

    304,007        1,253,251   

Shalimar Paints, Ltd.b

    525,830        1,139,983   

Shriram Transport Finance Co., Ltd.

    83,544        1,080,177   

Shriram City Union Finance, Ltd.

    41,454        992,592   

Cipla India, Ltd.

    60,053        588,691   

Multi Commodity Exchange of India, Ltd.

    32,155        448,210   
   

 

 

 

Total India

      18,972,248   
   

 

 

 
   
     Shares     Value  
INDONESIA: 9.8%    

PT Gudang Garam

    1,184,800        $4,702,376   

PT Matahari Department Store

    3,032,600        3,839,072   

PT Mayora Indah

    1,179,600        2,599,369   

PT Bank Mandiri Persero

    3,728,900        2,476,139   

PT Sumber Alfaria Trijaya

    38,533,300        1,621,278   

PT Indofood CBP Sukses Makmur

    1,301,700        1,259,275   

PT Electronic City Indonesia

    2,591,700        159,807   
   

 

 

 

Total Indonesia

      16,657,316   
   

 

 

 
   
CHINA/HONG KONG: 9.6%                

Shenzhou International Group Holdings, Ltd.

    689,000        3,948,508   

CIMC Enric Holdings, Ltd.

    4,378,000        2,550,638   

Luk Fook Holdings International, Ltd.

    1,200,000        2,534,730   

Playmates Toys, Ltd.

    8,756,000        2,204,598   

Tencent Holdings, Ltd.

    88,700        1,736,745   

Future Bright Holdings, Ltd.

    9,948,000        996,615   

Haitian International Holdings, Ltd.

    618,000        896,632   

Alibaba Group Holding, Ltd. ADRb

    10,300        837,081   

Louis XIII Holdings, Ltd.b

    1,923,000        520,530   
   

 

 

 

Total China/Hong Kong

      16,226,077   
   

 

 

 
   
SRI LANKA: 8.5%                

Sampath Bank PLC

    2,483,749        4,270,154   

National Development Bank PLC

    2,515,196        3,385,668   

Hemas Holdings PLC

    5,038,636        3,244,986   

Aitken Spence Hotel Holdings PLC

    1,973,457        930,295   

Chevron Lubricants Lanka PLC

    260,863        621,708   

Ceylon Tobacco Co. PLC

    85,424        587,753   

Ceylinco Insurance Co. PLC

    51,393        529,286   

Expolanka Holdings PLC

    9,348,946        524,967   

Lanka Orix Leasing Co. PLCb

    573,466        373,697   
   

 

 

 

Total Sri Lanka

      14,468,514   
   

 

 

 
   
PHILIPPINES: 5.9%                

Puregold Price Club, Inc.

    4,214,000        3,107,551   

Universal Robina Corp.

    505,710        1,995,549   

Vista Land & Lifescapes, Inc.

    18,094,100        1,986,577   

Emperador, Inc.

    9,273,800        1,763,904   

GT Capital Holdings, Inc.

    40,630        1,138,273   
   

 

 

 

Total Philippines

      9,991,854   
   

 

 

 
   
THAILAND: 2.8%                

SNC Former Public Co., Ltd.

    5,111,700        1,938,085   

Srisawad Power 1979 Public Co., Ltd.

    1,283,568        1,690,430   

Beauty Community Public Co., Ltd.

    7,142,000        1,133,697   
   

 

 

 

Total Thailand

      4,762,212   
   

 

 

 
   
SINGAPORE: 1.1%                

Yoma Strategic Holdings, Ltd.b

    5,491,766        1,787,119   
   

 

 

 

Total Singapore

      1,787,119   
   

 

 

 
   
CAMBODIA: 1.1%                

NagaCorp, Ltd.

    2,828,000        1,781,353   
   

 

 

 

Total Cambodia

      1,781,353   
   

 

 

 
   
 

 

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Table of Contents

Matthews Emerging Asia Fund

December 31, 2015

Schedule of Investmentsa (continued)

COMMON EQUITIES (continued)

 

     Shares     Value  
AUSTRALIA: 1.0%    

Oil Search, Ltd.

    349,221        $1,699,778   
   

 

 

 

Total Australia

      1,699,778   
   

 

 

 
   
TOTAL COMMON EQUITIES             165,171,840   
   

 

 

 

(Cost $158,973,147)

   
   

RIGHTS: 0.0%

   
PAKISTAN: 0.0%                

Shifa International Hospitals, Ltd., expires 1/29/16b

    55,184        24,050   
   

 

 

 

Total Pakistan

      24,050   
   

 

 

 
   
TOTAL RIGHTS             24,050   
   

 

 

 

(Cost $0)

   
   

WARRANTS: 0.0%

   
THAILAND: 0.0%                

Srisawad Power 1979 Public Co., Ltd., expires 6/11/20b

    50,336        17,485   
   

 

 

 

Total Thailand

      17,485   
   

 

 

 
   
TOTAL WARRANTS             17,485   
   

 

 

 

(Cost $0)

   
   
TOTAL INVESTMENTS: 97.3%             165,213,375   

(Cost $158,973,147c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 2.7%
      4,655,120   
   

 

 

 

NET ASSETS: 100.0%

      $169,868,495   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $158,973,147 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $25,659,723   

Gross unrealized depreciation

    (19,419,495
 

 

 

 

Net unrealized appreciation

    $6,240,228   
 

 

 

 

 

ADR American Depositary Receipt

 

JSC Joint Stock Co.

See accompanying notes to financial statements.

 

52    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Andrew Mattock, CFA   

Lead Manager

  
Henry Zhang, CFA    Winnie Chwang

Co-Manager

   Co-Manager
FUND FACTS
    Investor   Institutional

Ticker

  MCHFX   MICFX

CUSIP

  577130701   577130818

Inception

  2/19/98   10/29/10

NAV

  $18.42   $18.39

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.14%

 

0.99%

Portfolio Statistics

   

Total # of Positions

    43

Net Assets

    $734.0 million

Weighted Average Market Cap

 

$49.3 billion

Portfolio Turnover2

     

66.22%

Benchmark

MSCI China Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in China. China includes its administrative and other districts, such as Hong Kong.

Matthews China Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews China Fund returned 2.41% (Investor Class) and 2.50% (Institutional Class) while its benchmark, the MSCI China Index, returned –7.62%. For the fourth quarter of the year, the Fund returned 10.33% (Investor and Institutional Class) versus 4.03% for the Index.

Market Environment:

After a strong start to the year, associated with a rally in mainland indices, China’s equity market environment turned extremely negative. The heavy-handed approach used by authorities in attempting to stabilize this decline also prompted investor concern. Amid this turmoil, Chinese authorities, to the dismay of global markets, suddenly adjusted the mechanism for the daily setting of exchange rates. This change was not well-communicated and created much confusion. However, we ultimately consider the move to be a long-term positive development. The confusion regarding the currency intensified during the year as fears of capital flight reappeared. Onshore foreign exchange deposits in China have not increased with any significance, which may suggest a healthy adjustment is taking place. Another thing to note is that most of the foreign exchange reserve depletion occurred during the third quarter, and the run rate since has narrowed, which perhaps implies that a one-off balance sheet adjustment, rather than consistent capital outflows, is taking place. We believe the initial loss in reserves is a U.S. dollar adjustment in working capital by Chinese corporates, both onshore and offshore. Finally, China is receiving a US$500 to US$600 billion trade surplus annually. As commodity prices weaken, this should provide a buffer for continued outflows. We anticipate flows to moderate significantly. On the economic front, the lack of sequential growth momentum in China continues due to a decline in property market investment, and a slowing of the fixed asset investment in manufacturing. Our central case is that 2016 will be similar to 2015 in that we believe the economy should continue to shed excess capacity in some industries and associated nonperforming loans will be recognized. So far, this adjustment has been orderly, and we believe this will continue to be the case. The end of this down-cycle will be indicated by a moderation of write-offs at Chinese banks, and we are watching for this. The timing of this moderation, we feel, is uncertain and may well be a 2017 event. Meanwhile, the government refrains from launching large-scale stimulus programs to spur short-term economic growth, instead continuing with its approach to help stimulate only targeted areas and continue with structural long-term reform.

Performance Contributors and Detractors:

During the year, the health care sector was among the biggest contributors to relative Fund performance. Health care companies overall reported strong earnings, showing continued growth momentum. The year ahead will be more difficult for these companies as more intense pricing pressure and competition increases. Among our health care holdings, Jiangsu Hengrui Medicine was a top contributor to Fund performance, and the drug maker is typical of health care companies we favor as it has a strong diversified product pipeline and is committed to moving up the value chain, away from pure generics.

During the fourth quarter, financials sector holdings also contributed to Fund performance. Tier one property developers continue to take market share in a consolidating industry where overall trends are flat at best. In particular, China Vanke and China Resources Land contributed outsized returns. The Internet space was also another bright spot for the Fund. NetEase, a gaming company that develops most of its games in-house, further enhanced its mobile gaming platform and was a strong performer. ANTA Sports Products, a branded sportswear company that has benefited from an improvement in brand perception through focused

(continued)

 
1 Actual 2015 expense ratios.
2 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

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Table of Contents
 
PERFORMANCE AS OF DECEMBER 31, 2015  
 

 

  

3 Months

    

1 Year

     Average Annual Total Returns     

Inception
Date

 
           3 Years      5 Years      10 Years      Since
Inception
    
Investor Class (MCHFX)      10.33%         2.41%         1.50%         -1.04%         10.86%         9.37%         2/19/98   
Institutional Class (MICFX)      10.33%         2.50%         1.65%         -0.88%         n.a.         -1.16%         10/29/10   
MSCI China Index3      4.03%         -7.62%         1.31%         0.91%         10.31%         3.27% 4    
Lipper China Region Funds Category Average5      7.29%         -3.02%         2.98%         0.36%         7.97%         6.82% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  4 Calculated from 2/28/98.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector             % of Net Assets  

Tencent Holdings, Ltd.

   Information Technology             8.2%   
Ping An Insurance Group Co. of China, Ltd.    Financials             5.5%   
China Construction Bank Corp.    Financials             4.3%   
China Life Insurance Co., Ltd.    Financials             3.6%   
China Overseas Land & Investment, Ltd.    Financials             3.3%   
China Resources Land, Ltd.    Financials             3.3%   
China State Construction International Holdings, Ltd.    Industrials             3.1%   
JD.com, Inc.    Consumer Discretionary             2.9%   
NetEase, Inc.    Information Technology             2.8%   
China Vanke Co., Ltd.    Financials             2.8%   
% OF ASSETS IN TOP TEN                39.8%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

54    MATTHEWS ASIA FUNDS


Table of Contents

Matthews China Fund

Portfolio Manager Commentary (unaudited) (continued)

advertisement, also did well. It has shown prowess in managing its inventory cycle in recent years.

Performance in the industrial space was among the biggest detractors to Fund performance. Among our industrials holdings, Air China, despite weak oil prices, was a poor performer. Sentiment around excessive RMB depreciation on Air China’s USD debt offset the strong consumer travel story.

It must be highlighted that being thorough in our bottom-up approach helped the Fund in tough conditions during 2015. Minimizing stock selection mistakes and staying away from companies where the outlook was particularly uncertain ensured the Fund had a good year relative to its benchmark.

Notable Portfolio Changes:

During the quarter, we increased our positions in the life insurance industry, which significantly boosted our financials weighting. Although life insurers are classified within the financials sector, we tend to view such businesses as consumer discretionary holdings in China. Sales of life insurance policies are showing very positive operating trends as companies continue to penetrate China’s untapped regions. We believe Chinese life insurance policy design and the reduction in the interest rate environment in China have boosted the appetite for such sales. Our holdings here include AIA, Ping An and China Life. The insurance industry has strong competitive dynamics in which the big companies dominate and there is real strength in economies of scale in the ability to attract agency workforce.

During the year, we exited instant noodle producer Tingyi as we believed the barriers to entry and competition in its core noodle business continued unabated. We also sold Golden Eagle, Tsingtao Brewery, Sun Art Retail and Belle, the women’s shoe retail store operator, as over-supply and Internet channels continue to pose margin and sales issues in the traditional retail space. Market conditions in 2015 allowed us to re-evaluate Fund positions, and we took the opportunity to replace some holdings with securities that were previously too expensive. These changes resulted in unusually high turnover for the portfolio, which caused a higher distribution than is typical for this Fund. We expect turnover to moderate significantly in 2016 as we completed portfolio restructuring by the third quarter of 2015.

Outlook:

Looking forward, we expect the central government to continue to achieve a balance between non-intervention and major stimulus programs. Targeted accommodative policies have been adopted to prevent the economy from further slowing. 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. Capital market reform is also high on the agenda. This area of reform should not be underestimated, and we anticipate seeing further reforms over the next 12 months. In particular, capital account reforms in relation to the currency and opening up of equity and bond markets will provide short-term volatility as the market tends to react negatively to big changes and uncertainty of outcome. The government, we believe, has the firepower to manage this transition. The last point to note on capital account reform is it is massively underrepresented in Chinese assets, bonds, equity and cash. Any signs of an improvement in the underlying nature of the Chinese economy could facilitate a sizable reallocation into a market that remains underrepresented in global portfolios. At current valuations, we see the risk-to-reward ratio as extremely attractive, despite the skepticism on China’s growth transition away from heavy industry. We believe the determination of the government to achieve this objective is clear. Despite valuations being cheap, we expect volatility should present us with 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 very significant and something we have not seen since China’s World Trade Organization deal was signed.

   
SECTOR ALLOCATION7      
Financials     38.5   
Consumer Discretionary     17.7   
Information Technology     16.8   
Industrials     15.4   
Health Care     5.3   
Consumer Staples     2.7   
Utilities     2.4   
Energy     1.0   
Cash and Other Assets, Less Liabilities     0.2   

 

   
MARKET CAP EXPOSURE (%)7      
Mega Cap (over $25B)     45.8   
Large Cap ($10B–$25B)     24.4   
Mid Cap ($3B–10B)     22.7   
Small Cap (under $3B)     6.9   
Cash and Other Assets, Less Liabilities     0.2   

 

7 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.
 

 

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Table of Contents

Matthews China Fund

December 31, 2015

Consolidated Schedule of Investmentsa

COMMON EQUITIES: CHINA/HONG KONG: 99.8%

 

     Shares     Value  
FINANCIALS: 38.5%    

Insurance: 11.6%

   

Ping An Insurance Group Co. of China, Ltd. H Shares

    7,304,500        $40,282,162   

China Life Insurance Co., Ltd. H Shares

    8,199,000        26,320,418   

AIA Group, Ltd.

    3,048,400        18,214,444   
   

 

 

 
    84,817,024   
   

 

 

 
   

Real Estate Management & Development: 11.4%

  

 

China Overseas Land & Investment, Ltd.

    6,896,000        24,007,477   

China Resources Land, Ltd.

    8,280,000        23,959,855   

China Vanke Co., Ltd. H Sharesb

    6,993,268        20,510,781   

Shanghai Lujiazui Finance & Trade Zone Development Co., Ltd. B Shares

    3,735,686        15,155,899   
   

 

 

 
    83,634,012   
   

 

 

 
   

Banks: 9.5%

   

China Construction Bank Corp. H Shares

    46,063,660        31,422,239   

China Merchants Bank Co., Ltd. H Shares

    6,738,643        15,774,088   

Chongqing Rural Commercial Bank Co., Ltd. H Shares

    24,695,000        14,832,333   

BOC Hong Kong Holdings, Ltd.

    2,583,000        7,860,125   
   

 

 

 
    69,888,785   
   

 

 

 
   

Capital Markets: 4.0%

   

CITIC Securities Co., Ltd. H Shares

    6,437,500        14,916,650   

China Galaxy Securities Co., Ltd. H Shares

    16,092,500        14,625,430   
   

 

 

 
    29,542,080   
   

 

 

 
   

Diversified Financial Services: 2.0%

   

Hong Kong Exchanges and Clearing, Ltd.

    563,400        14,352,497   
   

 

 

 

Total Financials

      282,234,398   
   

 

 

 
   
CONSUMER DISCRETIONARY: 17.7%                

Internet & Catalog Retail: 6.1%

   

JD.com, Inc. ADRc

    650,600        20,991,609   

Vipshop Holdings, Ltd. ADRc

    905,729        13,830,482   

Ctrip.com International, Ltd. ADRc

    220,700        10,225,031   
   

 

 

 
    45,047,122   
   

 

 

 
   

Household Durables: 3.5%

   

Gree Electric Appliances, Inc. of Zhuhai A Sharesd

    3,824,278        13,102,936   

Haier Electronics Group Co., Ltd.

    6,170,000        12,454,212   
   

 

 

 
    25,557,148   
   

 

 

 
   

Textiles, Apparel & Luxury Goods: 2.4%

   

ANTA Sports Products, Ltd.

    6,436,000        17,595,152   
   

 

 

 
   

Auto Components: 2.1%

   

Fuyao Glass Industry Group Co., Ltd. A Sharesd

    6,640,207        15,484,948   
   

 

 

 
   

Media: 1.8%

   

Shanghai Oriental Pearl Media Co., Ltd. A Shares

    2,316,008        13,283,532   
   

 

 

 
   

Automobiles: 1.8%

   

Chongqing Changan Automobile Co., Ltd. B Shares

    5,827,934        12,831,424   
   

 

 

 

Total Consumer Discretionary

      129,799,326   
   

 

 

 
   
     Shares     Value  
INFORMATION TECHNOLOGY: 16.8%    

Internet Software & Services: 12.9%

   

Tencent Holdings, Ltd.

    3,079,800        $60,302,441   

NetEase, Inc. ADR

    113,600        20,588,864   

Baidu, Inc. ADRc

    73,000        13,799,920   
   

 

 

 
    94,691,225   
   

 

 

 
   

Electronic Equipment, Instruments & Components: 2.1%

  

Hangzhou Hikvision Digital Technology Co., Ltd. A Sharesd

    2,915,459        15,408,886   
   

 

 

 
   

Communications Equipment: 1.8%

   

ZTE Corp. H Shares

    5,927,164        13,455,192   
   

 

 

 

Total Information Technology

  

    123,555,303   
   

 

 

 
   
INDUSTRIALS: 15.4%                

Commercial Services & Supplies: 3.1%

   

China Everbright International, Ltd.

    10,219,000        13,066,815   

Dongjiang Environmental Co., Ltd. H Shares

    5,715,600        9,659,264   
   

 

 

 
    22,726,079   
   

 

 

 
   

Construction & Engineering: 3.1%

   

China State Construction International Holdings, Ltd.

    12,992,000        22,467,209   
   

 

 

 
   

Transportation Infrastructure: 2.7%

   

China Merchants Holdings International Co., Ltd.

    4,308,581        13,627,483   

Qingdao Port International Co., Ltd. H Shares

    14,043,000        6,253,358   
   

 

 

 
    19,880,841   
   

 

 

 
   

Electrical Equipment: 1.9%

   

Boer Power Holdings, Ltd.

    7,745,000        13,914,473   
   

 

 

 
   

Airlines: 1.8%

   

Air China, Ltd. H Shares

    16,949,900        13,293,749   
   

 

 

 
   

Air Freight & Logistics: 1.8%

   

Sinotrans, Ltd. H Shares

    24,822,000        13,213,014   
   

 

 

 
   

Marine: 1.0%

   

SITC International Holdings Co., Ltd.

    13,886,000        7,340,266   
   

 

 

 

Total Industrials

  

    112,835,631   
   

 

 

 
   
HEALTH CARE: 5.3%                

Pharmaceuticals: 3.3%

   

Jiangsu Hengrui Medicine Co., Ltd. A Sharesd

    1,799,919        13,572,325   

Sino Biopharmaceutical, Ltd.

    12,317,000        11,136,006   
   

 

 

 
    24,708,331   
   

 

 

 
   

Health Care Providers & Services: 2.0%

   

Sinopharm Group Co., Ltd. H Shares

    3,625,600        14,474,210   
   

 

 

 

Total Health Care

  

    39,182,541   
   

 

 

 
   
CONSUMER STAPLES: 2.7%                

Beverages: 2.7%

   

Kweichow Moutai Co., Ltd. A Sharesd

    584,779        19,586,079   
   

 

 

 

Total Consumer Staples

  

    19,586,079   
   

 

 

 
   
 

 

56    MATTHEWS ASIA FUNDS


Table of Contents

Matthews China Fund

December 31, 2015

Consolidated Schedule of Investmentsa (continued)

COMMON EQUITIES: CHINA/HONG KONG (continued)

 

    Shares     Value  
UTILITIES: 2.4%                

Water Utilities: 2.4%

   

Beijing Enterprises Water Group, Ltd.

    25,054,000        $17,474,787   
   

 

 

 

Total Utilities

  

    17,474,787   
   

 

 

 
   
ENERGY: 1.0%    

Oil, Gas & Consumable Fuels: 1.0%

   

China Shenhua Energy Co., Ltd. H Shares

    4,891,500        7,638,084   
   

 

 

 

Total Energy

      7,638,084   
   

 

 

 
   
TOTAL INVESTMENTS: 99.8%             732,306,149   

(Cost $657,904,382e)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 0.2%
      1,736,934   
   

 

 

 

NET ASSETS: 100.0%

      $734,043,083   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Illiquid security, trading was halted at December 31, 2015.

 

c Non-income producing security.

 

d Security held by Matthews CF-U Series. See note 2-C.

 

e Cost for federal income tax purposes is $659,256,884 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $111,959,009   

Gross unrealized depreciation

    (38,909,744
 

 

 

 

Net unrealized appreciation

    $73,049,265   
 

 

 

 

 

ADR American Depositary Receipt

See accompanying notes to financial statements.

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Sunil Asnani  

Lead Manager

   
Sharat Shroff, CFA  

Co-Manager

   
FUND FACTS        
    Investor   Institutional

Ticker

  MINDX   MIDNX

CUSIP

  577130859   577130768

Inception

  10/31/05   10/29/10

NAV

  $26.43   $26.49

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.11%

 

0.90%

Portfolio Statistics

 

Total # of Positions

  48

Net Assets

  $1.5 billion

Weighted Average Market Cap

 

$9.6 billion

Portfolio Turnover2

 

9.51%

Benchmark

   

S&P Bombay Stock Exchange 100 Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in publicly traded common stocks, preferred stocks and convertible securities of companies located in India.

Matthews India Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews India Fund returned 0.90% (Investor Class) and 1.12% (Institutional Class) while its benchmark, the S&P Bombay Stock Exchange 100 Index, declined –6.41%. For the fourth quarter of the year, the Fund returned –1.26% (Investor Class) and –1.23% (Institutional Class) versus –0.65% for the Index.

Market Environment:

Investor sentiment over Indian equities in 2015 was largely negative following consecutive quarters of dismal earnings growth. However, in the fourth quarter India’s stock markets were marginally positive, possibly suggesting more optimism over earnings growth. In 2015, there was a notable disconnect between moderate GDP growth and flat-to-marginally negative corporate earnings growth. This may partly be explained by different sector composition between the economy and the capital markets, which are represented by varying sectors. Another plausible explanation may be the difference between India’s declining wholesale price index and the consumer price index, which in general has grown recently by mid-single digits.

A lack of progress in economic reforms continues to be a disappointment. Parliamentary sessions during the second half of the year ended without much movement on the reform agenda, and a deadlock continued to delay a high-profile proposed Goods & Service Tax (GST) bill. However, Indian stock markets were marginally positive during the fourth quarter, which might suggest that investors had recalibrated expectations over the timing of economic reforms. During the fourth quarter, the energy, utilities, and materials sectors performed relatively better than more defensive sectors, such as consumer staples, health care and information technology after underperforming them for most of the year.

India’s central bank was quite active during the year. The Reserve Bank of India (RBI) provided some support to the market by reducing interest rates by 100 basis points (1.0%) in 2015. RBI’s engagement with private and public sector banks during the year also led to faster transmission of interest rate cuts in the economy.

Despite the year’s headwinds, the rupee depreciated only 4.5% and held up much better against the U.S. dollar versus other emerging market currencies. High real interest rates in India coupled with a lower current account deficit for India led investors to prefer rupee-denominated assets in 2015.

Performance Contributors and Detractors:

The outperformance of the portfolio during the year could be explained by our limited exposure to macro-dependent sectors, such as state-owned banks and metals, and higher exposure to relatively defensive and secular sectors, such as information technology, consumer staples and health care. Our portfolio has historically been positioned to be light on commodity-dependent sectors, and also underweight on companies particularly dependent on policy tailwinds, with limited control over their own destinies. This strategy helped us in 2015, when much-anticipated investment and banking reforms failed to emerge. While moderating economic growth adversely affected consumer stocks, the drop in input prices was able to sustain earnings growth. Our health care and information technology holdings actually benefited from India’s weakening rupee, even though our rationale for these holdings are company-specific.

Notable Portfolio Changes:

During the year, we exited a few positions and added to new positions across sectors such as technology, health care and consumer discretionary. One such

(continued)

 
1 Actual 2015 expense ratios.
2 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

58    MATTHEWS ASIA FUNDS


Table of Contents
   
PERFORMANCE AS OF DECEMBER 31, 2015         
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      1 Year      3 Years      5 Years      10 Years      Since
Inception
     Inception
Date
 

Investor Class (MINDX)

     -1.26%         0.90%         15.84%         5.37%         11.10%         12.27%         10/31/05   

Institutional Class (MIDNX)

     -1.23%         1.12%         16.04%         5.55%         n.a.         4.95%         10/29/10   

S&P Bombay Stock Exchange 100 Index3

     -0.65%         -6.41%         5.43%         -1.00%         8.20%         9.95% 4    

Lipper India Region Funds Category Average5

     -0.36%         -3.85%         7.61%         -1.34%         6.77%         8.22% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  4 Calculated from 10/31/05.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

     
TOP TEN POSITIONS6              
     Sector      % of Net Assets  

Taro Pharmaceutical Industries, Ltd.

   Health Care        5.1%   

ITC, Ltd.

   Consumer Staples        4.8%   

IndusInd Bank, Ltd.

   Financials        4.7%   

Shriram City Union Finance, Ltd.

   Financials        4.6%   

eClerx Services, Ltd.

   Information Technology        4.5%   

Cognizant Technology Solutions Corp.

   Information Technology        4.3%   

Mindtree, Ltd.

   Information Technology        4.1%   

Kotak Mahindra Bank, Ltd.

   Financials        4.1%   

Ajanta Pharma, Ltd.

   Health Care        4.0%   

Housing Development Finance Corp., Ltd.

   Financials        3.7%   

% OF ASSETS IN TOP TEN

          43.9%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
   
SECTOR ALLOCATION (%)7      

Financials

    26.9   

Consumer Staples

    18.2   

Information Technology

    16.8   

Health Care

    14.9   

Industrials

    9.7   

Consumer Discretionary

    8.2   

Materials

    5.4   

Liabilities in Excess of Cash and Other Assets

    -0.1   

 

   
MARKET CAP EXPOSURE (%)7      

Mega Cap (over $25B)

    17.4   

Large Cap ($10B–$25B)

    5.3   

Mid Cap ($3B–10B)

    26.3   

Small Cap (under $3B)

    51.1   

Liabilities in Excess of Cash and Other Assets

    -0.1   

 

7 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

Matthews India Fund

Portfolio Manager Commentary (unaudited) (continued)

addition was Just Dial, which began as a firm in the space of online local classifieds, and is now trying to capture more online business. The company’s economic moat lies in its ability to enlist millions of businesses, which attract over 100 million search requests. The challenge for Just Dial is to remain relevant to customers while also maintaining profitability.

Outlook:

Toward the end of 2015, inflation in India accelerated to a 14-month high. While reported inflation has remained in line with central bank expectations, it seems unlikely there will be further monetary policy easing anytime soon. We believe RBI’s focus going forward may remain on interest rate transmission.

The central bank has also been active in trying to resolve the issue of stressed assets that have been plaguing large bank balance sheets. The central government introduced a bankruptcy bill in 2015, aimed at offering changes to help the current situation. We believe these efforts should help improve credit availability in the economy.

During the year, infrastructure projects related to highways, railways and water sanitation have seen substantial improvement over last year. Mobilization of resources and labor associated with these projects is expected to gather momentum in coming months, which should improve job creation for the country’s rural economy.

While opposition continues to stall Prime Minister Narendra Modi’s government reform agenda, incremental steps are consistently being taken. Recently, the central government has announced steps to rationalize and to implement the direct transfer of fuel price subsidies. These steps would reduce the fiscal burden and make funds available for infrastructure investment.

 

 

60    MATTHEWS ASIA FUNDS


Table of Contents

Matthews India Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 100.1%

 

     Shares     Value  
FINANCIALS: 26.9%    

Banks: 12.7%

   

IndusInd Bank, Ltd.

    4,875,934        $71,166,711   

Kotak Mahindra Bank, Ltd.

    5,697,258        61,709,554   

HDFC Bank, Ltd.

    2,030,165        33,157,947   

HDFC Bank, Ltd. ADR

    206,922        12,746,395   

IDFC Bank, Ltd.b

    13,050,467        12,003,717   
   

 

 

 
    190,784,324   
   

 

 

 
   

Consumer Finance: 5.4%

   

Shriram City Union Finance, Ltd.

    2,870,154        68,724,176   

Sundaram Finance, Ltd.

    588,318        12,196,857   
   

 

 

 
    80,921,033   
   

 

 

 
   

Thrifts & Mortgage Finance: 4.9%

   

Housing Development Finance Corp., Ltd.

    2,958,810        56,276,097   

GRUH Finance, Ltd.

    4,421,238        18,226,297   
   

 

 

 
    74,502,394   
   

 

 

 
   

Diversified Financial Services: 3.8%

   

CRISIL, Ltd.

    1,527,723        45,292,068   

IDFC, Ltd.

    13,050,467        9,481,647   

Multi Commodity Exchange of India, Ltd.

    168,101        2,343,168   
   

 

 

 
    57,116,883   
   

 

 

 
   

Real Estate Management & Development: 0.1%

  

 

Ascendas India Trust

    1,966,800        1,206,796   
   

 

 

 

Total Financials

  

    404,531,430   
   

 

 

 
   
CONSUMER STAPLES: 18.2%                

Personal Products: 9.9%

   

Emami, Ltd.

    3,520,577        53,038,228   

Bajaj Corp., Ltd. b

    5,759,447        36,857,511   

Dabur India, Ltd.

    8,332,176        34,813,557   

Marico, Ltd.

    7,362,328        25,130,114   
   

 

 

 
    149,839,410   
   

 

 

 
   

Tobacco: 6.9%

   

ITC, Ltd.

    14,617,949        72,283,101   

VST Industries, Ltd.†

    1,215,704        31,082,796   
   

 

 

 
    103,365,897   
   

 

 

 
   

Food Products: 1.4%

   

Zydus Wellness, Ltd.

    1,670,471        21,813,810   
   

 

 

 

Total Consumer Staples

  

    275,019,117   
   

 

 

 
   
INFORMATION TECHNOLOGY: 16.8%                

IT Services: 12.9%

   

eClerx Services, Ltd.†

    3,135,581        67,149,179   

Cognizant Technology Solutions Corp. Class Ab

    1,082,700        64,983,654   

Mindtree, Ltd.

    2,888,292        62,378,571   
   

 

 

 
    194,511,404   
   

 

 

 
   

Internet Software & Services: 3.9%

   

Info Edge India, Ltd.

    3,072,208        39,585,498   

Just Dial, Ltd.

    1,528,000        19,379,275   
   

 

 

 
      58,964,773   
   

 

 

 

Total Information Technology

      253,476,177   
   

 

 

 
   
     Shares     Value  
HEALTH CARE: 14.9%    

Pharmaceuticals: 14.1%

   

Taro Pharmaceutical Industries, Ltd.b

    501,466        $77,501,570   

Ajanta Pharma, Ltd.

    2,992,072        59,956,701   

Sun Pharma Advanced Research Co., Ltd.b

    4,651,736        23,793,898   

Sun Pharmaceutical Industries, Ltd.

    1,867,725        23,104,182   

Alembic Pharmaceuticals, Ltd.

    2,042,940        21,461,581   

Caplin Point Laboratories, Ltd.

    264,872        5,635,653   
   

 

 

 
    211,453,585   
   

 

 

 
   

Health Care Equipment & Supplies: 0.8%

   

Poly Medicure, Ltd.

    2,076,732        12,449,811   
   

 

 

 

Total Health Care

  

    223,903,396   
   

 

 

 
   
INDUSTRIALS: 9.7%                

Machinery: 5.1%

   

AIA Engineering, Ltd.

    3,107,467        41,780,911   

Thermax, Ltd.

    1,501,877        20,544,268   

Ashok Leyland, Ltd.

    11,106,152        14,693,261   
   

 

 

 
    77,018,440   
   

 

 

 
   

Air Freight & Logistics: 1.8%

   

Blue Dart Express, Ltd.

    261,973        26,707,715   
   

 

 

 
   

Road & Rail: 1.6%

   

Container Corp. of India, Ltd.

    1,191,324        23,612,067   
   

 

 

 
   

Transportation Infrastructure: 1.2%

   

Gujarat Pipavav Port, Ltd.b

    8,578,564        18,221,810   
   

 

 

 

Total Industrials

  

    145,560,032   
   

 

 

 
   
CONSUMER DISCRETIONARY: 8.2%                

Textiles, Apparel & Luxury Goods: 5.0%

   

Titan Co., Ltd.

    7,860,467        41,095,343   

Page Industries, Ltd.

    107,100        21,614,593   

Kewal Kiran Clothing, Ltd.

    266,781        8,887,424   

Vaibhav Global, Ltd.b

    500,000        3,769,485   
   

 

 

 
    75,366,845   
   

 

 

 
   

Household Durables: 3.2%

   

Symphony, Ltd.

    1,166,560        40,630,679   

LA Opala RG, Ltd.

    746,323        7,171,775   
   

 

 

 
      47,802,454   
   

 

 

 

Total Consumer Discretionary

      123,169,299   
   

 

 

 
   
MATERIALS: 5.4%                

Chemicals: 3.5%

   

Supreme Industries, Ltd.

    1,988,965        20,435,426   

Asian Paints, Ltd.

    1,379,000        18,370,639   

Castrol India, Ltd.

    2,139,063        14,246,267   
   

 

 

 
    53,052,332   
   

 

 

 
   

Metals & Mining: 1.9%

   

NMDC, Ltd.

    21,023,892        28,457,932   
   

 

 

 

Total Materials

      81,510,264   
   

 

 

 
   
 

 

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Table of Contents

Matthews India Fund

December 31, 2015

Schedule of Investmentsa (continued)

 

          Value  
TOTAL INVESTMENTS: 100.1%         $1,507,169,715   

(Cost $1,264,551,439c)

   
   
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS: (0.1%)       (1,342,721
   

 

 

 

NET ASSETS: 100.0%

      $1,505,826,994   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $1,264,693,757 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $331,685,282   

Gross unrealized depreciation

    (89,209,324
 

 

 

 

Net unrealized appreciation

    $242,475,958   
 

 

 

 

 

Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

 

ADR American Depositary Receipt

See accompanying notes to financial statements.

 

 

62    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS

Kenichi Amaki    

Lead Manager

   
Taizo Ishida    

Co-Manager

   
FUND FACTS
    Investor   Institutional

Ticker

  MJFOX   MIJFX

CUSIP

  577130800   577130792

Inception

  12/31/98   10/29/10

NAV

  $18.97   $19.00

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

  0.99%   0.87%

Portfolio Statistics

   

Total # of Positions

    61

Net Assets

    $1.9 billion

Weighted Average Market Cap

 

$16.0 billion

Portfolio Turnover2

     

24.19%

Benchmark

MSCI Japan Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Japan.

Matthews Japan Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Japan Fund returned 20.83% (Investor Class) and 20.94% (Institutional Class) outperforming its benchmark, the MSCI Japan Index, which returned 9.90%. For the fourth quarter of the year, the Fund returned 10.42% (Investor Class) and 10.47% (Institutional Class) versus 9.38% for the Index.

Market Environment:

Japanese equities finally delivered in 2015—marking the first time since 2010 that the MSCI Japan Index, which gained 9.90%, outperformed the S&P 500 Index, which gained 1.37%, in U.S. dollar terms. While investors cheered robust corporate earnings and rising shareholder returns, markets were also supported by outsized purchases by the Bank of Japan and government pension funds. In fact, 2015 was a rare year in which market gains were not driven by overseas fund inflows. Japan’s currency, the yen, remained within a tight range throughout the year and had little impact on equity performance.

However, it was a disappointing year for the economy, which continued to stagnate due to weak consumption and capital expenditures. Higher product prices, particularly in food, apparel and other daily necessities, somewhat curtailed consumer spending. Wage growth has not been sufficient enough to improve consumer sentiment.

Performance and Contributors:

The consumer discretionary sector was the leading contributor to Fund performance in 2015. Names we added during the year, such as hotel and dormitory operator Kyoritsu Maintenance and retailer Ryohin Keikaku were some top performers. Both benefited from rising household incomes in China as inbound tourism pushed up hotel occupancy in Japan and Ryohin Keikaku saw robust sales growth for its MUJI brand stores in China. The top absolute contributor was Asahi Intecc, a medical device company. We have held Asahi Intecc for more than five years, and the firm continues to exceed expectations in terms of both regional expansions as well as new product launches.

On the other hand, among the worst-performing holdings was telecom operator SoftBank. Turning around Softbank’s U.S. subsidiary, Sprint, proved to be a far larger challenge than SoftBank had expected. Intervention by the Japanese government to lower telecom tariffs has also weighed on SoftBank’s share price. We decided to exit SoftBank as we believe government intervention in the telecom sector may continue, and that it would limit SoftBank’s ability to generate sufficient cash flow to fund its many ventures, including Sprint.

Notable Portfolio Changes:

Over the course of the year, we have increased exposure to service-oriented businesses. Business activity in Japan remains robust while labor is becoming harder to find and gradually more expensive. Given such an environment, we believe service companies that can provide a means for businesses to be more productive have an opportunity to grow their presence. In the past quarter, we added MISUMI Group, a company that sells machine tool and automation components online. Our focus on more service-oriented firms also puts us more in line with the actual composition of Japan’s increasingly service-oriented economy, while the benchmark remains dominated by large-scale manufacturing businesses.

Outlook:

From a top-down perspective, we expect Japan’s GDP growth to continue to stagnate in 2016. Weak consumption continues to be a drag on growth. Hourly wages

(continued)

 

 

 

1 Actual 2015 expense ratios.
2 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

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Table of Contents
 
PERFORMANCE AS OF DECEMBER 31, 2015  
 

 

   3 Months      1 Year      Average Annual Total Returns      Inception
Date
 
           3 Years      5 Years      10 Years      Since
Inception
    

Investor Class (MJFOX)

     10.42%         20.83%         16.41%         9.53%         2.16%         5.88%         12/31/98   

Institutional Class (MIJFX)

     10.47%         20.94%         16.56%         9.65%         n.a.         11.59%         10/29/10   

MSCI Japan Index3

     9.38%         9.90%         10.45%         4.61%         1.08%         2.93% 4    

Lipper Japanese Funds Category Average5

     8.97%         12.03%         11.65%         5.95%         0.63%         4.01% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definitions.

 

  4 Calculated from 12/31/98.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

     
TOP TEN POSITIONS6              
     Sector      % of Net Assets  

Kao Corp.

   Consumer Staples        3.0%   

Toyota Motor Corp.

   Consumer Discretionary        2.6%   

Tokio Marine Holdings, Inc.

   Financials        2.5%   

Pigeon Corp.

   Consumer Staples        2.5%   

Asahi Intecc Co., Ltd.

   Health Care        2.4%   

Nihon M&A Center, Inc.

   Industrials        2.3%   

Keyence Corp.

   Information Technology        2.2%   

Ryohin Keikaku Co., Ltd.

   Consumer Discretionary        2.2%   

Hoya Corp.

   Health Care        2.2%   

COOKPAD, Inc.

   Information Technology        2.2%   

% OF ASSETS IN TOP TEN

          24.1%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

64    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Japan Fund

Portfolio Manager Commentary (unaudited) (continued)

have seen consistent growth of approximately 1% year-over-year but so far have not resulted in increased consumption. Productivity gains remain benign and businesses have not undertaken sufficient investment to boost productivity going forward.

On the other hand, we believe the bottom-up picture looks fine. Though we expect profit growth in Japan to slow in 2016, such growth should still be higher on a relative basis compared to other major markets. Valuations also remain attractive on a relative basis despite the gains seen in 2015.

The most notable event for investors in 2015 was the implementation of Japan’s Corporate Governance Code. Dividends paid out by listed firms have increased substantially on the back of strong earnings. Major banks have announced detailed plans to further dispose of cross shareholdings.1 Though we do not expect a quick and drastic change in Japan’s corporate culture, we believe these developments may bring about a gradual improvement in return on equity for listed Japanese companies. These improvements may prompt a further market re-rating of Japanese equities over the long term, and as such, we remain optimistic on the outlook for Japanese equities.

 

1 Cross Shareholdings: A situation in which a publicly traded corporation owns stock in another listed entity.
   
SECTOR ALLOCATION (%)7      
Industrials     25.2   
Consumer Discretionary     16.5   
Consumer Staples     14.9   
Health Care     13.3   
Information Technology     12.8   
Financials     10.5   
Materials     2.3   
Cash and Other Assets, Less Liabilities     4.5   

 

   
MARKET CAP EXPOSURE (%)7      

Mega Cap (over $25B)

    16.5   

Large Cap ($10B–$25B)

    18.7   

Mid Cap ($3B–10B)

    18.6   

Small Cap (under $3B)

    41.7   

Cash and Other Assets, Less Liabilities

    4.5   

 

7 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.
 

 

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Table of Contents

Matthews Japan Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: JAPAN: 95.5%

 

     Shares     Value  
INDUSTRIALS: 25.2%    

Professional Services: 7.6%

  

 

Nihon M&A Center, Inc.

    923,500        $44,463,081   

TechnoPro Holdings, Inc.

    1,380,700        40,295,867   

Nomura Co., Ltd.

    1,945,400        29,894,675   

Benefit One, Inc.

    889,800        20,802,414   

Recruit Holdings Co., Ltd.

    432,200        12,703,995   
   

 

 

 
      148,160,032   
   

 

 

 
   

Machinery: 7.2%

  

 

Komatsu, Ltd.

    2,270,100        37,144,401   

Mitsubishi Heavy Industries, Ltd.

    8,421,000        36,820,838   

Harmonic Drive Systems, Inc.

    1,553,200        33,591,409   

SMC Corp.

    128,600        33,401,781   
   

 

 

 
      140,958,429   
   

 

 

 
   

Electrical Equipment: 3.7%

  

 

Mabuchi Motor Co., Ltd.

    691,600        37,481,205   

Nidec Corp.

    472,500        34,263,806   
   

 

 

 
      71,745,011   
   

 

 

 
   

Building Products: 2.8%

  

 

Daikin Industries, Ltd.

    402,200        29,288,880   

Aica Kogyo Co., Ltd.

    1,298,500        25,516,059   
   

 

 

 
      54,804,939   
   

 

 

 
   

Trading Companies & Distributors: 2.1%

  

 

MISUMI Group, Inc.

    2,954,100        40,806,916   
   

 

 

 
   

Road & Rail: 1.2%

  

 

Trancom Co., Ltd.

    429,400        23,872,140   
   

 

 

 
   

Air Freight & Logistics: 0.6%

  

 

AIT Corp.†

    1,130,300        10,956,219   
   

 

 

 

Total Industrials

      491,303,686   
   

 

 

 
   
CONSUMER DISCRETIONARY: 16.5%                

Specialty Retail: 4.7%

   

VT Holdings Co., Ltd.

    5,401,800        32,130,902   

United Arrows, Ltd.

    636,100        27,422,983   

Sac’s Bar Holdings, Inc.

    1,480,350        21,595,166   

Workman Co., Ltd.

    171,000        11,110,684   
   

 

 

 
      92,259,735   
   

 

 

 
   

Automobiles: 2.6%

  

 

Toyota Motor Corp.

    831,000        51,172,166   
   

 

 

 
   

Multiline Retail: 2.2%

  

 

Ryohin Keikaku Co., Ltd.

    213,500        43,236,189   
   

 

 

 
   

Hotels, Restaurants & Leisure: 2.0%

  

 

Kyoritsu Maintenance Co., Ltd.

    457,900        39,269,339   
   

 

 

 
   

Internet & Catalog Retail: 2.0%

  

 

Start Today Co., Ltd.

    1,198,100        38,568,297   
   

 

 

 
   

Distributors: 1.7%

  

 

Doshisha Co., Ltd.

    1,643,200        33,144,176   
   

 

 

 
   

Auto Components: 1.3%

  

 

Nifco, Inc.

    519,200        24,046,911   
   

 

 

 

Total Consumer Discretionary

      321,696,813   
   

 

 

 
   
     Shares     Value  
CONSUMER STAPLES: 14.9%    

Food & Staples Retailing: 5.5%

  

 

Seven & I Holdings Co., Ltd.

    938,500        $42,968,810   

San-A Co., Ltd.

    800,600        35,921,167   

Cosmos Pharmaceutical Corp.

    187,600        29,574,254   
   

 

 

 
      108,464,231   
   

 

 

 
   

Household Products: 3.5%

  

 

Pigeon Corp.

    1,993,900        48,372,197   

Unicharm Corp.

    969,200        19,792,687   
   

 

 

 
      68,164,884   
   

 

 

 
   

Personal Products: 3.0%

  

 

Kao Corp.

    1,134,800        58,315,951   
   

 

 

 
   

Food Products: 2.9%

  

 

Calbee, Inc.

    837,600        35,371,049   

Ariake Japan Co., Ltd.

    377,400        20,879,150   
   

 

 

 
      56,250,199   
   

 

 

 

Total Consumer Staples

      291,195,265   
   

 

 

 
   
HEALTH CARE: 13.3%                

Health Care Equipment & Supplies: 8.7%

  

 

Asahi Intecc Co., Ltd.

    1,004,200        46,147,002   

Hoya Corp.

    1,052,900        43,055,800   

Sysmex Corp.

    629,400        40,372,666   

CYBERDYNE, Inc.b

    1,537,800        25,909,319   

Daiken Medical Co., Ltd.†

    1,755,200        14,950,699   
   

 

 

 
      170,435,486   
   

 

 

 
   

Health Care Technology: 2.2%

  

 

M3, Inc.

    2,020,800        41,899,640   
   

 

 

 
   

Pharmaceuticals: 1.5%

  

 

Rohto Pharmaceutical Co., Ltd.

    1,476,300        29,453,157   
   

 

 

 
   

Health Care Providers & Services: 0.9%

  

 

N Field Co., Ltd.†

    1,006,400        10,682,592   

WIN-Partners Co., Ltd.

    432,600        6,195,423   
   

 

 

 
      16,878,015   
   

 

 

 

Total Health Care

      258,666,298   
   

 

 

 
   
INFORMATION TECHNOLOGY: 12.8%                

Electronic Equipment, Instruments & Components: 7.1%

  

Keyence Corp.

    79,600        43,748,572   

Murata Manufacturing Co., Ltd.

    270,200        38,876,725   

Omron Corp.

    915,400        30,525,765   

Anritsu Corp.

    2,275,900        14,911,844   

Dexerials Corp.

    1,013,800        10,859,731   
   

 

 

 
      138,922,637   
   

 

 

 
   

Internet Software & Services: 3.3%

  

 

COOKPAD, Inc.

    2,025,300        42,993,881   

Kakaku.com, Inc.

    1,093,500        21,508,711   
   

 

 

 
      64,502,592   
   

 

 

 
   

Software: 1.4%

  

 

NSD Co., Ltd.

    1,335,700        19,325,232   

Broadleaf Co., Ltd.

    753,800        7,418,647   
   

 

 

 
      26,743,879   
   

 

 

 
   
 

 

66    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Japan Fund

December 31, 2015

Schedule of Investmentsa (continued)

COMMON EQUITIES : JAPAN (continued)

 

     Shares     Value  

Semiconductors & Semiconductor Equipment: 1.0%

  

 

Rohm Co., Ltd.

    366,600        $18,568,608   
   

 

 

 

Total Information Technology

      248,737,716   
   

 

 

 
   
FINANCIALS: 10.5%                

Diversified Financial Services: 6.0%

  

 

ORIX Corp.

    3,025,800        42,447,326   

Zenkoku Hosho Co., Ltd.

    950,100        31,384,948   

Financial Products Group Co., Ltd.

    3,258,800        25,434,936   

eGuarantee, Inc.†

    841,800        18,101,879   
   

 

 

 
      117,369,089   
   

 

 

 
   

Insurance: 2.5%

  

 

Tokio Marine Holdings, Inc.

    1,259,400        48,643,856   
   

 

 

 
   

Banks: 2.0%

  

 

Sumitomo Mitsui Financial Group, Inc.

    1,012,900        38,227,909   
   

 

 

 

Total Financials

      204,240,854   
   

 

 

 
   
MATERIALS: 2.3%                

Chemicals: 2.3%

  

 

Shin-Etsu Chemical Co., Ltd.

    643,200        34,968,121   

MORESCO Corp.†

    774,500        10,886,881   
   

 

 

 

Total Materials

      45,855,002   
   

 

 

 
   
TOTAL INVESTMENTS: 95.5%             1,861,695,634   

(Cost $1,692,361,025c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 4.5%
      87,631,036   
   

 

 

 

NET ASSETS: 100.0%

      $1,949,326,670   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $1,696,489,403 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $228,342,366   

Gross unrealized depreciation

    (63,136,135
 

 

 

 

Net unrealized appreciation

    $165,206,231   
 

 

 

 

 

Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

See accompanying notes to financial statements.

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS    
Michael J. Oh, CFA    

Lead Manager

   
Michael B. Han, CFA  

Co-Manager

   
FUND FACTS
    Investor   Institutional

Ticker

  MAKOX   MIKOX

CUSIP

  577130305   577130826

Inception

  1/3/95   10/29/10

NAV

  $6.15   $6.18

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.10%

 

0.93%

Portfolio Statistics

   

Total # of Positions

  54

Net Assets

  $207.7 million

Weighted Average Market Cap

 

$22.1 billion

Portfolio Turnover2

 

20.36%

Benchmark

 

Korea Composite Stock Price Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in South Korea.

Matthews Korea Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Korea Fund returned 15.16% (Investor Class) and 15.27% (Institutional Class) outperforming its benchmark, the Korea Composite Stock Price Index*, which fell –4.61%. For the fourth quarter of the year, the Fund returned 4.27% (Investor Class) and 4.43% (Institutional Class) versus 0.55% for the Index.

Market Environment:

During the year, South Korea’s trade surplus reached US$90 billion—an all-time high—as declining commodity prices precipitated a slowdown in imports that outpaced its export decline. Nonetheless, the Korean won depreciated more than 7% against the U.S. dollar. Despite taking a toll on the industrials sector amid a global slowdown in investment, falling commodity pricing became a boon for Korean consumers. Consumption indicators, such as outbound travel, were strong. The outbreak of the Middle East Respiratory Syndrome (“MERS”) had hampered overall tourism and consumption data early in the summer, but abated late in the season.

Performance Contributors and Detractors:

During the fourth quarter, LG Household & Health Care and LG Chem were two top contributors to Fund performance. The former performed strongly as its beverage business saw a turnaround and its sales of cosmetics among Chinese tourists and consumers soared. The latter, LG Chem, is one of only a few major battery makers for electric vehicles globally, and the increasing popularity in electric cars has benefited the company, which added Tesla as a new client during the quarter.

For the quarter, key detractors to Fund performance included Hotel Shilla and BGF Retail. Hotel Shilla, an operator of luxury hotels and duty free shops, saw its share price decline following increased competition among duty free stores and a bidding race for licenses to run such stores. The MERS outbreak also negatively affected the company’s performance as inbound tourism slowed. For BGF Retail, a major convenience store company, we believe that there was significant profit-taking activity as the stock was strong earlier in the year. Despite the setback in the fourth quarter, BGF Retail remained the top contributor to Fund performance for the calendar year.

Notable Portfolio Changes:

During the quarter, we initiated a position in the preferred shared class of Samsung SDI, a lithium-ion battery manufacturer. In recent years, the firm underwent a series of restructuring. After selling off its petrochemical operations business to Hanwha Chemical during the quarter, the company’s remaining units were centered on the lithium-ion battery business and electric material business along with its stake in certain affiliates. In our view, the company was able to sell its commodity business at a premium at the peak of the market cycle. When we added Samsung SDI, its preferred shares were trading at more than a 40% discount to common shares.

Among our existing holdings, we trimmed E-Mart as we are concerned that the company is facing increased competition from e-commerce players. We switched some of our common shares of Amorepacific, LG Household & Health Care and Hotel Shilla into preferred shares to take advantage of more attractive valuations.

Outlook:

Overall valuations for the Korean market remain attractive, especially compared with other developed markets in the world. We are seeing encouraging signs that

 

* Korea Composite Stock Price Index performance data may be readjusted periodically by the Korea Exchange due to certain factors, including the declaration of dividends.

(continued)

 

 

 

1 Actual 2015 expense ratios.
2 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

68    MATTHEWS ASIA FUNDS


Table of Contents
               
PERFORMANCE AS OF DECEMBER 31, 2015                                                 
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      1 Year      3 Years      5 Years      10 Years      Since
Inception
     Inception
Date
 

Investor Class (MAKOX)

     4.27%         15.16%         7.97%         7.87%         6.31%         6.29%         1/3/95   

Institutional Class (MIKOX)

     4.43%         15.27%         8.06%         8.04%         n.a.         9.47%         10/29/10   

Korea Composite Stock Price Index3

     0.55%         -4.61%         -2.95%         -0.66%         3.39%         2.64% 4    

Lipper Pacific ex Japan Funds Category Average5

     4.37%         -6.61%         -0.13%         0.80%         6.06%         5.92% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 Korea Composite Stock Price Index performance data may be readjusted periodically by the Korea Exchange due to certain factors, including the declaration of dividends. It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  4 Calculated from 1/3/95.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

     
TOP TEN POSITIONS6              
     Sector      % of Net Assets  

LG Household & Health Care, Ltd., Pfd.

   Consumer Staples        4.2%   

BGF Retail Co., Ltd.

   Consumer Staples        3.9%   

Amorepacific Corp., Pfd.

   Consumer Staples        3.7%   

Samsung Electronics Co., Ltd., Pfd.

   Information Technology        3.7%   

Samsung Electronics Co., Ltd.

   Information Technology        3.5%   

Shinhan Financial Group Co., Ltd.

   Financials        3.5%   

Orion Corp.

   Consumer Staples        3.1%   

Samsung Fire & Marine Insurance Co., Ltd., Pfd.

   Financials        3.1%   

Dongbu Insurance Co., Ltd.

   Financials        2.9%   

Naver Corp.

   Information Technology        2.8%   

% OF ASSETS IN TOP TEN

          34.4%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
 
SECTOR ALLOCATION (%)7  

Consumer Staples

    26.9   

Consumer Discretionary

    21.8   

Financials

    15.8   

Information Technology

    12.7   

Materials

    5.0   

Industrials

    4.7   

Telecommunication Services

    3.6   

Health Care

    3.4   

Energy

    3.0   

Cash and Other Assets, Less Liabilities

    3.1   

 

 
MARKET CAP EXPOSURE (%)7  

Mega Cap (over $25B)

     9.5   

Large Cap ($10B–$25B)

     36.6   

Mid Cap ($3B–10B)

     23.7   

Small Cap (under $3B)

     27.1   

Cash and Other Assets, Less Liabilities

     3.1   

 

7 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

Matthews Korea Fund

Portfolio Manager Commentary (unaudited) (continued)

dividend payout ratios should continue to improve in South Korea as companies continue to announce more shareholder-friendly policies. A currency risk remains as the currently strong U.S. dollar could further weaken the won in 2016. We believe that attractive valuations, along with increasing dividends, can provide a nice tailwind to the Korean equity market going forward. We maintain a long-term approach in seeking to identify high quality companies led by capable management teams that stand to benefit from Korea’s long-term secular trends.

 

 

70    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Korea Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: SOUTH KOREA: 75.1%

 

     Shares     Value  
CONSUMER DISCRETIONARY: 19.1%    

Hotels, Restaurants & Leisure: 5.8%

  

Kangwon Land, Inc.

    136,640        $4,459,711   

Modetour Network, Inc.

    154,085        4,401,187   

Shinsegae Food Co., Ltd.

    21,316        3,119,226   
   

 

 

 
      11,980,124   
   

 

 

 
   

Auto Components: 4.7%

  

Hyundai Mobis Co., Ltd.

    23,876        4,995,565   

Hankook Tire Co., Ltd.

    119,816        4,778,955   
   

 

 

 
      9,774,520   
   

 

 

 
   

Automobiles: 2.7%

   

Kia Motors Corp.

    124,232        5,539,502   
   

 

 

 
   

Media: 2.1%

   

CJ CGV Co., Ltd.

    29,234        3,106,907   

Cheil Worldwide, Inc.b

    79,016        1,381,963   
   

 

 

 
      4,488,870   
   

 

 

 
   

Specialty Retail: 1.7%

  

Hotel Shilla Co., Ltd.

    54,569        3,573,132   
   

 

 

 
   

Multiline Retail: 1.3%

  

Hyundai Department Store Co., Ltd.

    24,494        2,625,203   
   

 

 

 
   

Internet & Catalog Retail: 0.8%

  

NS Shopping Co., Ltd.

    10,422        1,641,358   
   

 

 

 

Total Consumer Discretionary

      39,622,709   
   

 

 

 
   
CONSUMER STAPLES: 18.9%                

Food Products: 8.7%

  

Orion Corp.

    6,503        6,423,419   

Ottogi Corp.

    5,434        5,631,571   

Daesang Corp.

    112,977        3,107,768   

Binggrae Co., Ltd.

    48,495        2,819,156   
   

 

 

 
      17,981,914   
   

 

 

 
   

Food & Staples Retailing: 7.3%

  

BGF Retail Co., Ltd.

    56,179        8,133,120   

Hyundai Greenfood Co., Ltd.

    192,083        4,034,740   

E-Mart, Inc.

    18,489        2,966,737   
   

 

 

 
      15,134,597   
   

 

 

 
   

Household Products: 1.9%

  

LG Household & Health Care, Ltd.

    4,509        4,003,915   
   

 

 

 
   

Personal Products: 1.0%

  

Amorepacific Corp.

    6,180        2,168,730   
   

 

 

 

Total Consumer Staples

      39,289,156   
   

 

 

 
   
FINANCIALS: 12.8%                

Banks: 5.5%

  

Shinhan Financial Group Co., Ltd.

    213,636        7,176,409   

KB Financial Group, Inc.

    82,672        2,329,185   

DGB Financial Group, Inc.

    224,584        1,913,238   
   

 

 

 
      11,418,832   
   

 

 

 
   

Insurance: 4.2%

  

Dongbu Insurance Co., Ltd.

    100,190        5,994,516   

Samsung Fire & Marine Insurance Co., Ltd.

    10,355        2,706,862   
   

 

 

 
      8,701,378   
   

 

 

 
     Shares     Value  

Capital Markets: 3.1%

  

Shinyoung Securities Co., Ltd.

    80,699        $3,484,427   

Kiwoom Securities Co., Ltd.

    55,912        2,919,728   
   

 

 

 
      6,404,155   
   

 

 

 

Total Financials

      26,524,365   
   

 

 

 
   
INFORMATION TECHNOLOGY: 8.4%                

Technology Hardware, Storage & Peripherals: 3.5%

  

Samsung Electronics Co., Ltd.

    6,830        7,284,757   
   

 

 

 
   

Internet Software & Services: 2.8%

  

Naver Corp.

    10,510        5,860,790   
   

 

 

 
   

Semiconductors & Semiconductor Equipment: 1.6%

  

SK Hynix, Inc.

    64,368        1,662,816   

Koh Young Technology, Inc.

    47,439        1,550,794   
   

 

 

 
      3,213,610   
   

 

 

 
   

Electronic Equipment, Instruments & Components: 0.5%

  

Bixolon Co., Ltd.

    84,519        1,075,175   
   

 

 

 

Total Information Technology

      17,434,332   
   

 

 

 
   
INDUSTRIALS: 4.7%                

Commercial Services & Supplies: 1.5%

  

KEPCO Plant Service & Engineering Co., Ltd.

    41,246        3,120,001   
   

 

 

 
   

Professional Services: 1.2%

  

SaraminHR Co., Ltd.

    120,621        2,353,145   
   

 

 

 
   

Machinery: 1.0%

  

Hy-Lok Corp.

    100,845        2,127,792   
   

 

 

 
   

Trading Companies & Distributors: 1.0%

  

iMarketKorea, Inc.

    98,161        2,106,244   
   

 

 

 

Total Industrials

      9,707,182   
   

 

 

 
   
TELECOMMUNICATION SERVICES: 3.6%                

Wireless Telecommunication Services: 2.2%

  

SK Telecom Co., Ltd. ADR

    226,600        4,565,990   
   

 

 

 
   

Diversified Telecommunication Services: 1.4%

  

KT Corp. ADRb

    241,200        2,872,692   
   

 

 

 

Total Telecommunication Services

      7,438,682   
   

 

 

 
   
HEALTH CARE: 3.4%                

Pharmaceuticals: 3.4%

  

Yuhan Corp.

    13,026        3,004,996   

Dong-A ST Co., Ltd.

    23,987        2,971,798   

DongKook Pharmaceutical Co., Ltd.

    24,611        1,218,992   
   

 

 

 

Total Health Care

      7,195,786   
   

 

 

 
   
MATERIALS: 2.2%                

Chemicals: 2.2%

  

LG Chem, Ltd.

    13,283        3,667,213   

KPX Chemical Co., Ltd.

    21,148        868,648   
   

 

 

 

Total Materials

      4,535,861   
   

 

 

 
   
ENERGY: 2.0%                

Oil, Gas & Consumable Fuels: 2.0%

  

SK Innovation Co., Ltd.b

    23,026        2,525,284   

S-Oil Corp.

    24,496        1,640,896   
   

 

 

 

Total Energy

      4,166,180   
   

 

 

 
   
TOTAL COMMON EQUITIES             155,914,253   
   

 

 

 

(Cost $108,872,054)

   
 

 

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Table of Contents

Matthews Korea Fund

December 31, 2015

Schedule of Investmentsa (continued)

PREFERRED EQUITIES: SOUTH KOREA: 21.8%

 

     Shares     Value  
CONSUMER STAPLES: 8.0%    

Household Products: 4.2%

  

LG Household & Health Care, Ltd., Pfd.

    18,986        $8,770,935   
   

 

 

 
   

Personal Products: 3.8%

  

Amorepacific Corp., Pfd.

    39,808        7,757,450   
   

 

 

 

Total Consumer Staples

      16,528,385   
   

 

 

 
   
INFORMATION TECHNOLOGY: 4.3%                

Technology Hardware, Storage & Peripherals: 3.7%

  

Samsung Electronics Co., Ltd., Pfd.

    8,351        7,719,565   
   

 

 

 
   

Electronic Equipment, Instruments & Components: 0.6%

  

Samsung SDI Co., Ltd., Pfd.

    20,284        1,267,646   
   

 

 

 

Total Information Technology

      8,987,211   
   

 

 

 
   
FINANCIALS: 3.0%                

Insurance: 3.0%

  

Samsung Fire & Marine Insurance Co., Ltd., Pfd.

    39,526        6,346,051   
   

 

 

 

Total Financials

      6,346,051   
   

 

 

 
   
MATERIALS: 2.8%                

Chemicals: 2.8%

  

LG Chem, Ltd., Pfd.

    27,910        5,831,001   
   

 

 

 

Total Materials

      5,831,001   
   

 

 

 
   
CONSUMER DISCRETIONARY: 2.7%                

Automobiles: 2.3%

  

Hyundai Motor Co., Ltd., 2nd Pfd.

    53,516        4,763,318   
   

 

 

 
   

Specialty Retail: 0.4%

  

Hotel Shilla Co., Ltd., Pfd.

    18,549        777,704   
   

 

 

 

Total Consumer Discretionary

      5,541,022   
   

 

 

 
   
ENERGY: 1.0%                

Oil, Gas & Consumable Fuels: 1.0%

  

S-Oil Corp., Pfd.

    51,498        2,030,053   
   

 

 

 

Total Energy

      2,030,053   
   

 

 

 
   
TOTAL PREFERRED EQUITIES             45,263,723   
   

 

 

 

(Cost $25,859,805)

   
   
TOTAL INVESTMENTS: 96.9%             201,177,976   

(Cost $134,731,859c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 3.1%
      6,489,066   
   

 

 

 

NET ASSETS: 100.0%

      $207,667,042   
   

 

 

 
a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $137,871,194 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $70,679,353   

Gross unrealized depreciation

    (7,372,571
 

 

 

 

Net unrealized appreciation

    $63,306,782   
 

 

 

 

 

ADR American Depositary Receipt

 

Pfd. Preferred

See accompanying notes to financial statements.

 

 

72    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Lydia So, CFA  

Lead Manager

 
Kenichi Amaki   Beini Zhou, CFA

Co-Manager

  Co-Manager
FUND FACTS
    Investor   Institutional

Ticker

  MSMLX   MISMX

CUSIP

  577125206   577125867

Inception

  9/15/08   4/30/13

NAV

  $19.41   $19.40

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.48%

 

1.30%

After Fee Waiver and Reimbursement2

  1.47%   1.25%

Portfolio Statistics

   

Total # of Positions

  76

Net Assets

  $609.9 million

Weighted Average Market Cap

 

$1.2 billion

Portfolio Turnover3

 

48.29%

Benchmark

 

MSCI AC Asia ex Japan Small Cap Index

Redemption Fee

 

2% within first 90 calendar days of purchase

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of Small Companies located in Asia ex Japan, which consists of all countries and markets in Asia excluding Japan, but including all other developed, emerging and frontier countries and markets in the Asian region.

Matthews Asia Small Companies Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Asia Small Companies Fund returned –9.43% (Investor Class) and –9.23% (Institutional Class), while its benchmark, the MSCI All Country Asia ex Japan Small Cap Index, returned –3.28%. For the fourth quarter of the year, the Fund returned 3.55% (Investor Class) and 3.62% (Institutional Class), versus 4.83% for the Index.

Market Environment:

Asia’s equity markets stabilized somewhat in the fourth quarter of 2015, after earlier anxieties that had rocked emerging markets abated. However, underlying concerns persisted over the effects of depressed commodity prices, weak emerging market currencies and the implications of the U.S. Federal Reserve interest rate hike on further capital outflows. China’s sluggish economic growth continued to have spillover effects on the rest of Asia, especially for commodity export-dependent countries. Late in the year, the International Monetary Fund (IMF) included China’s currency, the renminbi, in the basket of currencies that make up the IMF’s Special Drawing Right, or SDR. This development should be constructive for the continued internationalization of the currency. Finally, toward the end of the year, the U.S. Federal Reserve hiked interest rates for the first time since 2006 as long-anticipated by the market.

Performance Contributors and Detractors:

Holdings leveraged to Chinese industrial and capital expenditure investment activities were the portfolio’s main performance detractors during the year. Some Indonesian holdings performed poorly because of stock-specific operational issues as well as macroeconomic headwinds.

During the fourth quarter of 2015, holdings that sustained growth momentum and were less sensitive to macroeconomic factors performed relatively better. Vitasoy International, a Hong Kong-based beverage manufacturer, was a major contributor to performance. Its China operations registered robust volume growth and operating efficiency as prudent expansion and investments from past years bore fruit. China Biologic Products, a Chinese biopharmaceutical company, also performed strongly as demand for its blood plasma products remained robust. On the other hand, subdued industrial activities globally hampered share price and valuation multiples for our Korean holding Hy-Lok. The firm suffered as the trajectory for demand of its precision fitting products turned more uncertain toward the second half of the year.

Notable Portfolio Changes:

During the quarter, we adjusted the portfolio, exiting many holdings in various industries for company-specific reasons. One company we shed was Tisco Financial Group, a Thai consumer finance company. Despite being well-managed, slowing demand in auto-related loans as well as certain asset quality issues may persist longer than expected. We initiated positions in fast-growing companies that operate in industries that are beneficiaries of structural shifts. For example, we added KCE Electronics, a printed circuit board manufacturer based in Thailand, as the

(continued)

 

 

1 Actual 2015 expense ratios.
2 Matthews has contractually agreed (i) to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) of the Institutional Class to 1.25% first by waiving class specific expenses (i.e., Rule 12b-1 fees or shareholder service fees specific to a particular class) of the Institutional Class and then, to the extent necessary, by waiving non-class specific expenses of the Institutional Class, and (ii) if any Fund-wide expenses (i.e., expenses that apply to both the Institutional Class and the Investor Class) are waived for the Institutional Class to maintain the 1.25% expense limitation, to waive an equal amount (in annual percentage terms) of those same expenses for the Investor Class. The Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursement for the Investor Class may vary from year to year and will in some years exceed 1.25%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
3 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

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Table of Contents
             
PERFORMANCE AS OF DECEMBER 31, 2015                                          
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      1 Year      3 Years      5 Years      Since
Inception
     Inception
Date
 
Investor Class (MSMLX)      3.55%         -9.43%         2.64%         1.39%         12.29%         9/15/2008   
Institutional Class (MISMX)      3.62%         -9.23%         n.a.         n.a.         0.55%         4/30/2013   
MSCI AC Asia ex Japan Small Cap Index3      4.83%         -3.28%         2.06%         -0.87%         7.95% 4    
Lipper Pacific ex Japan Funds Category Average5      4.37%         -6.61%         -0.13%         0.80%         7.14% 6    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data does not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  4 Calculated from 9/15/08.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

  6 Calculated from 9/30/08.

 

       
TOP TEN POSITIONS7                     
     Sector      Country      % of Net Assets  

Vitasoy International Holdings, Ltd.

   Consumer Staples      China/Hong Kong        3.3%   
Fairwood Holdings, Ltd.    Consumer Discretionary      China/Hong Kong        2.4%   
Kerry Logistics Network, Ltd.    Industrials      China/Hong Kong        2.4%   
PChome Online, Inc.    Information Technology      Taiwan        2.2%   
Lee’s Pharmaceutical Holdings, Ltd.    Health Care      China/Hong Kong        2.2%   
Karex BHD    Consumer Staples      Malaysia        2.1%   
Clear Media, Ltd.    Consumer Discretionary      China/Hong Kong        1.9%   
i-SENS, Inc.    Health Care      South Korea        1.9%   
Interpark Corp.    Consumer Discretionary      South Korea        1.9%   
Lifetech Scientific Corp.    Health Care      China/Hong Kong        1.8%   
% OF ASSETS IN TOP TEN                22.1%   

 

  7 Holdings may combine more than one security from same issuer and related depositary receipts.

 

74    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Small Companies Fund

Portfolio Manager Commentary (unaudited) (continued)

company had demonstrated the ability to gain market share while improving profitability. We believe that the company is well-positioned to benefit from the ongoing global trend we have seen of more electronic components being used in automobiles.

Outlook:

With China’s ongoing structural reform efforts over capital markets and its economic rebalancing, we believe there will inevitably be some painful adjustments resulting in slower growth rates over the medium term. Looking across the region, some governments had struggled to deliver constructive policies on infrastructure investments to spur growth because of country-specific political constraints. Given the challenging economic backdrop, companies might face an increasingly tough operating environment as corporate and consumer demands remain tepid. As prospects for a broad-based economic growth pick-up in the region remain uncertain, we continue to favor companies that are financially sound and better-positioned to withstand cyclical downturns. As investors driven by bottom-up fundamentals, we remain constructive on selecting entrepreneurial companies within the vast Asia small-cap universe that are disciplined capital allocators and focused on executing their respective corporate strategies over the long term.

Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than larger companies. 

   
COUNTRY ALLOCATION (%)8,9      
China/Hong Kong     31.7   
Taiwan     16.5   
India     15.1   
South Korea     7.8   
Singapore     6.5   
Thailand     5.6   
Indonesia     5.0   
Malaysia     4.1   
Philippines     4.1   
Vietnam     0.5   
Cash and Other Assets, Less Liabilities     3.1   

 

   
SECTOR ALLOCATION (%)9      
Industrials     19.8   
Consumer Discretionary     16.8   
Consumer Staples     16.2   
Information Technology     16.0   
Health Care     13.6   
Financials     10.3   
Materials     2.6   
Utilities     1.6   
Cash and Other Assets, Less Liabilities     3.1   

 

   
MARKET CAP EXPOSURE (%)9,10      
Mega Cap (over $25B)     0.0   
Large Cap ($10B–$25B)     0.0   
Mid Cap ($3B–10B)     2.2   
Small Cap (under $3B)     94.7   
Cash and Other Assets, Less Liabilities     3.1   

 

8 Not all countries where the Fund may invest are included in the benchmark index.

 

9 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

 

10 The Fund defines Small Companies as companies with market capitalization generally between $100 million and $3 billion or the largest company included in the Fund’s primary benchmark, the MSCI All Country Asia ex Japan Small Cap Index.
 

 

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Table of Contents

Matthews Asia Small Companies Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 96.9%

 

     Shares     Value  
CHINA/HONG KONG: 31.7%    

Vitasoy International Holdings, Ltd.

    9,920,000        $20,291,118   

Fairwood Holdings, Ltd.

    4,710,000        14,798,782   

Kerry Logistics Network, Ltd.

    10,117,000        14,716,122   

Lee’s Pharmaceutical Holdings, Ltd.

    10,582,500        13,207,425   

Clear Media, Ltd.

    11,162,000        11,503,859   

Lifetech Scientific Corp.b

    58,136,000        11,019,491   

Qingdao Port International Co., Ltd. H Shares

    23,146,000        10,306,931   

Sunny Optical Technology Group Co., Ltd.

    4,416,000        10,071,829   

Towngas China Co., Ltd.

    17,006,000        9,852,225   

China Distance Education Holdings, Ltd. ADR

    655,399        9,627,811   

Minth Group, Ltd.

    4,676,000        9,289,628   

51job, Inc. ADRb

    300,800        8,861,568   

Bitauto Holdings, Ltd. ADRb

    303,200        8,574,496   

Phoenix New Media, Ltd. ADRb

    1,349,556        8,124,327   

China Biologic Products, Inc.b

    55,354        7,885,731   

eHi Car Services, Ltd. ADRb

    617,235        7,770,989   

Convenience Retail Asia, Ltd.

    15,896,000        7,137,771   

Regina Miracle International Holdings, Ltd.b

    4,476,052        6,526,330   

YGM Trading, Ltd.

    5,708,000        3,682,557   
   

 

 

 

Total China/Hong Kong

      193,248,990   
   

 

 

 
   
TAIWAN: 16.5%                

PChome Online, Inc.

    1,347,241        13,392,859   

Merida Industry Co., Ltd.

    2,040,000        10,940,832   

Voltronic Power Technology Corp.

    702,848        10,423,866   

Sporton International, Inc.

    1,692,094        10,323,799   

Aerospace Industrial Development Corp.

    8,310,000        10,132,531   

Adlink Technology, Inc.

    3,907,811        8,989,297   

Addcn Technology Co., Ltd.

    1,098,500        8,905,442   

TSC Auto ID Technology Co., Ltd.

    893,100        8,642,251   

FineTek Co., Ltd.†

    3,192,920        7,205,664   

Sinmag Equipment Corp.

    2,037,517        6,426,761   

Sunny Friend Environmental Technology Co., Ltd.

    1,329,000        5,169,130   
   

 

 

 

Total Taiwan

      100,552,432   
   

 

 

 
   
INDIA: 15.1%                

Bajaj Corp., Ltd.b

    1,527,896        9,777,752   

GRUH Finance, Ltd.

    2,156,236        8,888,958   

Mindtree, Ltd.

    403,256        8,709,138   

Berger Paints India, Ltd.

    2,124,515        8,611,922   

Ipca Laboratories, Ltd.

    713,883        7,974,158   

Supreme Industries, Ltd.

    708,293        7,277,287   

AIA Engineering, Ltd.

    505,689        6,799,154   

CRISIL, Ltd.

    228,579        6,776,631   

Page Industries, Ltd.

    33,163        6,692,855   

LA Opala RG, Ltd.

    582,275        5,595,359   

Emami, Ltd.

    355,325        5,353,045   

Just Dial, Ltd.

    402,786        5,108,443   

Gujarat Pipavav Port, Ltd.b

    2,278,002        4,838,726   
   

 

 

 

Total India

      92,403,428   
   

 

 

 
   
     Shares     Value  
SOUTH KOREA: 7.8%    

i-SENS, Inc.b

    398,104        $11,476,050   

Interpark Corp.

    588,879        11,406,020   

Medy-Tox, Inc.

    21,781        9,411,956   

NICE Holdings Co., Ltd.

    420,475        7,750,587   

Hy-Lok Corp.

    366,921        7,741,897   
   

 

 

 

Total South Korea

      47,786,510   
   

 

 

 
   
SINGAPORE: 6.5%    

ARA Asset Management, Ltd.

    12,768,318        10,576,632   

Raffles Medical Group, Ltd.

    3,218,200        9,434,759   

iFAST Corp., Ltd.

    7,011,500        6,654,808   

Super Group, Ltd.

    10,898,000        6,425,493   

Petra Foods, Ltd.

    3,616,200        5,350,905   

ISEC Healthcare, Ltd.

    6,930,800        1,173,617   
   

 

 

 

Total Singapore

      39,616,214   
   

 

 

 
   
THAILAND: 5.6%                

KCE Electronics Public Co., Ltd.

    4,590,300        8,872,981   

Bangkok Chain Hospital Public Co., Ltd.

    33,672,475        8,434,445   

Supalai Public Co., Ltd.

    13,225,600        6,656,056   

Aeon Thana Sinsap Thailand Public Co., Ltd.

    2,234,400        5,962,882   

Plan B Media Public Co., Ltd. F Sharesb

    12,394,400        2,431,733   

Forth Smart Service Public Co., Ltd.

    4,031,300        1,718,011   

Aeon Thana Sinsap Thailand Public Co., Ltd. NVDR

    88,700        236,711   
   

 

 

 

Total Thailand

      34,312,819   
   

 

 

 
   
INDONESIA: 5.0%                

PT Sumber Alfaria Trijaya

    172,892,000        7,274,382   

PT Selamat Sempurna

    20,489,400        7,075,049   

PT Bank Tabungan Pensiunan Nasionalb

    33,715,400        5,850,557   

PT Ultrajaya Milk Industry & Trading Co.b

    17,446,900        4,974,616   

PT Wismilak Inti Makmur

    89,261,900        2,766,739   

PT Astra Otoparts

    22,315,625        2,576,679   
   

 

 

 

Total Indonesia

      30,518,022   
   

 

 

 
   
MALAYSIA: 4.1%                

Karex BHD

    13,389,050        12,857,218   

7-Eleven Malaysia Holdings BHD

    25,278,100        9,066,793   

GD Express Carrier BHD

    7,266,100        2,917,511   
   

 

 

 

Total Malaysia

      24,841,522   
   

 

 

 
   
PHILIPPINES: 4.1%                

Security Bank Corp.

    3,375,367        10,155,255   

Concepcion Industrial Corp.

    7,812,030        7,138,822   

RFM Corp.

    51,834,200        4,351,187   

Philippine Seven Corp.

    1,454,751        3,091,597   
   

 

 

 

Total Philippines

      24,736,861   
   

 

 

 
   
VIETNAM: 0.5%                

DHG Pharmaceutical JSC

    995,900        2,945,401   
   

 

 

 

Total Vietnam

      2,945,401   
   

 

 

 
   
TOTAL COMMON EQUITIES             590,962,199   
   

 

 

 

(Cost $560,865,373)

   
 

 

76    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Small Companies Fund

December 31, 2015

Schedule of Investmentsa (continued)

RIGHTS: 0.0%

 

     Shares     Value  
TAIWAN: 0.0%    

Adlink Technology, Inc., expires 1/11/16b

    220,240        $77,505   
   

 

 

 

Total Taiwan

      77,505   
   

 

 

 
   
TOTAL RIGHTS             77,505   
   

 

 

 

(Cost $0)

   
   
TOTAL INVESTMENTS: 96.9%             591,039,704   

(Cost $560,865,373c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 3.1%
      18,875,004   
   

 

 

 

NET ASSETS: 100.0%

      $609,914,708   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $561,290,826 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $109,047,063   

Gross unrealized depreciation

    (79,298,185
 

 

 

 

Net unrealized appreciation

    $29,748,878   
 

 

 

 

 

Affiliated Issuer, as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of this issuer)

 

ADR American Depositary Receipt

 

BHD Berhad

 

JSC Joint Stock Co.

 

NVDR Non-voting Depositary Receipt

See accompanying notes to financial statements.

 

 

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Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Tiffany Hsiao, CFA  

Lead Manager

 
Henry Zhang, CFA   Kenichi Amaki
Co-Manager   Co-Manager
FUND FACTS
    Investor Class

Ticker

  MCSMX

CUSIP

  577125404

Inception

  5/31/11

NAV

  $8.79

Initial Investment

  $2,500

Gross Expense Ratio1

  2.10%

After Fee Waiver and Reimbursement2

  1.50%

Portfolio Statistics

 

Total # of Positions

  47

Net Assets

  $21.5 million

Weighted Average Market Cap

  $1.5 billion

Portfolio Turnover3

  72.49%

Benchmark

 

MSCI China Small Cap Index

Redemption Fee

 

2% within first 90 calendar days of purchase

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of Small Companies located in China. China includes its administrative and other districts, such as Hong Kong.

Matthews China Small Companies Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews China Small Companies Fund returned 4.07%, while its benchmark, the MSCI China Small Cap Index, returned 3.48%. For the fourth quarter of the year, the Fund returned 11.06%, versus 10.33% for the Index.

Market Environment:

As we had anticipated, the fourth quarter of 2015 was much less volatile for China’s stock markets than the previous two quarters. This was likely a result of the market digesting the generally weak first half earnings data and refocusing on growth drivers for the new year. A number of key events during the quarter also helped stabilize sentiment by assuaging uncertainty going into 2016. These key events include: the International Monetary Fund’s agreement to include the Chinese renminbi into its reserve currency basket; the Chinese Ministry of Finance’s announcement of a new basket approach toward the renminbi valuation; the Chinese government’s annual central economic work conference, which set an accommodative policy direction for the new year; and the first U.S. Federal Reserve rate hike since 2006. Economic data announced toward the end of the quarter reflected a Chinese economy that is stabilizing as evidenced by the moderating deceleration of trade data, resilience of retail sales and stable fixed asset investments.

Performance Contributors and Detractors:

During the fourth quarter of 2015, positive stock selection in the health care and financials sectors were the biggest contributors to the Fund’s relative outperformance versus the benchmark. On the other hand, the technology sector posed a large drag on relative Fund performance, in part due to some holdings that pulled back following a strong third quarter.

Two of our best-performing stocks were China Biologic Products, the largest overseas-listed Chinese blood plasma collection and product maker, and Vitasoy International, a leading brand in the Greater China soy milk and tea drinks segment. China Biologic Products continues to gain market share through superior execution, and it benefits from increasing usage of blood plasma products in various therapeutic fields. Vitasoy also continues to gain share by its methodical process of expanding its presence in China.

Our top detractors during the quarter were both technology companies: TK Group Holdings and Adlink Technology—both suffered near-term setbacks as their customers scaled back on orders toward year-end. Over the long run, we believe both companies still hold a significant edge in their technology, and should benefit from upgrades related to the next phase of advanced manufacturing known as Industry 4.0. This includes a significant growth in the commercial applications for devices and embedded computing sensors that collect and exchange real-time data known as “The Internet of Things.”

Notable Portfolio Changes:

During the year, the Fund saw unusually high turnover as market conditions resulted in elevated shareholder redemptions. In order to meet these redemptions, securities that had been long held in the portfolio had to be sold. In many cases, these holdings had significantly appreciated and once sold, resulted in a higher distribution than is typical for this Fund.

During the fourth quarter, we initiated a position in Wuxi Little Swan, the second-largest washing machine maker in China. We have been impressed with the company’s supply chain transformation, which has allowed it to increase sales and lower costs at the same time. The majority of the company’s products are now produced only after an order has been placed and can be delivered to the customer within three weeks. This significantly improves cash flows through lower working capital, and it boosts sales by being more responsive to trends in the market.

(continued)

 

 

1 Actual 2015 expense ratios.
2 Matthews has contractually agreed to waive fees and reimburse expenses to the extent needed to limit Total Annual Fund Operating Expenses (excluding Rule 12b-1 fees, front-end or contingent deferred loads, taxes, interest, brokerage commissions, short sale dividend expenses, expenses incurred in connection with any merger or reorganization or extraordinary expenses such as litigation) to 1.50%. If the operating expenses fall below the expense limitation in a year within three years after Matthews has made a waiver or reimbursement, the Fund may reimburse Matthews up to an amount that does not cause the expenses for that year to exceed the expense limitation applicable at the time of that fee waiver and/or expense reimbursement or to exceed any other agreed upon expense limitation for that year. This agreement will remain in place until April 30, 2017, may be renewed for additional periods not exceeding one year and may be terminated at any time by the Board of Trustees on behalf of the Fund on 60 days’ written notice to Matthews. Matthews may decline to renew this agreement by written notice to the Trust at least 30 days before its annual expiration date.
3 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

78    MATTHEWS ASIA FUNDS


Table of Contents
           
PERFORMANCE AS OF DECEMBER 31, 2015                                   
 

 

    

 

      

 

     Average Annual
Total Returns
      

 

 
     3 Months      1 Year      3 Years      Since
Inception
     Inception
date
 

Investor Class (MCSMX)

     11.06%         4.07%         9.03%         0.21%         5/31/2011   

MSCI China Small Cap Index4

     10.33%         3.48%         6.97%         -0.47%      

Lipper China Region Funds Category Average5

     7.29%         -3.02%         2.98%         -0.11%      

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares 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. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data does not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  4 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

     
TOP TEN POSITIONS6              
     Sector      % of Net Assets  

China Biologic Products, Inc.

   Health Care        5.5%   

Voltronic Power Technology Corp.

   Industrials        4.4%   

Lee’s Pharmaceutical Holdings, Ltd.

   Health Care        4.3%   

SITC International Holdings Co., Ltd.

   Industrials        3.9%   

Sunny Optical Technology Group Co., Ltd.

   Information Technology        3.6%   

KWG Property Holding, Ltd.

   Financials        3.5%   

Boer Power Holdings, Ltd.

   Industrials        3.2%   

Yuexiu Transport Infrastructure, Ltd.

   Industrials        3.0%   

Sporton International, Inc.

   Industrials        3.0%   

China Distance Education Holdings, Ltd.

   Consumer Discretionary        2.9%   

% OF ASSETS IN TOP TEN

          37.3%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

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Table of Contents
   
COUNTRY ALLOCATION (%)7      

China/Hong Kong

    85.8   

Taiwan

    12.3   

Cash and Other Assets, Less Liabilities

    1.9   

 

   
SECTOR ALLOCATION (%)7      

Industrials

    33.7   

Consumer Discretionary

    17.4   

Health Care

    16.1   

Information Technology

    12.8   

Financials

    10.9   

Consumer Staples

    5.1   

Utilities

    2.1   

Cash and Other Assets, Less Liabilities

    1.9   

 

   
MARKET CAP EXPOSURE (%)7,8      

Mega Cap (over $25B)

    0.0   

Large Cap ($10B–$25B)

    0.0   

Mid Cap ($3B–10B)

    11.2   

Small Cap (under $3B)

    86.9   

Cash and Other Assets, Less Liabilities

    1.9   

 

7 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.

 

8 The Fund defines Small Companies as companies with market capitalization generally between $100 million and $3 billion or the largest company included in the Fund’s primary benchmark, the MSCI China Small Cap Index.

Matthews China Small Companies Fund

Portfolio Manager Commentary (unaudited) (continued)

Outlook:

Despite the continuing trend of decelerating growth in the Chinese economy, we believe the generally accommodative and constructive government policies should improve the quality of growth going forward. Furthermore, if plans such as the reform of state-owned enterprises and tax reform are executed well, small companies should benefit over the long run as they are generally more innovative, efficient and competitive. For the time being, we will continue to focus on companies with sustainable quality earnings streams that can better weather uncertain economic conditions. We still find sectors, such as industrial automation and health care, to be among the most attractive from a secular growth perspective.

Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than larger companies.

 

 

80    MATTHEWS ASIA FUNDS


Table of Contents

Matthews China Small Companies Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 98.1%

 

     Shares     Value  
INDUSTRIALS: 33.7%    

Electrical Equipment: 8.4%

   

Voltronic Power Technology Corp.

    64,261        $953,048   

Boer Power Holdings, Ltd.

    384,000        689,885   

FineTek Co., Ltd.

    72,420        163,435   
   

 

 

 
      1,806,368   
   

 

 

 
   

Transportation Infrastructure: 6.7%

   

Yuexiu Transport Infrastructure, Ltd.

    1,042,000        650,869   

Shenzhen International Holdings, Ltd.

    226,000        415,863   

Qingdao Port International Co., Ltd. H Shares

    832,000        370,490   
   

 

 

 
      1,437,222   
   

 

 

 
   

Professional Services: 5.8%

   

Sporton International, Inc.

    106,113        647,416   

51job, Inc. ADRb

    20,324        598,745   
   

 

 

 
      1,246,161   
   

 

 

 
   

Marine: 3.9%

   

SITC International Holdings Co., Ltd.

    1,608,000        850,003   
   

 

 

 
   

Machinery: 3.6%

   

TK Group Holdings, Ltd.

    1,602,000        452,688   

CIMC Enric Holdings, Ltd.

    574,000        334,414   
   

 

 

 
      787,102   
   

 

 

 
   

Road & Rail: 2.5%

   

eHi Car Services, Ltd. ADRb

    42,600        536,334   
   

 

 

 
   

Air Freight & Logistics: 2.2%

   

Kerry Logistics Network, Ltd.

    321,500        467,652   
   

 

 

 
   

Commercial Services & Supplies: 0.6%

   

Sunny Friend Environmental Technology Co., Ltd.

    34,000        132,243   
   

 

 

 

Total Industrials

      7,263,085   
   

 

 

 
   
CONSUMER DISCRETIONARY: 17.4%                

Diversified Consumer Services: 5.0%

   

China Distance Education Holdings, Ltd. ADR

    42,660        626,675   

TAL Education Group ADRb

    9,600        446,112   
   

 

 

 
      1,072,787   
   

 

 

 
   

Auto Components: 3.7%

   

Minth Group, Ltd.

    294,000        584,078   

Hu Lane Associate, Inc.

    53,000        211,185   
   

 

 

 
      795,263   
   

 

 

 
   

Hotels, Restaurants & Leisure: 3.6%

   

Fairwood Holdings, Ltd.

    162,000        509,003   

Homeinns Hotel Group ADRb

    7,550        257,908   
   

 

 

 
      766,911   
   

 

 

 
   

Household Durables: 2.0%

   

Wuxi Little Swan Co., Ltd. B Shares

    179,417        427,186   
   

 

 

 
   

Media: 1.8%

   

Clear Media, Ltd.

    385,000        396,791   
   

 

 

 
   

Textiles, Apparel & Luxury Goods: 1.3%

   

Best Pacific International Holdings, Ltd. H Shares

    334,000        159,457   

Regina Miracle International Holdings, Ltd.b

    83,000        121,019   
   

 

 

 
      280,476   
   

 

 

 

Total Consumer Discretionary

      3,739,414   
   

 

 

 
     Shares     Value  
HEALTH CARE: 16.1%    

Biotechnology: 7.3%

   

China Biologic Products, Inc.b

    8,300        $1,182,418   

Shanghai Haohai Biological Technology Co., Ltd. H Sharesb

    60,800        398,285   
   

 

 

 
      1,580,703   
   

 

 

 
   

Pharmaceuticals: 6.1%

   

Lee’s Pharmaceutical Holdings, Ltd.

    739,500        922,928   

SSY Group, Ltd.

    1,521,022        390,573   
   

 

 

 
      1,313,501   
   

 

 

 
   

Health Care Equipment & Supplies: 1.7%

   

Lifetech Scientific Corp.b

    1,972,000        373,786   
   

 

 

 
   

Life Sciences Tools & Services: 1.0%

   

Genscript Biotech Corp.b

    1,222,000        208,133   
   

 

 

 

Total Health Care

      3,476,123   
   

 

 

 
   
INFORMATION TECHNOLOGY: 12.8%                

Electronic Equipment, Instruments & Components: 7.8%

  

Sunny Optical Technology Group Co., Ltd.

    341,000        777,739   

PAX Global Technology, Ltd.

    553,000        567,361   

Technovator International, Ltd.b

    512,000        325,018   

China High Precision Automation Group, Ltd.b,c

    195,000        7,548   
   

 

 

 
      1,677,666   
   

 

 

 
   

Technology Hardware, Storage & Peripherals: 2.5%

  

Adlink Technology, Inc.

    234,777        540,067   
   

 

 

 
   

Software: 1.4%

   

Chanjet Information Technology Co., Ltd. H Shares

    141,400        308,965   
   

 

 

 
   

Internet Software & Services: 1.1%

   

Phoenix New Media, Ltd. ADRb

    39,400        237,188   
   

 

 

 

Total Information Technology

      2,763,886   
   

 

 

 
   
FINANCIALS: 10.9%                

Real Estate Management & Development: 7.0%

  

KWG Property Holding, Ltd.

    1,031,500        760,385   

Beijing Properties Holdings, Ltd.b

    4,646,000        381,004   

China Jinmao Holdings Group, Ltd.

    1,078,000        367,193   
   

 

 

 
      1,508,582   
   

 

 

 
   

Capital Markets: 2.5%

   

Value Partners Group, Ltd.

    469,000        545,142   
   

 

 

 
   

Diversified Financial Services: 1.4%

   

China Merchants China Direct Investments, Ltd.

    178,000        294,370   
   

 

 

 

Total Financials

      2,348,094   
   

 

 

 
   
CONSUMER STAPLES: 5.1%                

Food Products: 5.1%

   

Vitasoy International Holdings, Ltd.

    288,000        589,097   

Tenwow International Holdings, Ltd.

    936,000        305,785   

China Modern Dairy Holdings, Ltd.

    784,000        202,568   
   

 

 

 

Total Consumer Staples

      1,097,450   
   

 

 

 
   
 

 

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Table of Contents

Matthews China Small Companies Fund

December 31, 2015

Schedule of Investmentsa (continued)

COMMON EQUITIES (continued)

 

     Shares     Value  
UTILITIES: 2.1%    

Gas Utilities: 2.1%

   

Towngas China Co., Ltd.

    770,000        $446,090   
   

 

 

 

Total Utilities

      446,090   
   

 

 

 
   
TOTAL COMMON EQUITIES             21,134,142   
   

 

 

 

(Cost $20,492,099)

   
   

RIGHTS: 0.0%

   
INFORMATION TECHNOLOGY: 0.0%                

Technology Hardware, Storage & Peripherals: 0.0%

  

Adlink Technology, Inc., expires 1/11/16b

    13,091        4,607   
   

 

 

 

Total Information Technology

      4,607   
   

 

 

 
   
TOTAL RIGHTS             4,607   
   

 

 

 

(Cost $0)

   
   
TOTAL INVESTMENTS: 98.1%             21,138,749   

(Cost $20,492,099d)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 1.9%
      407,253   
   

 

 

 

NET ASSETS: 100.0%

      $21,546,002   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Illiquid security, trading was halted at December 31, 2015.

 

d Cost for federal income tax purposes is $20,538,503 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $3,195,820   

Gross unrealized depreciation

    (2,595,574
 

 

 

 

Net unrealized appreciation

    $600,246   
 

 

 

 

 

ADR American Depositary Receipt

See accompanying notes to financial statements.

 

 

82    MATTHEWS ASIA FUNDS


Table of Contents

LOGO

 

PORTFOLIO MANAGERS
Michael J. Oh, CFA  

Lead Manager

 
Lydia So, CFA  

Co-Manager

 
FUND FACTS
    Investor   Institutional

Ticker

  MATFX   MITEX

CUSIP

  577130883   577125859

Inception

  12/27/99   4/30/13

NAV

  $12.32   $12.34

Initial Investment

  $2,500   $3 million

Gross Expense Ratio1

 

1.18%

 

0.97%

Portfolio Statistics

Total # of Positions

    46

Net Assets

    $166.5 million

Weighted Average Market Cap

 

$25.5 billion

Portfolio Turnover2

     

72.85%

Benchmark

MSCI AC Asia Index

MSCI AC Asia Information Technology Index

OBJECTIVE

 

 

Long-term capital appreciation.

STRATEGY

 

 

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its total net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in Asia that derive more than 50% of their revenues from the sale of products or services in science- and technology-related industries and services. Asia consists of all countries and markets in Asia, including developed, emerging, and frontier countries and markets in the Asian region.

Matthews Asia Science and Technology Fund

Portfolio Manager Commentary (unaudited)

For the year ending December 31, 2015, the Matthews Asia Science and Technology Fund returned 4.48% (Investor Class) and 4.63% (Institutional Class) while its benchmark, the MSCI All Country Asia Index, fell –0.36%. For the fourth quarter of the year, the Fund returned 15.33% (Investor Class) and 15.39% (Institutional Class) versus 6.54% for the Index.

Market Environment:

China’s Internet sector recovered late in 2015 and performed well during the fourth quarter of the year following some consolidation. We were very encouraged by this ongoing trend of consolidation in the sector as we saw another major merger and acquisition, this time in China’s online travel industry. This was the third major merger and acquisition deal to come out of China’s Internet industry in 2015. The first was a deal between China’s two biggest ride-sharing and taxi hailing app companies, Didi and Kuaidi, in February. Then in October came the merger between two of the country’s biggest online local services providers, Dianping and Meituan. The most recent merger, in November, was in the online travel industry between Ctrip.com International and Qunar. We believe that such developments are quite positive as they improve efficiency and profitability in their respective industries.

Performance Contributors and Detractors:

Chinese Internet companies performed well during the fourth quarter as most companies reported better-than-expected earnings. Ctrip.com was among the biggest contributors to Fund performance during the fourth quarter. The stock surged when the firm announced it would combine its products and services with that of Qunar, the second-biggest online player. Both Ctrip.com and Qunar have benefited from strong growth in China’s rapidly developing travel and tourism industry. NetEase, an online and mobile game operator in China, also performed well on the back of strong revenue growth. As China continues to restructure its economy from an export-driven model to a consumption-driven one, we believe Internet companies should be well-positioned to benefit. Chinese Internet companies have become some of the most innovative companies, not just in China but across the region, and continue to reshape how consumers acquire and consume services and products in China.

Lupin, an India-based pharmaceutical company, was among the detractors during the quarter as its earnings fell below expectation. However, we still believe that the long-term growth outlook for Lupin has not changed despite short-term volatility in earnings and we continue to maintain the position.

Notable Portfolio Changes:

During the fourth quarter, we added Shandong Weigao Group Medical Polymer, a China-based health care company that manufactures medical consumables. The company has dominant share and positioning in China’s competitive medical consumables market. Its valuations had become attractive due to price-cuts driven by government policies, but the company maintains healthy growth rates and we believe its growth potential in the overall market is still intact. The Fund also added LG Chem, a maker of lithium batteries used in electronic cars. We believe that the electronic car industry is well-poised to grow in the region as consumers become more environmentally conscious and as pollution becomes a bigger issue across Asia. Overall, we continued to increase our exposure to services industries while reducing exposure to the technology hardware industry.

(continued)

 
1 Actual 2015 expense ratios.
2 The lesser of fiscal year 2015 long-term purchase costs or sales proceeds divided by the average monthly market value of long-term securities.

 

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Table of Contents
 
PERFORMANCE AS OF DECEMBER 31, 2015  
 

 

    

 

      

 

     Average Annual Total Returns       

 

 
     3 Months      1 Year      3 Years      5 Years      10 Years      Since
Inception
     Inception
Date
 

Investor Class (MATFX)

     15.33%         4.48%         15.67%         7.88%         8.29%         2.69%         12/27/1999   

Institutional Class (MITEX)

     15.39%         4.63%         n.a.         n.a.         n.a.         14.40%         4/30/2013   

MSCI AC Asia Index3

     6.54%         -0.36%         4.53%         2.23%         2.95%         1.76% 4    

MSCI AC Asia Information Technology Index3

     7.88%         -2.45%         7.19%         3.33%         3.44%         -1.54% 4    

Lipper Global Science and Technology Funds Category Average5

     11.17%         6.65%         16.65%         10.52%         9.48%         1.66% 4    

Performance assumes reinvestment of all dividends and/or distributions before taxes. All performance quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate with market conditions so that when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the return figures quoted. For the Fund’s most recent month-end performance, visit matthewsasia.com.

 

 

GROWTH OF A $10,000 INVESTMENT SINCE INCEPTION—INVESTOR CLASS

LOGO

Plotted monthly. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions or redemption of Fund shares. Values are in US$.

 

  3 It is not possible to invest directly in an index. Source: Index data from Morgan Stanley Capital International and Bloomberg; total return calculations performed by BNY Mellon Investment Servicing (US) Inc. Please see page 87 for index definition.

 

  4 Calculated from 12/31/99.

 

  5 The Lipper Category Average does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains for the stated periods.

 

       
TOP TEN POSITIONS6                     
     Sector      Country      % of Net Assets  

Baidu, Inc.

   Information Technology      China/Hong Kong        8.5%   

Ctrip.com International, Ltd.

   Consumer Discretionary      China/Hong Kong        4.9%   

JD.com, Inc.

   Consumer Discretionary      China/Hong Kong        4.8%   

LG Household & Health Care, Ltd., Pfd.

   Consumer Staples      South Korea        4.0%   

NetEase, Inc.

   Information Technology      China/Hong Kong        3.4%   

China Biologic Products, Inc.

   Health Care      China/Hong Kong        2.9%   

Naver Corp.

   Information Technology      South Korea        2.9%   

Info Edge India, Ltd.

   Information Technology      India        2.9%   

Qunar Cayman Islands, Ltd.

   Consumer Discretionary      China/Hong Kong        2.7%   

CITIC Telecom International Holdings, Ltd.

   Telecommunication Services      China/Hong Kong        2.5%   

% OF ASSETS IN TOP TEN

               39.5%   

 

  6 Holdings may combine more than one security from same issuer and related depositary receipts.

 

84    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Science and Technology Fund

Portfolio Manager Commentary (unaudited) (continued)

Outlook:

We anticipate an ongoing transition in China toward an economy more geared toward consumption, and believe this could create attractive buying opportunities. We will continue to seek to identify innovative companies that are creating new markets or gaining market share within existing sectors. Our focus will remain on secular growth industries, such as the Internet, health care and services industries, and we will maintain a long-term approach.

 
COUNTRY ALLOCATION (%)7  
China/Hong Kong     43.7   
South Korea     15.5   
Japan     11.0   
India     9.6   
Taiwan     7.1   
Singapore     2.3   
United States     1.9   
Thailand     1.9   
Indonesia     1.5   
Vietnam     0.8   
Cash and Other Assets, Less Liabilities     4.7   

 

 
SECTOR ALLOCATION (%)  
Information Technology     36.7   
Consumer Discretionary     22.2   
Health Care     16.0   
Industrials     7.9   
Telecommunication Services     5.6   
Consumer Staples     5.3   
Materials     1.6   
Cash and Other Assets, Less Liabilities     4.7   

 

 
MARKET CAP EXPOSURE (%)8  

Mega Cap (over $25B)

    24.0   

Large Cap ($10B–$25B)

    29.6   

Mid Cap ($3B–10B)

    14.8   

Small Cap (under $3B)

    26.9   

Cash and Other Assets, Less Liabilities

    4.7   

 

7 Not all countries are included in the benchmark index(es).

 

8 Source: FactSet Research Systems. Percentage values in data are rounded to the nearest tenth of one percent; the values may not sum to 100% due to rounding.
 

 

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Table of Contents

Matthews Asia Science and Technology Fund

December 31, 2015

Schedule of Investmentsa

COMMON EQUITIES: 88.2%

 

     Shares     Value  
CHINA/HONG KONG: 43.7%    

Baidu, Inc. ADRb

    74,900        $14,159,096   

Ctrip.com International, Ltd. ADRb

    176,600        8,181,878   

JD.com, Inc. ADRb

    249,200        8,040,438   

NetEase, Inc. ADR

    31,000        5,618,440   

China Biologic Products, Inc.b

    34,400        4,900,624   

Qunar Cayman Islands, Ltd. ADRb

    86,200        4,546,188   

CITIC Telecom International Holdings, Ltd.

    10,732,000        4,088,904   

Tencent Holdings, Ltd.

    203,800        3,990,401   

CAR, Inc.b

    2,421,000        3,989,431   

Shandong Weigao Group Medical Polymer Co., Ltd. H Shares

    5,752,000        3,933,092   

CSPC Pharmaceutical Group, Ltd.

    3,292,000        3,356,221   

Zhaopin, Ltd. ADRb

    215,063        3,294,765   

Vipshop Holdings, Ltd. ADRb

    164,242        2,507,975   

PAX Global Technology, Ltd.

    2,083,000        2,137,094   
   

 

 

 

Total China/Hong Kong

      72,744,547   
   

 

 

 
   
JAPAN: 11.0%                

Olympus Corp.

    95,800        3,771,519   

Hoya Corp.

    88,200        3,606,726   

Shimano, Inc.

    18,600        2,856,189   

Kao Corp.

    44,500        2,286,799   

Murata Manufacturing Co., Ltd.

    14,200        2,043,114   

Keyence Corp.

    3,700        2,033,539   

Asahi Intecc Co., Ltd.

    37,500        1,723,275   
   

 

 

 

Total Japan

      18,321,161   
   

 

 

 
   
INDIA: 9.6%                

Info Edge India, Ltd.

    371,814        4,790,835   

Lupin, Ltd.

    113,328        3,135,547   

Bharti Infratel, Ltd.

    423,901        2,734,970   

Blue Dart Express, Ltd.

    22,300        2,273,448   

Just Dial, Ltd.

    125,653        1,593,628   

Mindtree, Ltd.

    65,378        1,411,972   
   

 

 

 

Total India

      15,940,400   
   

 

 

 
   
SOUTH KOREA: 8.4%                

Naver Corp.

    8,733        4,869,865   

Modetour Network, Inc.

    134,153        3,831,862   

SaraminHR Co., Ltd.

    94,539        1,844,322   

iMarketKorea, Inc.

    80,846        1,734,716   

Samsung Electronics Co., Ltd.

    1,554        1,657,469   
   

 

 

 

Total South Korea

      13,938,234   
   

 

 

 
   
TAIWAN: 7.1%                

PChome Online, Inc.

    307,525        3,057,091   

Delta Electronics, Inc.

    591,511        2,782,221   

Merida Industry Co., Ltd.

    477,000        2,558,224   

Ennoconn Corp.

    181,000        2,039,371   

Largan Precision Co., Ltd.

    21,000        1,436,921   
   

 

 

 

Total Taiwan

      11,873,828   
   

 

 

 
     Shares     Value  
SINGAPORE: 2.3%    

Raffles Medical Group, Ltd.

    751,600        $2,203,457   

iFAST Corp., Ltd.

    1,802,100        1,710,423   
   

 

 

 

Total Singapore

      3,913,880   
   

 

 

 
   
UNITED STATES: 1.9%                

Cognizant Technology Solutions Corp. Class Ab

    53,300        3,199,066   
   

 

 

 

Total United States

      3,199,066   
   

 

 

 
   
THAILAND: 1.9%                

Major Cineplex Group Public Co., Ltd.

    3,261,900        3,185,411   
   

 

 

 

Total Thailand

      3,185,411   
   

 

 

 
   
INDONESIA: 1.5%                

PT Telekomunikasi Indonesia Persero ADR

    55,100        2,446,440   
   

 

 

 

Total Indonesia

      2,446,440   
   

 

 

 
   
VIETNAM: 0.8%                

Mobile World Investment Corp.b

    375,365        1,307,308   
   

 

 

 

Total Vietnam

      1,307,308   
   

 

 

 
   
TOTAL COMMON EQUITIES             146,870,275   
   

 

 

 

(Cost $110,517,307)

   
   

PREFERRED EQUITIES: 7.1%

   
SOUTH KOREA: 7.1%                

LG Household & Health Care, Ltd., Pfd.

    14,270        6,592,291   

LG Chem, Ltd., Pfd.

    12,492        2,609,848   

Samsung Electronics Co., Ltd., Pfd.

    2,796        2,584,589   
   

 

 

 

Total South Korea

      11,786,728   
   

 

 

 
   
TOTAL PREFERRED EQUITIES             11,786,728   
   

 

 

 

(Cost $9,227,414)

   
   
TOTAL INVESTMENTS: 95.3%             158,657,003   

(Cost $119,744,721c)

   
   
CASH AND OTHER ASSETS,
LESS LIABILITIES: 4.7%
      7,875,538   
   

 

 

 

NET ASSETS: 100.0%

      $166,532,541   
   

 

 

 

 

a Certain securities were fair valued under the valuation polices approved by the Board of Trustees (Note 2-A).

 

b Non-income producing security.

 

c Cost for federal income tax purposes is $119,778,528 and net unrealized appreciation consists of:

 

Gross unrealized appreciation

    $43,617,145   

Gross unrealized depreciation

    (4,738,670
 

 

 

 

Net unrealized appreciation

    $38,878,475   
 

 

 

 

 

ADR American Depositary Receipt

 

Pfd. Preferred

See accompanying notes to financial statements.

 

 

86    MATTHEWS ASIA FUNDS


Table of Contents

Disclosures

Fund Holdings: The Fund holdings shown in this report are as of December 31, 2015. Holdings are subject to change at any time, so holdings shown in this report may not reflect current Fund holdings. The Funds file complete schedules of portfolio holdings with the Securities and Exchange Commission (the “SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Form N-Q is filed with the SEC within 60 days of the end of the quarter to which it relates, and is available on the SEC’s website at www.sec.gov. It may also be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800.SEC.0330. Complete schedules of investments are also available without charge, upon request, from the Funds by calling us at 800.789.ASIA (2742).

Proxy Voting Record: The Funds’ Statement of Additional Information containing a description of the policies and procedures that the Funds have used to vote proxies relating to portfolio securities, along with each Fund’s proxy voting record relating to portfolio securities held during the most recent 12-month period ended June 30, is available upon request, at no charge, at the Funds’ website at matthewsasia.com or by calling 800.789.ASIA (2742), or on the SEC’s website at www.sec.gov.

Shareholder Reports and Prospectuses: To reduce the Funds’ expenses, we try to identify related shareholders in a household and send only one copy of the Funds’ prospectus and financial reports to that address. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. At any time you may view the Funds’ current prospectus, summary prospectus and financial reports on our website. If you prefer to receive individual copies of the Funds’ prospectus or financial reports, please call us at 800.789.ASIA (2742).

Redemption Fee Policy: Currently, a 2.00% redemption fee will be assessed on the sale or exchange of shares of the Matthews Emerging Asia Fund, Matthews Asia Small Companies Fund and Matthews China Small Companies Fund (collectively, the “Covered Funds”) within 90 days after the date an investor purchases shares of the Covered Funds. Effective April 30, 2015, Funds other than the Covered Funds discontinued the assessment of a 2.00% redemption fee, as approved by the Board of Trustees. The imposition of redemption fees pursuant to the Funds’ Short-Term Trading Redemption Fee Policy for the Covered Funds may assist the Covered Funds in discouraging market timing activity.

The redemption fee is also imposed to discourage short-term buying and selling of shares of the Covered Funds, which can disrupt the management of the Covered Funds’ investment portfolios and may have detrimental effects on the Covered Funds and other shareholders, and to allocate the costs the Covered Funds incur as a result of short-term trading and market timing. This fee is payable directly to the Covered Funds.

To determine whether the redemption fee applies, the Covered Funds do not count the day that you purchased your shares, and first redeem the shares that you have held the longest.

The Covered Funds may grant exemptions from the redemption fee in certain circumstances. For more information on this policy, please see the Funds’ prospectus.

Index Definitions

The HSBC Asian Local Bond Index (ALBI) tracks the total return performance of a bond portfolio consisting of local-currency denominated, high quality and liquid bonds in Asia ex-Japan. The ALBI includes bonds from the following countries: Korea, Hong Kong, India, Singapore, Taiwan, Malaysia, Thailand, Philippines, Indonesia and China.

The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.

The MSCI All Country Asia Pacific Index is a free float–adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand.

The MSCI Emerging Markets (EM) Asia Index is a free float-adjusted market capitalization weighted index of the stock markets of China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand.

The MSCI China Index is a free float–adjusted market capitalization–weighted index of Chinese equities that includes China-affiliated corporations and H shares listed on the Hong Kong exchange, and B shares listed on the Shanghai and Shenzhen exchanges.

The S&P Bombay Stock Exchange (BSE) 100 Index is a free float–adjusted market capitalization–weighted index of the 100 stocks listed on the Bombay Stock Exchange.

The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan.

The Korea Composite Stock Price Index (KOSPI) is a market capitalization–weighted index of all common stocks listed on the Korea Stock Exchange.

The MSCI All Country Asia ex Japan Small Cap Index is a free float–adjusted market capitalization–weighted small cap index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.

The MSCI China Small Cap Index is a free float–adjusted market capitalization–weighted small cap index of the Chinese equity securities markets, including H shares listed on the Hong Kong exchange, B shares listed on the Shanghai and Shenzhen exchanges, and Hong Kong-listed securities known as Red Chips (issued by entities owned by national or local governments in China) and P Chips (issued by companies controlled by individuals in China and deriving substantial revenues in China).

The MSCI All Country Asia Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.

The MSCI All Country Asia Information Technology Index is a free float–adjusted market capitalization–weighted index designed to measure the combined equity market performance of companies in the information technology sector of developed and emerging markets countries in Asia. Component companies include those of software and services, technology hardware and equipment, and semiconductors and semiconductor equipment.

 

 

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Table of Contents

Disclosure of Fund Expenses (unaudited)

 

We believe it is important for you to understand the impact of fees regarding your investment. All mutual funds have operating expenses. As a shareholder of a mutual fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund. A fund’s operating expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing fees (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

This table illustrates your fund’s costs in two ways:

Actual Fund Return: This section helps you to estimate the actual operating expenses, after any applicable fee waivers, that you paid over the period. The “Ending Account Value” shown is derived from the fund’s actual return for the past six month period, the “Expense Ratio” column shows the period’s annualized expense ratio, and the “Operating Expenses Paid During Period” column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund at the beginning of the period. You may use the information here, together with your account value, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an

$8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund in the first line under the heading entitled “Operating Expenses Paid During Period.”

Hypothetical 5% Return: This section is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had an annual return of 5% before operating expenses, but that the expense ratio is unchanged. In this case, because the return used is not the fund’s actual return, the results do not apply to your investment. This example is useful in making comparisons to other mutual funds because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on an assumed 5% annual return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

Please note that the operating expenses shown in the table are meant to highlight and help you compare your ongoing costs only and do not reflect any transactional costs such as sales charges (loads), redemption fees, or exchange fees.

Matthews Asia Funds does not charge any sales loads, exchange fees, or 12b-1 fees, but these may be present in other funds to which you compare this data. Therefore, the hypothetical portions of the table are useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.

 

 

88    MATTHEWS ASIA FUNDS


Table of Contents

December 31, 2015

 

    INVESTOR CLASS         INSTITUTIONAL CLASS  
    

Beginning
Account

Value

7/1/15

    

Ending
Account

Value
12/31/15

     Expense
Ratio1
     Operating
Expenses
Paid During
Period
7/1/15–
12/31/152
        

Beginning
Account

Value
7/1/2015

    

Ending
Account

Value
12/31/15

     Expense
Ratio1
    Operating
Expenses
Paid During
Period
7/1/15–
12/31/152
 
ASIA FIXED INCOME STRATEGY                                                                         

Matthews Asia Strategic Income Fund

                      

Actual Fund Return

    $1,000.00         $990.50         1.12%         $5.62          $1,000.00         $992.60         0.90%        $4.52   

Hypothetical 5% Return

    $1,000.00         $1,019.56         1.12%         $5.70          $1,000.00         $1,020.67         0.90%        $4.58   
ASIA GROWTH AND INCOME STRATEGIES                                                                         

Matthews Asian Growth and Income Fund

                      

Actual Fund Return

    $1,000.00         $923.10         1.09%         $5.28          $1,000.00         $924.00         0.92%        $4.46   

Hypothetical 5% Return

    $1,000.00         $1,019.71         1.09%         $5.55            $1,000.00         $1,020.57         0.92%        $4.69   

Matthews Asia Dividend Fund

                      

Actual Fund Return

    $1,000.00         $922.00         1.05%         $5.09          $1,000.00         $922.00         0.92%        $4.46   

Hypothetical 5% Return

    $1,000.00         $1,019.91         1.05%         $5.35            $1,000.00         $1,020.57         0.92%        $4.69   

Matthews China Dividend Fund

                      

Actual Fund Return

    $1,000.00         $892.50         1.26%         $6.01          $1,000.00         $893.50         1.01%        $4.82   

Hypothetical 5% Return

    $1,000.00         $1,018.85         1.26%         $6.41          $1,000.00         $1,020.11         1.01%        $5.14   
ASIA VALUE STRATEGY                                                                         

Matthews Asia Value Fund*

                      

Actual Fund Return

    $1,000.00         $1,013.50         1.50%         $1.28          $1,000.00         $1,013.00         1.25% 3      $1.07   

Hypothetical 5% Return

    $1,000.00         $1,017.64         1.50%         $7.63          $1,000.00         $1,018.90         1.25% 3      $6.36   
ASIA GROWTH STRATEGIES                                                                         

Matthews Asia Focus Fund

                      

Actual Fund Return

    $1,000.00         $887.30         1.51%         $7.18          $1,000.00         $888.40         1.25%        $5.95   

Hypothetical 5% Return

    $1,000.00         $1,017.59         1.51%         $7.68            $1,000.00         $1,018.90         1.25%        $6.36   

Matthews Asia Growth Fund

                      

Actual Fund Return

    $1,000.00         $956.40         1.14%         $5.62          $1,000.00         $958.00         0.91%        $4.49   

Hypothetical 5% Return

    $1,000.00         $1,019.46         1.14%         $5.80            $1,000.00         $1,020.62         0.91%        $4.63   

Matthews Pacific Tiger Fund

                      

Actual Fund Return

    $1,000.00         $912.80         1.09%         $5.26          $1,000.00         $913.80         0.90%        $4.34   

Hypothetical 5% Return

    $1,000.00         $1,019.71         1.09%         $5.55            $1,000.00         $1,020.67         0.90%        $4.58   

Matthews Asia ESG Fund

                      

Actual Fund Return

    $1,000.00         $942.10         1.44%         $7.05          $1,000.00         $943.70         1.25%        $6.12   

Hypothetical 5% Return

    $1,000.00         $1,017.95         1.44%         $7.32            $1,000.00         $1,018.90         1.25%        $6.36   

Matthews Emerging Asia Fund

                      

Actual Fund Return

    $1,000.00         $976.90         1.53%         $7.62          $1,000.00         $977.60         1.22%        $6.08   

Hypothetical 5% Return

    $1,000.00         $1,017.49         1.53%         $7.78            $1,000.00         $1,019.06         1.22%        $6.21   

Matthews China Fund

                      

Actual Fund Return

    $1,000.00         $866.00         1.15%         $5.41          $1,000.00         $866.30         1.00%        $4.70   

Hypothetical 5% Return

    $1,000.00         $1,019.41         1.15%         $5.85            $1,000.00         $1,020.16         1.00%        $5.09   

Matthews India Fund

                      

Actual Fund Return

    $1,000.00         $947.70         1.15%         $5.65          $1,000.00         $948.90         0.91%        $4.47   

Hypothetical 5% Return

    $1,000.00         $1,019.41         1.15%         $5.85            $1,000.00         $1,020.62         0.91%        $4.63   

Matthews Japan Fund

                      

Actual Fund Return

    $1,000.00         $988.00         0.99%         $4.96          $1,000.00         $988.50         0.86%        $4.31   

Hypothetical 5% Return

    $1,000.00         $1,020.21         0.99%         $5.04            $1,000.00         $1,020.87         0.86%        $4.38   

Matthews Korea Fund

                      

Actual Fund Return

    $1,000.00         $994.90         1.11%         $5.58          $1,000.00         $995.10         0.93%        $4.68   

Hypothetical 5% Return

    $1,000.00         $1,019.61         1.11%         $5.65            $1,000.00         $1,020.52         0.93%        $4.74   

 

* Commenced operations on November 30, 2015.

 

1 Annualized, based on the Fund’s most recent fiscal half-year expenses.

 

2 Operating expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by 184 days, then divided by 365.

 

3 Operating expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by 31 days, then divided by 365.

 

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Table of Contents

Disclosure of Fund Expenses (unaudited) (continued)

 

    INVESTOR CLASS         INSTITUTIONAL CLASS  
    

Beginning
Account

Value

7/1/15

    

Ending
Account

Value
12/31/15

     Expense
Ratio1
     Operating
Expenses
Paid During
Period
7/1/15–
12/31/152
        

Beginning
Account

Value
7/1/2015

    

Ending
Account

Value
12/31/15

     Expense
Ratio1
     Operating
Expenses
Paid During
Period
7/1/15–
12/31/152
 
ASIA SMALL COMPANY STRATEGIES                                                                          

Matthews Asia Small Companies Fund

                       

Actual Fund Return

    $1,000.00         $854.70         1.48%         $6.92          $1,000.00         $855.90         1.26%         $5.89   

Hypothetical 5% Return

    $1,000.00         $1,017.74         1.48%         $7.53            $1,000.00         $1,018.85         1.26%         $6.41   

Matthews China Small Companies Fund

                       

Actual Fund Return

    $1,000.00         $893.20         1.50%         $7.16                

Hypothetical 5% Return

    $1,000.00         $1,017.64         1.50%         $7.63                
ASIA SPECIALTY STRATEGY                                                                          

Matthews Asia Science and Technology Fund

                       

Actual Fund Return

    $1,000.00         $960.80         1.22%         $6.03          $1,000.00         $961.50         0.99%         $4.89   

Hypothetical 5% Return

    $1,000.00         $1,019.06         1.22%         $6.21            $1,000.00         $1,020.21         0.99%         $5.04   

 

1 Annualized, based on the Fund’s most recent fiscal half-year expenses.

 

2 Operating expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by 184 days, then divided by 365.

 

90    MATTHEWS ASIA FUNDS


Table of Contents

 

 

 

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Table of Contents

Statements of Assets and Liabilities

 

       

Matthews Asia
Strategic

Income Fund

      

Matthews Asian
Growth and

Income Fund

       Matthews Asia
Dividend Fund1
       Matthews China
Dividend Fund
 

ASSETS:

                   

Investments at value (A) (Note 2-A and 7):

                   

Unaffiliated issuers

       $57,820,048           $2,839,910,133           $4,246,278,701           $176,915,548   

Affiliated issuers

                           460,348,854             

Total investments

       57,820,048           2,839,910,133           4,706,627,555           176,915,548   

Cash

       1,608,926           6,104,823           61,871,524           4,038,241   

Segregated foreign currency at value (B)

                           71,382             

Foreign currency at value (B) (Note 2-C)

       1,511,573           1,103,933           9,364,043             

Dividends, interest and other receivable—Unaffiliated issuers

       1,051,189           10,932,068           13,083,878           111,818   

Dividends receivable—Affiliated issuers

                                       

Receivable for securities sold

                 22,760,359           3,290,580           427,477   

Receivable for capital shares sold

       63,041           9,309,902           23,075,250           650,585   

Due from Advisor (Note 5)

                                       

Deferred offering costs (Note 2-E)

                                       

Unrealized appreciation on forward foreign currency exchange contracts

       334,847                                 

Prepaid expenses and other assets

       20,755           146,552           35,329           42,055   

TOTAL ASSETS

       62,410,379           2,890,267,770           4,817,419,541           182,185,724   

LIABILITIES:

                   

Payable for securities purchased

                           38,788           444,749   

Payable for capital shares redeemed

       171,980           18,060,703           9,226,361           640,940   

Unrealized depreciation on forward foreign currency exchange contracts

       38,273                                 

Deferred foreign capital gains tax liability (Note 2-G)

       965                                 

Due to Advisor (Note 5)

       24,744           1,678,948           2,643,275           100,258   

Administration and accounting fees payable

       843           41,960           63,859           2,380   

Administration and shareholder servicing fees payable

       7,573           363,191           560,495           21,691   

Custodian fees payable

       389           147,847           152,083             

Intermediary service fees payable (Note 5)

       9,573           719,565           716,070           33,042   

Professional fees payable

       20,555           42,915           54,074           18,730   

Transfer agent fees payable

       385           11,003           72,177           1,626   

Printing fees payable

                 147,269           158,649           2,317   

Offering costs (Note 2-E)

                                       

Trustees fees payable

                                       

Accrued other expenses payable

       4,496                     110,027             

TOTAL LIABILITIES

       279,776           21,213,401           13,795,858           1,265,733   

NET ASSETS

       $62,130,603           $2,869,054,369           $4,803,623,683           $180,919,991   

NET ASSETS:

                   

Investor Class

       $51,129,598           $2,045,435,360           $2,757,910,393           $165,514,383   

Institutional Class

       11,001,005           823,619,009           2,045,713,290           15,405,608   

TOTAL

       $62,130,603           $2,869,054,369           $4,803,623,683           $180,919,991   

SHARES OUTSTANDING:

                   

(shares of beneficial interest issued and outstanding, respectively, unlimited number of shares authorized with a $0.001 par value)

                   

Investor Class

       5,131,212           127,568,587           179,605,293           12,005,469   

Institutional Class

       1,104,785           51,418,285           133,264,411           1,117,428   

TOTAL

       6,235,997           178,986,872           312,869,704           13,122,897   
1 Consolidated Statements of Assets and Liabilities. See Note 2-C.

 

See accompanying notes to financial statements.

 

92    MATTHEWS ASIA FUNDS


Table of Contents

December 31, 2015

 

Matthews Asia
Value Fund
    Matthews Asia
Focus Fund
    Matthews Asia
Growth Fund
    Matthews Pacific
Tiger Fund
    Matthews Asia
ESG Fund
 
       
       
  $1,320,377        $10,749,522        $760,804,877        $6,033,506,582        $4,840,407   
                       596,651,164          
  1,320,377        10,749,522        760,804,877        6,630,157,746        4,840,407   
  417,745        450,099        13,970,217        61,486,309        102,974   
                                
  4,285        11,902        75,103        3,029,378        2   

 

 

 

4,564

 

  

    33,906        469,903        6,491,425        8,720   
                       753,846          
                4,797,671               6,448   
  11,950        50,529        1,452,334        13,105,785        5,418   
  40,508        10,178                      71,990   
  87,206                             26,229   

 

 

 

 

  

                           
         15,739        60,704        46,648          
  1,886,635        11,321,875        781,630,809        6,715,071,137        5,062,188   
       
  41,413                             2   
         136,680        3,848,419        23,395,883        300   

 

 

 

 

  

                           

 

 

 

 

  

           141,754               9,835   
                439,511        3,673,742          
  9        157        10,541        90,093        72   

 

 

 

167

 

  

    1,395        95,164        762,734        643   
  2,727               38,390        463,699        4,730   
  198               149,364        957,249          
  12,729        8,558        26,941        70,838        12,723   
  41        219        3,691        71,738        42   
  499        18        13,177        124,862        10,417   
  95,134                             78,686   
  20                             555   
  1,103               8,094        44,945        9,832   
  154,040        147,027        4,775,046        29,655,783        127,837   
  $1,732,595        $11,174,848        $776,855,763        $6,685,415,354        $4,934,351   
       
  $1,589,491        $5,474,349        $526,969,427        $2,720,868,577        $3,247,953   
  143,104        5,700,499        249,886,336        3,964,546,777        1,686,398   
  $1,732,595        $11,174,848        $776,855,763        $6,685,415,354        $4,934,351   
       
       
  161,338        629,805        24,981,689        115,582,909        351,982   
  14,560        655,863        11,767,259        168,553,810        183,975   
  175,898        1,285,668        36,748,948        284,136,719        535,957   

 

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Table of Contents

Statements of Assets and Liabilities (continued)

 

       

Matthews Asia
Strategic

Income Fund

      

Matthews Asian
Growth and

Income Fund

       Matthews Asia
Dividend Fund1
       Matthews China
Dividend Fund
 

NET ASSET VALUE:

                                           

Investor Class, offering price and redemption price

       $9.96           $16.03           $15.36           $13.79   

Institutional Class, offering price and redemption price

       $9.96           $16.02           $15.35           $13.79   

NET ASSETS CONSIST OF:

                   

Capital paid-in

       $67,075,877           $2,622,477,980           $4,348,200,631           $175,660,361   

Undistributed (distributions in excess of) net investment income (loss)

       (141,570        (9,981,676        (4,689,915        (367,605

Undistributed/accumulated net realized gain (loss) on investments, financial futures contracts, and foreign currency related transactions

       (1,535,531        40,251,822           (40,485,123        516,116   

Net unrealized appreciation (depreciation) on investments, financial futures contracts, foreign currency translations and deferred foreign capital gains taxes

       (3,268,173        216,306,243           500,598,090           5,111,119   

NET ASSETS

       $62,130,603           $2,869,054,369           $4,803,623,683           $180,919,991   

(A) Investments at cost:

                   

Unaffiliated issuers

       $61,378,254           $2,623,543,355           $3,741,066,074           $171,804,467   

Affiliated issuers

                           464,705,388             

Total investments at cost

       $61,378,254           $2,623,543,355           $4,205,771,462           $171,804,467   

(B) Foreign currency at cost

       $1,511,573           $1,103,933           $9,613,953           $—   

 

1 Consolidated Statements of Assets and Liabilities. See Note 2-C.

 

See accompanying notes to financial statements.

 

94    MATTHEWS ASIA FUNDS


Table of Contents

December 31, 2015

 

Matthews Asia
Value Fund
    Matthews Asia
Focus Fund
    Matthews Asia
Growth Fund
    Matthews Pacific
Tiger Fund
    Matthews Asia
ESG Fund
 
                                     
  $9.85        $8.69        $21.09        $23.54        $9.23   
  $9.83        $8.69        $21.24        $23.52        $9.17   
       
  $1,741,569        $13,265,385        $661,074,198        $5,255,153,512        $5,088,649   
  7,772     

 

80,691

  

    278,925               26,705   
 
 
 
    
    
 
 
  
    (709,662     (19,506,204     13,364,607        (52,070

 

(16,746

    (1,461,566     135,008,844        1,416,897,235        (128,933
  $1,732,595        $11,174,848        $776,855,763        $6,685,415,354        $4,934,351   
       
  $1,337,140        $12,210,811        $625,650,734        $4,467,455,485        $4,959,486   
                       745,786,796          
  $1,337,140        $12,210,811        $625,650,734        $5,213,242,281        $4,959,486   
  $4,274        $11,902        $75,103        $3,029,224        $2   

 

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Table of Contents

Statements of Assets and Liabilities (continued)

 

        Matthews Emerging
Asia Fund
      

Matthews

China Fund1

      

Matthews

India Fund

 

ASSETS:

              

Investments at value (A) (Note 2-A and 7):

              

Unaffiliated issuers

       $165,213,375           $732,306,149           $1,408,937,740   

Affiliated issuers

                           98,231,975   

Total investments

       165,213,375           732,306,149           1,507,169,715   

Cash

       4,285,963                       

Segregated foreign currency at value (B)

                 72,494             

Foreign currency at value (B)

       2,253,794           1,652,644           10,906,448   

Dividends, interest and other receivable—Unaffiliated issuers

       181,630                     372,989   

Dividends receivable—Affiliated issuers

                             

Receivable for securities sold

                 11,904,467           8,792,539   

Receivable for capital shares sold

       379,326           514,290           3,036,003   

Prepaid expenses and other assets

       13,480           39,727           46,111   

TOTAL ASSETS

       172,327,568           746,489,771           1,530,323,805   

LIABILITIES:

              

Payable for securities purchased

       389,880           7,474,674             

Payable for capital shares redeemed

       177,718           3,838,369           6,328,274   

Cash overdraft

                 273,630           14,780,558   

Deferred foreign capital gains tax liability (Note 2-G)

       1,660,502                     1,942,487   

Foreign capital gains tax payable (Note 2-G)

       72,437                       

Due to Advisor (Note 5)

       68,510           417,735           841,513   

Administration and accounting fees payable

       2,174           10,275           20,054   

Administration and shareholder servicing fees payable

       19,696           90,362           182,336   

Intermediary service fees payable (Note 5)

       30,705           160,710           248,331   

Professional fees payable

       8,651           24,787           30,216   

Transfer agent fees payable

       763           12,555           12,653   

Accrued other expenses payable

       28,037           143,591           110,389   

TOTAL LIABILITIES

       2,459,073           12,446,688           24,496,811   

NET ASSETS

       $169,868,495           $734,043,083           $1,505,826,994   

NET ASSETS:

              

Investor Class

       $114,590,180           $709,766,606           $1,151,948,121   

Institutional Class

       55,278,315           24,276,477           353,878,873   

TOTAL

       $169,868,495           $734,043,083           $1,505,826,994   

SHARES OUTSTANDING:

              

(shares of beneficial interest issued and outstanding, respectively, unlimited number of shares authorized with a $0.001 par value)

              

Investor Class

       10,170,853           38,536,969           43,588,611   

Institutional Class

       4,896,422           1,320,026           13,358,512   

TOTAL

       15,067,275           39,856,995           56,947,123   

 

1  Consolidated Statements of Assets and Liabilities. See Note 2-C.

 

See accompanying notes to financial statements.

 

96    MATTHEWS ASIA FUNDS


Table of Contents

December 31, 2015

 

Matthews

Japan Fund

   

Matthews

Korea Fund

    Matthews Asia
Small Companies
Fund
    Matthews China
Small Companies
Fund
    Matthews Asia
Science and
Technology Fund
 
       
       
  $1,796,117,364        $201,177,976        $583,834,040        $21,138,749        $158,657,003   
  65,578,270               7,205,664                 
  1,861,695,634        201,177,976        591,039,704        21,138,749        158,657,003   
  83,456,343        4,694,850        20,764,878        635,285        6,694,239   
                                
  4               619,715        8,361        900,633   
  1,339,933        2,085,503        253,252               263,828   
  37,679                               
  1,399,096               3,135,379                 
  22,270,200        118,618        1,646,581        111,600        321,800   
  47,506        15,013        32,830        6,313        18,318   
  1,970,246,395        208,091,960        617,492,339        21,900,308        166,855,821   
       
  17,771,298               600,789        327,970          
  1,770,046        230,441        6,105,618               149,488   
                                
                56,811                 
                                
  1,010,736        114,290        494,674        5,180        90,794   
  23,026        2,761        8,455        282        2,148   
  219,075        24,749        75,124        2,560        19,654   
  82,326        17,862        141,132               23,454   
  13,122        18,853        37,057        17,909        25,935   
  13,992        2,858        2,562        405        2,238   
  16,104        13,104        55,409               9,569   
  20,919,725        424,918        7,577,631        354,306        323,280   
  $1,949,326,670        $207,667,042        $609,914,708        $21,546,002        $166,532,541   
       
  $1,330,743,379        $147,684,772        $387,746,960        $21,546,002        $129,762,540   
  618,583,291        59,982,270        222,167,748               36,770,001   
  $1,949,326,670        $207,667,042        $609,914,708        $21,546,002        $166,532,541   
       
       
  70,167,096        24,015,280        19,975,837        2,452,395        10,531,982   
  32,562,867        9,707,828        11,454,086               2,979,461   
  102,729,963        33,723,108        31,429,923        2,452,395        13,511,443   

 

matthewsasia.com  |  800.789.ASIA      97   


Table of Contents

Statements of Assets and Liabilities (continued)

 

        Matthews Emerging
Asia Fund
      

Matthews

China Fund1

      

Matthews

India Fund

 

NET ASSET VALUE:

                                

Investor Class, offering price and redemption price

       $11.27           $18.42           $26.43   

Institutional Class, offering price and redemption price

       $11.29           $18.39           $26.49   

NET ASSETS CONSIST OF:

              

Capital paid-in

       $166,108,210           $644,211,368           $1,254,222,667   

Undistributed (distributions in excess of) net investment income (loss)

       276,735           (32,868        (50,865

Undistributed/accumulated net realized gain (loss) on investments and foreign currency related transactions

       (1,095,848        15,479,406           11,096,759   

Net unrealized appreciation (depreciation) on investments, foreign currency translations and deferred foreign capital gains taxes

       4,579,398           74,385,177           240,558,433   

NET ASSETS

       $169,868,495           $734,043,083           $1,505,826,994   

(A) Investments at cost:

              

Unaffiliated issuers

       $158,973,147           $657,904,382           $1,181,426,322   

Affiliated issuers

                           83,125,117   

Total investments at cost

       $158,973,147           $657,904,382           $1,264,551,439   

(B) Foreign currency at cost

       $2,253,808           $1,669,467           $10,906,448   

 

1  Consolidated Statements of Assets and Liabilities. See Note 2-C.

 

See accompanying notes to financial statements.

 

98    MATTHEWS ASIA FUNDS


Table of Contents

December 31, 2015

 

Matthews

Japan Fund

   

Matthews

Korea Fund

    Matthews Asia
Small Companies
Fund
    Matthews China
Small Companies
Fund
    Matthews Asia
Science and
Technology Fund
 
                                     
  $18.97        $6.15        $19.41        $8.79        $12.32   
  $19.00        $6.18        $19.40        $—        $12.34   
       
  $1,846,206,894        $135,013,532        $591,767,216        $20,196,514        $117,221,520   
       
  1,177,791        (93,408     1,244,170        1,346          
  (67,394,578     6,305,654        (13,195,238     701,492        10,405,773   
  169,336,563        66,441,264        30,098,560        646,650        38,905,248   
  $1,949,326,670        $207,667,042        $609,914,708        $21,546,002        $166,532,541   
  $1,622,203,732        $134,731,859        $546,539,760        $20,492,099        $119,744,721   
  70,157,293               14,325,613                 
  $1,692,361,025        $134,731,859        $560,865,373        $20,492,099        $119,744,721   
  $4        $—        $619,657        $8,361        $907,082   

 

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Table of Contents

Statements of Operations

 

        Matthews Asia
Strategic
Income Fund
      

Matthews Asian
Growth and

Income Fund

       Matthews Asia
Dividend Fund1
       Matthews China
Dividend Fund
 

INVESTMENT INCOME:

                   

Dividends—Unaffiliated Issuers

       $54,553           $128,462,695           $144,206,511           $5,903,655   

Dividends—Affiliated Issuers (Note 7)

                           22,043,241             

Interest

       3,871,629           4,802,504           1,114           57,688   

Foreign withholding tax

       (85,447        (7,461,719        (12,948,537        (371,441

TOTAL INVESTMENT INCOME

       3,840,735           125,803,480           153,302,329           5,589,902   

EXPENSES:

                   

Investment advisory fees (Note 5)

       438,698           25,621,034           35,306,056           1,183,701   

Administration and accounting fees (Note 5)

       5,399           308,810           506,832           14,287   

Administration and shareholder servicing fees (Note 5)

       94,329           5,389,839           7,429,497           248,951   

Accounting out-of-pocket fees

       34,791           46,081           54,353           34,070   

Custodian fees

       25,422           1,170,751           1,457,267           112,502   

Insurance fees

       19,391           19,391           25,925           722   

Intermediary service fees (Note 5)

       125,127           6,884,522           6,800,053           350,742   

Printing fees

       6,466           427,492           405,884           21,602   

Professional fees

       47,692           105,255           213,542           44,905   

Registration fees

       35,183           73,516           75,540           37,533   

Transfer agent fees

       3,225           90,241           583,595           12,220   

Trustees fees

       2,538           50,063           193,470           11,126   

Offering costs (Note 2-E)

                           96,561             

Other expenses

       4,828           103,522           116,236           17,455   

TOTAL EXPENSES

       843,089           40,290,517           53,264,811           2,089,816   

Advisory fees waived and expenses waived or reimbursed (Note 5)

       (113,621        (86,260        (244,805          

Administration fees waived (Note 5)

                 (86,260        (244,805          

NET EXPENSES

       729,468           40,117,997           52,775,201           2,089,816   

NET INVESTMENT INCOME (LOSS)

       3,111,267           85,685,483           100,527,128           3,500,086   
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FINANCIAL FUTURES CONTRACTS, FOREIGN CURRENCY RELATED TRANSACTIONS AND DEFERRED CAPITAL GAINS TAXES:                    

Net realized gain (loss) on investments—Unaffiliated Issuers

       226,884           161,549,914           256,519,653           10,318,680   

Net realized gain (loss) on investments—Affiliated Issuers

                           3,642,992             

Net realized gain (loss) on financial futures contracts

       (88,422                              

Net realized foreign capital gains tax

                           (216,219          

Net realized gain (loss) on foreign currency related transactions

       (1,438,110        (1,287,301        (1,974,507        (48,778

Net change in unrealized appreciation/depreciation on investments

       (2,508,426        (408,123,551        (204,821,506        (6,469,661

Net change in deferred foreign capital gains taxes on unrealized appreciation

       18,403                     7,302,449             

Net change in unrealized appreciation/depreciation on financial futures contracts

       (12,891                              

Net change in unrealized appreciation/depreciation on foreign currency related translations

       299,762           (107,432        (327,104        77   

Net realized and unrealized gain (loss) on investments, financial futures contracts, foreign currency related transactions and deferred capital gains taxes

       (3,502,800        (247,968,370        60,125,758           3,800,318   

NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS

       ($391,533        ($162,282,887        $160,652,886           $7,300,404   

 

* Matthews Asia Value Fund commenced operations on November 30, 2015.

 

** Matthews Asia ESG Fund commenced operations on April 30, 2015.

 

1  Consolidated Statements of Operations. See Note 2-C.

 

See accompanying notes to financial statements.

 

100    MATTHEWS ASIA FUNDS


Table of Contents

Year Ended December 31, 2015

 

Matthews Asia
Value Fund*
    Matthews Asia
Focus Fund
    Matthews Asia
Growth Fund
    Matthews Pacific
Tiger Fund
    Matthews Asia
ESG Fund**
 
       
  $5,785        $382,131        $16,027,429        $205,047,908        $50,346   
                       16,268,632          
         5        89        160          
  (880     (13,719     (1,445,364     (12,503,194     (7,045
  4,905        368,417        14,582,154        208,813,506        43,301   
       
  771        95,048        5,989,698        54,519,201        15,886   
  9        1,146        72,251        657,337        192   
 
 
    
167
 
  
    19,988        1,260,375        11,459,861        3,397   
  201        25,500        43,424        57,369        24,418   
  2,727        21,248        386,187        3,163,638        45,376   
         19,391        4,347        41,746          
  266        23,862        1,376,500        9,006,250        2,940   
  500        2,221        68,303        344,136        10,828   
  29,326        42,957        69,621        222,833        53,961   
  1,048        27,895        62,652        72,523        4,180   
  40        1,795        30,118        454,792        257   
  20        1,048        33,463        343,024        599   
  7,928                             52,457   
  20        3,362        20,761        177,322        2,459   
  43,023        285,461        9,417,700        80,520,032        216,950   
 
(41,279

    (87,252    
 
    
 
  
    (857,693     (183,985
                       (857,693       
  1,744        198,209        9,417,700        78,804,646        32,965   
  3,161        170,208        5,164,454        130,008,860        10,336   
       
 
 
    
 
  
    (609,861     13,899,209        685,636,391        (52,070
 
 
    
 
  
                  (19,396,677       
                                
                                
  (988     (1,014     (5,751     (763,754    
 
    
1,317
 
  

 

(16,763

    (1,483,528     (31,519,028     (1,050,830,850     (119,079
 
 
    
 
  
    982        120,781        5,827,625        (9,835
 
 
    
 
  
                           
 
 
    
17
 
  
    (133     3,699        (47,224     (19
  (17,734     (2,093,554     (17,501,090     (379,574,489     (179,686

 

($14,573

    ($1,923,346     ($12,336,636     ($249,565,629     ($169,350

 

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Table of Contents

Statements of Operations (continued)

 

        Matthews Emerging
Asia Fund
       Matthews China
Fund1
       Matthews
India Fund
 

INVESTMENT INCOME:

              

Dividends—Unaffiliated Issuers

       $3,365,820           $19,903,318           $11,718,335   

Dividends—Affiliated Issuers (Note 7)

                           2,578,272   

Interest

                 15           13,816   

Foreign withholding tax

       (297,602        (839,714          

TOTAL INVESTMENT INCOME

       3,068,218           19,063,619           14,310,423   

EXPENSES:

              

Investment advisory fees (Note 5)

       1,661,519           6,216,536           10,143,432   

Administration and accounting fees (Note 5)

       13,297           151,438           122,373   

Administration and shareholder servicing fees (Note 5)

       232,258           1,306,491           2,137,111   

Accounting out-of-pocket fees

       49,003           37,930           38,505   

Custodian fees

       396,277           331,247           772,169   

Intermediary service fees (Note 5)

       314,340           1,916,570           2,785,784   

Printing fees

       22,413           172,392           135,425   

Professional fees

       47,780           130,093           68,903   

Registration fees

       42,816           39,856           78,724   

Transfer agent fees

       6,281           118,552           100,498   

Trustees fees

       4,739           40,385           54,654   

Offering costs (Note 2-E)

                 96,561             

Other expenses

       26,073           35,353           43,501   

TOTAL EXPENSES

       2,816,796           10,593,404           16,481,079   

Advisory fees waived and expenses waived or reimbursed (Note 5)

       (452,048                    

NET EXPENSES

       2,364,748           10,593,404           16,481,079   

NET INVESTMENT INCOME (LOSS)

       703,470           8,470,215           (2,170,656
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCY RELATED TRANSACTIONS AND DEFERRED CAPITAL GAINS TAXES:               

Net realized gain (loss) on investments—Unaffiliated Issuers

       (883,817        131,493,138           24,512,494   

Net realized gain (loss) on investments—Affiliated Issuers

                           251,540   

Net realized foreign capital gains tax

       (124,875                    

Net realized gain (loss) on foreign currency related transactions

       (82,987        (273,081        (917,224

Net change in unrealized appreciation/depreciation on investments

       (4,198,765        (106,942,414        (62,169,687

Net change in deferred foreign capital gains taxes on unrealized appreciation

       (730,548        4,990           6,684,572   

Net change in unrealized appreciation/depreciation on foreign currency related translations

       951           11,673           (13,669

Net realized and unrealized gain (loss) on investments, foreign currency related transactions and deferred capital gains taxes

       (6,020,041        24,294,306           (31,651,974

NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS

       ($5,316,571        $32,764,521           ($33,822,630

 

1  Consolidated Statements of Operations. See Note 2-C.

 

See accompanying notes to financial statements.

 

102    MATTHEWS ASIA FUNDS


Table of Contents

Year Ended December 31, 2015

 

Matthews
Japan Fund
    Matthews
Korea Fund
    Matthews Asia
Small Companies
Fund
    Matthews China
Small Companies
Fund
    Matthews Asia
Science and
Technology Fund
 
       
  $14,613,800        $3,085,707        $12,405,821        $529,669        $1,664,237   
  882,727               368,679                 
                84               12   
  (1,547,684     (509,194     (1,137,342     (15,720     (175,988
  13,948,843        2,576,513        11,637,242        513,949        1,488,261   
       
  7,785,999        1,359,009        7,188,942        223,822        1,174,937   
  94,121        16,399        57,520        1,791        14,165   
  1,647,371        286,380        1,003,109        31,234        247,195   
  49,637        37,526        47,901        42,579        32,089   
  189,668        72,195        419,003        38,680        106,712   
  1,054,987        244,868        1,270,374        58,767        273,619   
  78,766        16,540        53,346        3,258        21,020   
  58,211        42,776        79,328        42,596        56,910   
  63,843        34,125        52,700        18,298        31,812   
  115,354        23,567        20,831        3,281        17,952   
  30,834        7,913        42,292        1,724        8,337   
                                
  31,745        12,186        22,712        3,003        10,136   
  11,200,536        2,153,484        10,258,058        469,033        1,994,884   
                (113,037     (133,327       
  11,200,536        2,153,484        10,145,021        335,706        1,994,884   
  2,748,307        423,029        1,492,221        178,243        (506,623
       
  24,814,680        13,748,671        (7,719,282     3,457,528        27,270,960   
  142,916               (32,275              
                                
  (340,642     (99,064     (249,073     863        (112,049
  124,627,217        10,801,565        (74,035,599     (3,135,949     (18,069,368
                378,114                 
  1,512        (46,204     (1,417     (826     (8,955

 

 

 

149,245,683

 

  

    24,404,968        (81,659,532     321,616        9,080,588   
  $151,993,990        $24,827,997        ($80,167,311     $499,859        $8,573,965   

 

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Table of Contents

Statements of Changes in Net Assets

 

MATTHEWS ASIA STRATEGIC INCOME FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $3,111,267         $2,549,890   

Net realized gain (loss) on investments and foreign currency related transactions

       (1,299,648      (1,349,144

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (2,208,664      (188,122

Net change on deferred foreign capital gains taxes on unrealized appreciation

       18,403         (15,022

Net change in unrealized appreciation/depreciation on financial futures contracts

       (12,891      (52,031

Net increase (decrease) in net assets resulting from operations

       (391,533      945,571   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (1,574,263      (1,819,452

Institutional Class

       (350,781      (294,936

Net decrease in net assets resulting from distributions

       (1,925,044      (2,114,388

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (1,988,782      21,884,520   

REDEMPTION FEES

       1,288         6,087   

Total increase (decrease) in net assets

       (4,304,071      20,721,790   

NET ASSETS:

       

Beginning of year

       66,434,674         45,712,884   

End of year (including undistributed/distributions in excess of net investment income of ($141,570) and ($241,167), respectively)

       $62,130,603         $66,434,674   
MATTHEWS ASIAN GROWTH AND INCOME FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $85,685,483         $92,607,652   

Net realized gain (loss) on investments and foreign currency related transactions

       160,262,613         117,898,875   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (408,230,983      (247,572,282

Net increase (decrease) in net assets resulting from operations

       (162,282,887      (37,065,755

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (60,473,615      (58,176,498

Institutional Class

       (25,646,657      (24,675,840

Realized gains on investments:

       

Investor Class

       (99,500,383      (73,703,258

Institutional Class

       (38,663,330      (28,748,112

Net decrease in net assets resulting from distributions

       (224,283,985      (185,303,708

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (979,815,420      58,477,140   

REDEMPTION FEES

       181,880         343,294   

Total increase (decrease) in net assets

       (1,366,200,412      (163,549,029

NET ASSETS:

       

Beginning of year

       4,235,254,781         4,398,803,810   

End of year (including distributions in excess of net investment income of ($9,981,676) and ($13,412,958), respectively)

       $2,869,054,369         $4,235,254,781   

 

See accompanying notes to financial statements.

 

104    MATTHEWS ASIA FUNDS


Table of Contents

 

 

MATTHEWS ASIA DIVIDEND FUND      Year Ended
December 31, 20151
     Year Ended
December 31, 2014 1
 

OPERATIONS:

       

Net investment income (loss)

       $100,527,128         $103,460,502   

Net realized gain (loss) on investments and foreign currency related transactions

       257,971,919         116,243,335   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (205,148,610      (236,016,208

Net change on deferred foreign capital gains taxes on unrealized appreciation

       7,302,449         (5,021,270

Net increase (decrease) in net assets resulting from operations

       160,652,886         (21,333,641

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (50,178,458      (47,911,397

Institutional Class

       (42,940,313      (32,066,176

Realized gains on investments:

       

Investor Class

       (40,978,371        

Institutional Class

       (30,690,700        

Return of Capital:

       

Investor Class

               (13,172,130

Institutional Class

               (8,815,853

Net decrease in net assets resulting from distributions

       (164,787,842      (101,965,556

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (217,935,493      (645,503,365

REDEMPTION FEES

       95,389         497,372   

Total increase (decrease) in net assets

       (221,975,060      (768,305,190

NET ASSETS:

       

Beginning of year

       5,025,598,743         5,793,903,933   

End of year (including distributions in excess of net investment income of ($4,689,915) and ($55,629,552), respectively)

       $4,803,623,683         $5,025,598,743   

1   Consolidated Statements of Changes in Net Assets. See Note 2-C.

       
MATTHEWS CHINA DIVIDEND FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $3,500,086         $2,671,693   

Net realized gain (loss) on investments and foreign currency related transactions

       10,269,902         2,594,721   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (6,469,584      (5,177,012

Net increase (decrease) in net assets resulting from operations

       7,300,404         89,402   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (3,549,297      (2,935,482

Institutional Class

       (479,873      (817,023

Realized gains on investments:

       

Investor Class

       (7,116,965      (1,191,973

Institutional Class

       (673,526      (314,911

Net decrease in net assets resulting from distributions

       (11,819,661      (5,259,389

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       37,808,908         1,987,255   

REDEMPTION FEES

       13,497         45,150   

Total increase (decrease) in net assets

       33,303,148         (3,137,582

NET ASSETS:

       

Beginning of year

       147,616,843         150,754,425   

End of year (including distributions in excess of net investment income of ($367,605) and ($1,285,165), respectively)

       $180,919,991         $147,616,843   

 

See accompanying notes to financial statements.

 

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Table of Contents

Statements of Changes in Net Assets (continued)

 

MATTHEWS ASIA VALUE FUND              Period Ended
December 31, 20151
 

OPERATIONS:

       

Net investment income (loss)

          $3,161   

Net realized gain (loss) on investments and foreign currency related transactions

          (988

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

                (16,746

Net increase (decrease) in net assets resulting from operations

                (14,573

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

          (1,748

Institutional Class

                (581

Net decrease in net assets resulting from distributions

                (2,329

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

                1,749,497   

Total increase (decrease) in net assets

                1,732,595   

NET ASSETS:

       

Beginning of period

                  

End of period (including undistributed net investment income of $7,772)

                $1,732,595   

1   Matthews Asia Value commenced operations on November 30, 2015.

       
MATTHEWS ASIA FOCUS FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $170,208         $93,078   

Net realized gain (loss) on investments and foreign currency related transactions

       (610,875      90,648   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (1,483,661      65,598   

Net change on deferred foreign capital gains taxes on unrealized appreciation

       982         8,519   

Net increase (decrease) in net assets resulting from operations

       (1,923,346      257,843   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (43,929      (55,443

Institutional Class

       (68,121      (57,082

Realized gains on investments:

       

Investor Class

       (30,710        

Institutional Class

       (30,458        

Net decrease in net assets resulting from distributions

       (173,218      (112,525

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (1,717,388      6,463,284   

REDEMPTION FEES

       1,869         2,548   

Total increase (decrease) in net assets

       (3,812,083      6,611,150   

NET ASSETS:

       

Beginning of year

       14,986,931         8,375,781   

End of year (including undistributed net investment income of $80,691 and $1,023, respectively)

       $11,174,848         $14,986,931   

 

See accompanying notes to financial statements.

 

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MATTHEWS ASIA GROWTH FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $5,164,454         $4,953,601   

Net realized gain (loss) on investments and foreign currency related transactions

       13,893,458         15,349,737   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (31,515,329      (9,391,211

Net change on deferred foreign capital gains taxes on unrealized appreciation

       120,781         (262,534

Net increase (decrease) in net assets resulting from operations

       (12,336,636      10,649,593   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

               (10,002,000

Institutional Class

               (5,438,617

Net decrease in net assets resulting from distributions

               (15,440,617

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (60,027,645      67,553,705   

REDEMPTION FEES

       36,064         162,173   

Total increase (decrease) in net assets

       (72,328,217      62,924,854   

NET ASSETS:

       

Beginning of year

       849,183,980         786,259,126   

End of year (including undistributed/(distributions in excess of) net investment income of $278,925 and ($11,816,062), respectively)

       $776,855,763         $849,183,980   
MATTHEWS PACIFIC TIGER FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $130,008,860         $47,931,459   

Net realized gain (loss) on investments and foreign currency related transactions

       665,475,960         301,174,040   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (1,050,878,074      479,195,485   

Net change on deferred foreign capital gains taxes on unrealized appreciation

       5,827,625         (4,638,516

Net increase (decrease) in net assets resulting from operations

       (249,565,629      823,662,468   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (44,786,496      (14,427,716

Institutional Class

       (72,239,388      (32,970,946

Realized gains on investments:

       

Investor Class

       (237,860,447      (134,989,408

Institutional Class

       (343,244,442      (226,070,336

Net decrease in net assets resulting from distributions

       (698,130,773      (408,458,406

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (463,729,788      48,148,464   

REDEMPTION FEES

       121,959         220,012   

Total increase (decrease) in net assets

       (1,411,304,231      463,572,538   

NET ASSETS:

       

Beginning of year

       8,096,719,585         7,633,147,047   

End of year (including undistributed net investment income of $0 and $12,414, respectively)

       $6,685,415,354         $8,096,719,585   

 

See accompanying notes to financial statements.

 

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Statements of Changes in Net Assets (continued)

 

MATTHEWS ASIA ESG FUND              Period Ended
December 31, 20151
 

OPERATIONS:

       

Net investment income (loss)

          $10,336   

Net realized gain (loss) on investments and foreign currency related transactions

          (50,753

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

          (119,098

Net change on deferred foreign capital gains taxes on unrealized appreciation

                (9,835

Net increase (decrease) in net assets resulting from operations

                (169,350

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

          (16,506

Institutional Class

                (20,899

Net decrease in net assets resulting from distributions

                (37,405

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

                5,141,106   

Total increase (decrease) in net assets

                4,934,351   

NET ASSETS:

       

Beginning of period

                  

End of period (including undistributed net investment income of $26,705)

                $4,934,351   

1   Matthews Asia ESG Fund commenced operations on April 30, 2015.

       
MATTHEWS EMERGING ASIA FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $703,470         $282,110   

Net realized gain (loss) on investments and foreign currency related transactions

       (1,091,679      520,478   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (4,197,814      9,875,738   

Net change on deferred foreign capital gains taxes on unrealized appreciation

       (730,548      (757,162

Net increase (decrease) in net assets resulting from operations

       (5,316,571      9,921,164   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (35,327      (518,224

Institutional Class

       (46,163      (105,103

Realized gains on investments:

       

Investor Class

       (300,074        

Institutional Class

       (132,999        

Net decrease in net assets resulting from distributions

       (514,563      (623,327

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       43,937,018         82,361,403   

REDEMPTION FEES

       49,908         14,452   

Total increase (decrease) in net assets

       38,155,792         91,673,692   

NET ASSETS:

       

Beginning of year

       131,712,703         40,039,011   

End of year (including undistributed/(distributions in excess of) net investment income of $276,735 and ($349,313), respectively)

       $169,868,495         $131,712,703   

 

See accompanying notes to financial statements.

 

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MATTHEWS CHINA FUND      Year Ended
December 31, 20151
     Year Ended
December 31, 20141
 

OPERATIONS:

       

Net investment income (loss)

       $8,470,215         $12,670,620   

Net realized gain (loss) on investments and foreign currency related transactions

       131,220,057         19,391,086   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (106,930,741      (96,779,181

Net change on deferred foreign capital gains taxes on unrealized appreciation

       4,990         (4,990

Net increase (decrease) in net assets resulting from operations

       32,764,521         (64,722,465

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (7,271,979      (11,939,433

Institutional Class

       (292,369      (897,946

Realized gains on investments:

       

Investor Class

       (112,695,199      (4,591,640

Institutional Class

       (3,998,950      (303,495

Net decrease in net assets resulting from distributions

       (124,258,497      (17,732,514

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (174,745,783      (321,454,659

REDEMPTION FEES

       64,297         141,324   

Total increase (decrease) in net assets

       (266,175,462      (403,768,314

NET ASSETS:

       

Beginning of year

       1,000,218,545         1,403,986,859   

End of year (including undistributed/(distributions in excess of) net investment income of ($32,868) and $73,913, respectively)

       $734,043,083         $1,000,218,545   

1   Consolidated Statements of Changes in Net Assets. See Note 2-C.

       
MATTHEWS INDIA FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       ($2,170,656      $2,121,302   

Net realized gain (loss) on investments and foreign currency related transactions

       23,846,810         6,119,604   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (62,183,356      298,047,926   

Net change on deferred foreign capital gains taxes on unrealized appreciation

       6,684,572         (8,627,059

Net increase (decrease) in net assets resulting from operations

       (33,822,630      297,661,773   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (1,210,919      (1,672,358

Institutional Class

       (713,191      (176,254

Realized gains on investments:

       

Investor Class

       (10,496,814      (5,267,446

Institutional Class

       (3,018,487      (320,352

Net decrease in net assets resulting from distributions

       (15,439,411      (7,436,410

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       469,778,771         362,428,175   

REDEMPTION FEES

       1,141,560         420,708   

Total increase (decrease) in net assets

       421,658,290         653,074,246   

NET ASSETS:

       

Beginning of year

       1,084,168,704         431,094,458   

End of year (including undistributed/(distributions in excess of) net investment income of ($50,865) and $1,797,278, respectively)

       $1,505,826,994         $1,084,168,704   

 

See accompanying notes to financial statements.

 

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Statements of Changes in Net Assets (continued)

 

MATTHEWS JAPAN FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $2,748,307         $1,903,581   

Net realized gain (loss) on investments and foreign currency related transactions

       24,616,954         13,363,795   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       124,628,729         (29,305,954

Net increase (decrease) in net assets resulting from operations

       151,993,990         (14,038,578

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

               (2,432,405

Institutional Class

               (893,149

Net decrease in net assets resulting from distributions

               (3,325,554

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       1,174,685,964         267,055,762   

REDEMPTION FEES

       42,911         221,547   

Total increase (decrease) in net assets

       1,326,722,865         249,913,177   

NET ASSETS:

       

Beginning of year

       622,603,805         372,690,628   

End of year (including undistributed/(distributions in excess of) net investment income of $1,177,791 and ($3,723,660), respectively)

       $1,949,326,670         $622,603,805   
MATTHEWS KOREA FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $423,029         $550,797   

Net realized gain (loss) on investments and foreign currency related transactions

       13,649,607         5,707,881   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       10,755,361         (9,305,293

Net increase (decrease) in net assets resulting from operations

       24,827,997         (3,046,615

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (299,912        

Institutional Class

       (230,197        

Realized gains on investments:

       

Investor Class

       (7,587,708      (5,528,243

Institutional Class

       (3,214,060      (4,268,341

Net decrease in net assets resulting from distributions

       (11,331,877      (9,796,584

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (25,043,885      80,886,069   

REDEMPTION FEES

       10,431         48,449   

Total increase (decrease) in net assets

       (11,537,334      68,091,319   

NET ASSETS:

       

Beginning of year

       219,204,376         151,113,057   

End of year (including undistributed/(distributions in excess of) net investment income of ($93,408) and $342,932, respectively)

       $207,667,042         $219,204,376   

 

See accompanying notes to financial statements.

 

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Table of Contents

 

MATTHEWS ASIA SMALL COMPANIES FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $1,492,221         $2,628,989   

Net realized gain (loss) on investments and foreign currency related transactions

       (8,000,630      2,692,424   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (74,037,016      48,527,175   

Net change on deferred foreign capital gains taxes on unrealized appreciation

       378,114         458,859   

Net increase (decrease) in net assets resulting from operations

       (80,167,311      54,307,447   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (527,668      (2,240,054

Institutional Class

       (972,889      (425,758

Net decrease in net assets resulting from distributions

       (1,500,557      (2,665,812

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       15,106,280         172,402,487   

REDEMPTION FEES

       226,015         85,734   

Total increase (decrease) in net assets

       (66,335,573      224,129,856   

NET ASSETS:

       

Beginning of year

       676,250,281         452,120,425   

End of year (including undistributed net investment income of $1,244,170 and $1,500,466, respectively)

       $609,914,708         $676,250,281   
MATTHEWS CHINA SMALL COMPANIES FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       $178,243         $32,748   

Net realized gain (loss) on investments and foreign currency related transactions

       3,458,391         725,842   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (3,136,775      (1,527,785

Net increase (decrease) in net assets resulting from operations

       499,859         (769,195

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

       (146,067      (50,571

Realized gains on investments:

       

Investor Class

       (1,644,128        

Return of Capital:

       

Investor Class

               (828,820

Net decrease in net assets resulting from distributions

       (1,790,195      (879,391

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       743,769         (2,960,536

REDEMPTION FEES

       24,657         2,817   

Total increase (decrease) in net assets

       (521,910      (4,606,305

NET ASSETS:

       

Beginning of year

       22,067,912         26,674,217   

End of year (including undistributed/(distributions in excess of) net investment income of $1,346 and ($38,540), respectively)

       $21,546,002         $22,067,912   

 

See accompanying notes to financial statements.

 

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Table of Contents

Statements of Changes in Net Assets (continued)

 

MATTHEWS ASIA SCIENCE AND TECHNOLOGY FUND      Year Ended
December 31, 2015
     Year Ended
December 31, 2014
 

OPERATIONS:

       

Net investment income (loss)

       ($506,623      $87,025   

Net realized gain (loss) on investments and foreign currency related transactions

       27,158,911         15,185,277   

Net change in unrealized appreciation/depreciation on investments and foreign currency related translations

       (18,078,323      (362,764

Net change on deferred foreign capital gains taxes on unrealized appreciation

               201,559   

Net increase (decrease) in net assets resulting from operations

       8,573,965         15,111,097   

DISTRIBUTIONS TO SHAREHOLDERS FROM:

       

Net investment income:

       

Investor Class

               (545,161

Institutional Class

               (384,106

Realized gains on investments:

       

Investor Class

       (17,188,079      (769,763

Institutional Class

       (4,989,441      (372,799

Net decrease in net assets resulting from distributions

       (22,177,520      (2,071,829

CAPITAL SHARE TRANSACTIONS (net) (Note 4)

       (6,569,665      12,612,113   

REDEMPTION FEES

       5,577         61,504   

Total increase (decrease) in net assets

       (20,167,643      25,712,885   

NET ASSETS:

       

Beginning of year

       186,700,184         160,987,299   

End of year (including distributions in excess of net investment income of $0 and ($787), respectively)

       $166,532,541         $186,700,184   

 

See accompanying notes to financial statements.

 

112    MATTHEWS ASIA FUNDS


Table of Contents

Financial Highlights

Matthews Asia Strategic Income Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

   Year Ended Dec. 31     

Period Ended

Dec. 31, 20111

 
INVESTOR CLASS    2015      2014      2013      2012     

Net Asset Value, beginning of period

     $10.31         $10.42         $10.84         $9.93         $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)2

     0.47         0.46         0.40         0.37         0.02   

Net realized gain (loss) and unrealized appreciation/depreciation on investments, financial futures contracts and foreign currency

     (0.53      (0.19      (0.48      0.95         (0.07

Total from investment operations

     (0.06      0.27         (0.08      1.32         (0.05

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.29      (0.38      (0.35      (0.42      (0.02

Net realized gains on investments

                     (0.01                

Total distributions

     (0.29      (0.38      (0.36      (0.42      (0.02

Paid-in capital from redemption fees (Note 4)

     3       3       0.02         0.01           

Net Asset Value, end of period

     $9.96         $10.31         $10.42         $10.84         $9.93   

TOTAL RETURN

     (0.58% )       2.54%         (0.50%      13.62%         (0.52% )4 

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of period (in 000’s)

     $51,130         $58,594         $38,051         $29,479         $7,746   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.28%         1.27%         1.28%         1.85%         3.20% 5 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.12%         1.13%         1.20%         1.17%         1.00% 5 

Ratio of net investment income (loss) to average net assets

     4.57%         4.36%         3.75%         3.58%         2.06% 5 

Portfolio turnover6

     50.09%         34.28%         48.71%         18.45%         3.66% 4 
 

 

   Year Ended Dec. 31     

Period Ended

Dec. 31, 20111

 
INSTITUTIONAL CLASS    2015      2014      2013      2012     

Net Asset Value, beginning of period

     $10.30         $10.42         $10.83         $9.93         $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)2

     0.49         0.48         0.42         0.39         0.02   

Net realized gain (loss) and unrealized appreciation/depreciation on investments, financial futures contracts, and foreign currency

     (0.52      (0.20      (0.46      0.94         (0.07

Total from investment operations

     (0.03      0.28         (0.04      1.33         (0.05

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.31      (0.40      (0.38      (0.44      (0.02

Net realized gains on investments

                     (0.01                

Total distributions

     (0.31      (0.40      (0.39      (0.44      (0.02

Paid-in capital from redemption fees (Note 4)

     3       3       0.02         0.01           

Net Asset Value, end of period

     $9.96         $10.30         $10.42         $10.83         $9.93   

TOTAL RETURN

     (0.27% )       2.64%         (0.20%      13.74%         (0.52% )4 

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of period (in 000’s)

     $11,001         $7,840         $7,662         $6,205         $5,266   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.09%         1.07%         1.09%         1.70%         3.20% 5 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     0.90%         0.93%         1.00%         1.00%         1.00% 5 

Ratio of net investment income (loss) to average net assets

     4.81%         4.55%         3.99%         3.70%         1.96% 5 

Portfolio turnover6

     50.09%         34.28%         48.71%         18.45%         3.66% 4 

 

1 Commencement of operations on November 30, 2011.
2 Calculated using the average daily shares method.
3 Less than $0.01 per share.
4 Not annualized.
5 Annualized.
6 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

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Table of Contents

Financial Highlights (continued)

Matthews Asian Growth and Income Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

   Year Ended Dec. 31  
INVESTOR CLASS    2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $18.01         $18.91         $18.61         $15.07         $18.04   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.39         0.39         0.41         0.43         0.47   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (1.19      (0.50      0.47         3.58         (2.36

Total from investment operations

     (0.80      (0.11      0.88         4.01         (1.89

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.42      (0.35      (0.46      (0.47      (0.47

Net realized gains on investments

     (0.76      (0.44      (0.12              (0.61

Total distributions

     (1.18      (0.79      (0.58      (0.47      (1.08

Paid-in capital from redemption fees (Note 4)2

                                       

Net Asset Value, end of year

     $16.03         $18.01         $18.91         $18.61         $15.07   

TOTAL RETURN

     (4.50%      (0.65%      4.83%         26.90%         (10.62%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $2,045,435         $3,052,565         $3,278,586         $3,214,984         $2,340,606   

Ratio of expenses to average net assets before any reimbursement or waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.09%         1.08%         1.08%         1.11%         1.12%   

Ratio of expenses to average net assets after any reimbursement or waiver or recapture of expenses by Advisor and Administrator

     1.09%         1.08%         1.08%         1.11%         1.12%   

Ratio of net investment income (loss) to average net assets

     2.17%         2.03%         2.14%         2.52%         2.71%   

Portfolio turnover3

     16.48%         16.79%         15.27%         17.43%         16.54%   
 

 

   Year Ended Dec. 31  
INSTITUTIONAL CLASS    2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $18.00         $18.90         $18.60         $15.06         $18.04   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.42         0.42         0.44         0.45         0.52   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (1.19      (0.50      0.48         3.58         (2.39

Total from investment operations

     (0.77      (0.08      0.92         4.03         (1.87

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.45      (0.38      (0.50      (0.49      (0.50

Net realized gains on investments

     (0.76      (0.44      (0.12              (0.61

Total distributions

     (1.21      (0.82      (0.62      (0.49      (1.11

Paid-in capital from redemption fees (Note 4)2

                                       

Net Asset Value, end of year

     $16.02         $18.00         $18.90         $18.60         $15.06   

TOTAL RETURN

     (4.33%      (0.48%      5.04%         27.09%         (10.54%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $823,619         $1,182,690         $1,120,218         $856,876         $531,493   

Ratio of expenses to average net assets before any reimbursement or waiver or recapture of expenses by Advisor and Administrator (Note 5)

     0.92%         0.92%         0.93%         0.97%         0.99%   

Ratio of expenses to average net assets after any reimbursement or waiver or recapture of expenses by Advisor and Administrator

     0.92%         0.92%         0.93%         0.97%         0.99%   

Ratio of net investment income (loss) to average net assets

     2.34%         2.19%         2.30%         2.69%         3.05%   

Portfolio turnover3

     16.48%         16.79%         15.27%         17.43%         16.54%   

 

1 Calculated using the average daily shares method.
2 Less than $0.01 per share.
3 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

114    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Dividend Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

   Year Ended Dec. 31  
INVESTOR CLASS    20151      20141      2013      2012      2011  

Net Asset Value, beginning of year

     $15.26         $15.60         $14.58         $12.48         $14.33   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)2

     0.29         0.30         0.32         0.36         0.36   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     0.31         (0.34      1.30         2.30         (1.78

Total from investment operations

     0.60         (0.04      1.62         2.66         (1.42

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.27      (0.23      (0.60      (0.56      (0.37

Return of capital

             (0.07                        

Net realized gains on investments

     (0.23                              (0.06

Total distributions

     (0.50      (0.30      (0.60      (0.56      (0.43

Paid-in capital from redemption fees (Note 4)3

                                       

Net Asset Value, end of year

     $15.36         $15.26         $15.60         $14.58         $12.48   

TOTAL RETURN

     3.86%         (0.32% )       11.27%         21.63%         (10.02%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $2,757,910         $2,918,228         $3,669,690         $2,780,043         $1,930,363   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.06%         1.06%         1.06%         1.09%         1.10%   

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.05%         1.05%         1.06%         1.09%         1.10%   

Ratio of net investment income (loss) to average net assets

     1.82%         1.89%         2.04%         2.65%         2.61%   

Portfolio turnover4

     35.98%         20.06%         14.06%         9.17%         16.48%   
 

 

   Year Ended Dec. 31  
INSTITUTIONAL CLASS    20151      20141      2013      2012      2011  

Net Asset Value, beginning of year

     $15.26         $15.59         $14.57         $12.48         $14.33   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)2

     0.32         0.32         0.34         0.37         0.41   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     0.29         (0.33      1.30         2.29         (1.82

Total from investment operations

     0.61         (0.01      1.64         2.66         (1.41

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.29      (0.25      (0.62      (0.57      (0.38

Return of capital

             (0.07                        

Net realized gains on investments

     (0.23                              (0.06

Total distributions

     (0.52      (0.32      (0.62      (0.57      (0.44

Paid-in capital from redemption fees (Note 4)3

                                       

Net Asset Value, end of year

     $15.35         $15.26         $15.59         $14.57         $12.48   

TOTAL RETURN

     3.93%         (0.18% )       11.43%         21.70%         (9.93%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $2,045,713         $2,107,371         $2,124,214         $922,561         $344,502   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     0.93%         0.93%         0.93%         0.97%         1.00%   

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     0.92%         0.93%         0.93%         0.97%         1.00%   

Ratio of net investment income (loss) to average net assets

     1.98%         2.02%         2.17%         2.72%         3.03%   

Portfolio turnover4

     35.98%         20.06%         14.06%         9.17%         16.48%   

 

1 Consolidated Financial Highlights. See Note 2-C.
2 Calculated using the average daily shares method.
3 Less than $0.01 per share.
4 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

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Table of Contents

Financial Highlights (continued)

Matthews China Dividend Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

   Year Ended Dec. 31  
INVESTOR CLASS    2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $13.37         $13.74         $12.35         $10.06         $12.17   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.29         0.25         0.25         0.25         0.29   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     1.01         (0.12      1.35         2.49         (2.04

Total from investment operations

     1.30         0.13         1.60         2.74         (1.75

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.28      (0.36      (0.23      (0.46      (0.35

Net realized gains on investments

     (0.60      (0.14                      (0.02

Total distributions

     (0.88      (0.50      (0.23      (0.46      (0.37

Paid-in capital from redemption fees (Note 4)

     2       2       0.02         0.01         0.01   

Net Asset Value, end of year

     $13.79         $13.37         $13.74         $12.35         $10.06   

TOTAL RETURN

     9.54%         0.93%         13.35%         27.81%         (14.44%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $165,514         $116,954         $125,965         $59,535         $26,467   

Ratio of expenses to average net assets before any reimbursement or waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.19%         1.19%         1.24%         1.47%         1.52%   

Ratio of expenses to average net assets after any reimbursement or waiver or recapture of expenses by Advisor and Administrator

     1.19%         1.19%         1.34%         1.50%         1.50%   

Ratio of net investment income (loss) to average net assets

     1.97%         1.88%         1.94%         2.24%         2.47%   

Portfolio turnover3

     79.91%         25.43%         20.52%         21.40%         22.31%   
 

 

   Year Ended Dec. 31  
INSTITUTIONAL CLASS    2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $13.37         $13.74         $12.34         $10.06         $12.17   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.28         0.28         0.33         0.22         0.30   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     1.04         (0.13      1.32         2.53         (2.01

Total from investment operations

     1.32         0.15         1.65         2.75         (1.71

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.30      (0.38      (0.26      (0.48      (0.38

Net realized gains on investments

     (0.60      (0.14                      (0.02

Total distributions

     (0.90      (0.52      (0.26      (0.48      (0.40

Paid-in capital from redemption fees (Note 4)

     2       2       0.01         0.01         2 

Net Asset Value, end of year

     $13.79         $13.37         $13.74         $12.34         $10.06   

TOTAL RETURN

     9.71%         1.11%         13.72%         27.90%         (14.22% ) 

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $15,406         $30,662         $24,790         $201         $12   

Ratio of expenses to average net assets

     1.00%         1.01%         1.08%         1.29%         1.31%   

Ratio of net investment income (loss) to average net assets

     1.89%         2.06%         2.54%         1.87%         2.61%   

Portfolio turnover3

     79.91%         25.43%         20.52%         21.40%         22.31%   

 

1 Calculated using the average daily shares method.
2 Less than $0.01 per share.
3 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

116    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Value Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

INVESTOR CLASS    Period Ended
Dec. 31,  20151
 

Net Asset Value, beginning of period

     $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

  

Net investment income (loss)2

     0.02   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.16

Total from investment operations

     (0.14

LESS DISTRIBUTIONS FROM:

  

Net investment income

     (0.01

Total distributions

     (0.01

Paid-in capital from redemption fees (Note 4)

       

Net Asset Value, end of period

     $9.85   

TOTAL RETURN

     (1.35% )3 

RATIOS/SUPPLEMENTAL DATA

  

Net assets, end of period (in 000’s)

     $1,589   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     36.42% 4 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.50% 4 

Ratio of net investment income (loss) to average net assets

     2.70% 4 

Portfolio turnover5

     10.80% 3 
INSTITUTIONAL CLASS    Period Ended
Dec. 31, 20151
 

Net Asset Value, beginning of period

     $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

  

Net investment income (loss)2

     0.02   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.15

Total from investment operations

     (0.13

LESS DISTRIBUTIONS FROM:

  

Net investment income

     (0.04

Total distributions

     (0.04

Paid-in capital from redemption fees (Note 4)

       

Net Asset Value, end of period

     $9.83   

TOTAL RETURN

     (1.30% )3 

RATIOS/SUPPLEMENTAL DATA

  

Net assets, end of period (in 000’s)

     $143   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     36.17% 4 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.25% 4 

Ratio of net investment income (loss) to average net assets

     2.41% 4 

Portfolio turnover5

     10.80% 3 

 

1 Commenced operations on November 30, 2015.
2 Calculated using the average daily shares method.
3 Not annualized.
4 Annualized.
5 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

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Table of Contents

Financial Highlights (continued)

Matthews Asia Focus Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Year Ended Dec. 31     

Period Ended

Dec. 31, 20131

 
INVESTOR CLASS    2015      2014     

Net Asset Value, beginning of period

     $10.01         $9.66         $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

        

Net investment income (loss)2

     0.11         0.09         0.04   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (1.31      0.33         (0.30

Total from investment operations

     (1.20      0.42         (0.26

LESS DISTRIBUTIONS FROM:

        

Net investment income

     (0.07      (0.07      (0.08

Net realized gains on investments

     (0.05                

Total distributions

     (0.12      (0.07      (0.08

Paid-in capital from redemption fees (Note 4)3

                       

Net Asset Value, end of period

     $8.69         $10.01         $9.66   

TOTAL RETURN

     (12.07%      4.38%         (2.63% )4 

RATIOS/SUPPLEMENTAL DATA

        

Net assets, end of period (in 000’s)

     $5,474         $7,839         $6,258   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     2.07%         2.16%         3.50% 5 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.50%         1.57%         1.71% 5 

Ratio of net investment income (loss) to average net assets

     1.08%         0.87%         0.64% 5 

Portfolio turnover6

     23.60%         24.12%         16.23% 4 
     Year Ended Dec. 31     

Period Ended

Dec. 31, 20131

 
INSTITUTIONAL CLASS    2015      2014     

Net Asset Value, beginning of period

     $10.04         $9.66         $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

        

Net investment income (loss)2

     0.13         0.10         0.05   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (1.33      0.36         (0.30

Total from investment operations

     (1.20      0.46         (0.25

LESS DISTRIBUTIONS FROM:

        

Net investment income

     (0.10      (0.08      (0.09

Net realized gains on investments

     (0.05                

Total distributions

     (0.15      (0.08      (0.09

Paid-in capital from redemption fees (Note 4)3

                       

Net Asset Value, end of period

     $8.69         $10.04         $9.66   

TOTAL RETURN

     (11.96%      4.77%         (2.48% )4 

RATIOS/SUPPLEMENTAL DATA

        

Net assets, end of period (in 000’s)

     $5,700         $7,148         $2,118   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.91%         1.94%         3.32% 5 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.25%         1.31%         1.50% 5 

Ratio of net investment income (loss) to average net assets

     1.30%         0.96%         0.79% 5 

Portfolio turnover6

     23.60%         24.12%         16.23% 4 

 

1 Commenced operations on April 30, 2013.
2 Calculated using the average daily shares method.
3 Less than $0.01 per share.
4 Not annualized.
5 Annualized.
6 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

118    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Growth Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

   Year Ended Dec. 31  
INVESTOR CLASS    2015     2014     2013     2012     2011  

Net Asset Value, beginning of year

     $21.10        $21.17        $18.02        $15.34        $17.97   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

          

Net investment income (loss)1

     0.11        0.12        0.11        0.15        0.11   

Net realized gain (loss) and unrealized appreciation/depreciation
on investments and foreign currency

     (0.12     0.19        3.37        2.53        (2.41

Total from investment operations

     (0.01     0.31        3.48        2.68        (2.30

LESS DISTRIBUTIONS FROM:

          

Net investment income

            (0.38     (0.33            (0.35

Total distributions

            (0.38     (0.33            (0.35

Paid-in capital from redemption fees (Note 4)

     2      2      2      2      0.02   

Net Asset Value, end of year

     $21.09        $21.10        $21.17        $18.02        $15.34   

TOTAL RETURN

     (0.05% )      1.49%        19.35%        17.47%        (12.70%

RATIOS/SUPPLEMENTAL DATA

          

Net assets, end of year (in 000’s)

     $526,969        $561,922        $558,407        $276,884        $259,166   

Ratio of expenses to average net assets

     1.11%        1.11%        1.12%        1.16%        1.19%   

Ratio of net investment income (loss) to average net assets

     0.49%        0.55%        0.55%        0.92%        0.63%   

Portfolio turnover3

     29.51%        22.24%        10.77%        44.76%        28.06%   
 

 

   Year Ended Dec. 31  
INSTITUTIONAL CLASS    2015     2014     2013     2012     2011  

Net Asset Value, beginning of year

     $21.19        $21.26        $18.08        $15.37        $17.98   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

          

Net investment income (loss)1

     0.16        0.16        0.15        0.17        0.14   

Net realized gain (loss) and unrealized appreciation/depreciation
on investments and foreign currency

     (0.11     0.19        3.39        2.54        (2.42

Total from investment operations

     0.05        0.35        3.54        2.71        (2.28

LESS DISTRIBUTIONS FROM:

          

Net investment income

            (0.42     (0.36            (0.35

Total distributions

            (0.42     (0.36            (0.35

Paid-in capital from redemption fees (Note 4)

     2      2      2      2      0.02   

Net Asset Value, end of year

     $21.24        $21.19        $21.26        $18.08        $15.37   

TOTAL RETURN

     0.24%        1.63%        19.63%        17.63%        (12.58%

RATIOS/SUPPLEMENTAL DATA

          

Net assets, end of year (in 000’s)

     $249,886        $287,262        $227,852        $147,142        $84,302   

Ratio of expenses to average net assets

     0.91%        0.91%        0.93%        0.98%        1.03%   

Ratio of net investment income (loss) to average net assets

     0.72%        0.74%        0.73%        1.02%        0.84%   

Portfolio turnover3

     29.51%        22.24%        10.77%        44.76%        28.06%   

 

1 Calculated using the average daily shares method.
2 Less than $0.01 per share.
3 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

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Table of Contents

Financial Highlights (continued)

Matthews Pacific Tiger Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

   Year Ended Dec. 31  
INVESTOR CLASS    2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $26.57         $24.99         $24.42         $20.33         $23.44   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.42         0.14         0.17         0.18         0.10   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.82      2.80         0.72         4.09         (2.78

Total from investment operations

     (0.40      2.94         0.89         4.27         (2.68

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.42      (0.13      (0.16      (0.16      (0.11

Net realized gains on investments

     (2.21      (1.23      (0.16      (0.02      (0.33

Total distributions

     (2.63      (1.36      (0.32      (0.18      (0.44

Paid-in capital from redemption fees (Note 4)

     2       2       2       2       0.01   

Net Asset Value, end of year

     $23.54         $26.57         $24.99         $24.42         $20.33   

TOTAL RETURN

     (1.30% )       11.79%         3.63%         21.00%         (11.41%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $2,720,869         $3,047,077         $2,954,108         $2,994,026         $2,780,640   

Ratio of expenses to average net assets before any reimbursement or waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.09%         1.09%         1.09%         1.11%         1.11%   

Ratio of expenses to average net assets after any reimbursement or waiver or recapture of expenses by Advisor and Administrator

     1.07%         1.08%         1.09%         1.11%         1.11%   

Ratio of net investment income (loss) to average net assets

     1.53%         0.52%         0.67%         0.82%         0.44%   

Portfolio turnover 3

     12.56%         11.38%         7.73%         6.53%         10.51%   
 

 

   Year Ended Dec. 31  
INSTITUTIONAL CLASS    2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $26.56         $24.97         $24.41         $20.32         $23.44   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.44         0.18         0.21         0.21         0.23   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.80      2.82         0.71         4.10         (2.87

Total from investment operations

     (0.36      3.00         0.92         4.31         (2.64

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.47      (0.18      (0.20      (0.20      (0.15

Net realized gains on investments

     (2.21      (1.23      (0.16      (0.02      (0.33

Total distributions

     (2.68      (1.41      (0.36      (0.22      (0.48

Paid-in capital from redemption fees (Note 4)2

                                       

Net Asset Value, end of year

     $23.52         $26.56         $24.97         $24.41         $20.32   

TOTAL RETURN

     (1.15%      12.03%         3.78%         21.24%         (11.28%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $3,964,547         $5,049,643         $4,679,039         $3,770,568         $2,029,091   

Ratio of expenses to average net assets before any reimbursement or waiver or recapture of expenses by Advisor and Administrator (Note 5)

     0.91%         0.92%         0.92%         0.95%         0.95%   

Ratio of expenses to average net assets after any reimbursement or waiver or recapture of expenses by Advisor and Administrator

     0.89%         0.91%         0.92%         0.95%         0.95%   

Ratio of net investment income (loss) to average net assets

     1.61%         0.68%         0.83%         0.95%         1.03%   

Portfolio turnover3

     12.56%         11.38%         7.73%         6.53%         10.51%   

 

1 Calculated using the average daily shares method.
2 Less than $0.01 per share.
3 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

120    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia ESG Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

INVESTOR CLASS    Period Ended
Dec. 31, 20151
 

Net Asset Value, beginning of period

     $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

  

Net investment income (loss)2

     0.02   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.75

Total from investment operations

     (0.73

LESS DISTRIBUTIONS FROM:

  

Net investment income

     (0.04

Total distributions

     (0.04

Paid-in capital from redemption fees (Note 4)

       

Net Asset Value, end of period

     $9.23   

TOTAL RETURN

     (7.30% )3 

RATIOS/SUPPLEMENTAL DATA

  

Net assets, end of period (in 000’s)

     $3,248   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     9.09% 4 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.44% 4 

Ratio of net investment income (loss) to average net assets

     0.25% 4 

Portfolio turnover5

     21.72% 3 
INSTITUTIONAL CLASS    Period Ended
Dec. 31, 20151
 

Net Asset Value, beginning of period

     $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

  

Net investment income (loss)2

     0.05   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.77

Total from investment operations

     (0.72

LESS DISTRIBUTIONS FROM:

  

Net investment income

     (0.11

Total distributions

     (0.11

Paid-in capital from redemption fees (Note 4)

       

Net Asset Value, end of period

     $9.17   

TOTAL RETURN

     (7.14% )3 

RATIOS/SUPPLEMENTAL DATA

  

Net assets, end of period (in 000’s)

     $1,686   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     8.90% 4 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.25% 4 

Ratio of net investment income (loss) to average net assets

     0.75% 4 

Portfolio turnover5

     21.72% 3 

 

1  Commenced operations on April 30, 2015.
2  Calculated using the average daily shares method.
3  Not annualized.
4  Annualized.
5  The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

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Table of Contents

Financial Highlights (continued)

Matthews Emerging Asia Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

     Year Ended Dec. 31     

Period Ended

Dec. 31, 20131

 
INVESTOR CLASS    2015      2014     

Net Asset Value, beginning of period

     $11.60         $9.93         $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

        

Net investment income (loss)2

     0.04         0.04         (0.01

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.34      1.69         (0.05

Total from investment operations

     (0.30      1.73         (0.06

LESS DISTRIBUTIONS FROM:

        

Net investment income

     3       (0.06      3 

Return of capital

                     (0.01

Net realized gains on investments

     (0.03                

Total distributions

     (0.03      (0.06      (0.01

Paid-in capital from redemption fees (Note 4)3

                       

Net Asset Value, end of period

     $11.27         $11.60         $9.93   

TOTAL RETURN

     (2.56% )       17.39%         (0.61% )4 

RATIOS/SUPPLEMENTAL DATA

        

Net assets, end of period (in 000’s)

     $114,590         $110,363         $38,022   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.75%         1.78%         2.39% 5 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.50%         1.58%         1.98% 5 

Ratio of net investment income (loss) to average net assets

     0.33%         0.34%         (0.08% )5 

Portfolio turnover6

     12.14%         8.21%         1.66% 4 
     Year Ended Dec. 31      Period Ended
Dec. 31, 20131
 
INSTITUTIONAL CLASS    2015      2014     

Net Asset Value, beginning of period

     $11.60         $9.92         $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

        

Net investment income (loss)2

     0.07         0.06         0.01   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (0.34      1.69         (0.07

Total from investment operations

     (0.27      1.75         (0.06

LESS DISTRIBUTIONS FROM:

        

Net investment income

     (0.01      (0.07      3 

Return of capital

                     (0.02

Net realized gains on investments

     (0.03                

Total distributions

     (0.04      (0.07      (0.02

Paid-in capital from redemption fees (Note 4)3

                       

Net Asset Value, end of period

     $11.29         $11.60         $9.92   

TOTAL RETURN

     (2.33%      17.68%         (0.55% )4 

RATIOS/SUPPLEMENTAL DATA

        

Net assets, end of period (in 000’s)

     $55,278         $21,350         $2,017   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.57%         1.59%         2.21% 5 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.25%         1.33%         1.75% 5 

Ratio of net investment income (loss) to average net assets

     0.65%         0.55%         0.19% 5 

Portfolio turnover6

     12.14%         8.21%         1.66% 4 

 

1  Commenced operations on April 30, 2013.
2  Calculated using the average daily shares method.
3  Less than $0.01 per share.
4  Not annualized.
5  Annualized.
6  The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

122    MATTHEWS ASIA FUNDS


Table of Contents

Matthews China Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

INVESTOR CLASS    Year Ended Dec. 31  
   20151      20141      2013      2012      2011  

Net Asset Value, beginning of year

     $21.46         $22.84         $23.47         $21.51         $29.36   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)2

     0.20         0.24         0.25         0.30         0.26   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     0.30         (1.25      1.33         2.26         (5.78

Total from investment operations

     0.50         (1.01      1.58         2.56         (5.52

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.21      (0.27      (0.26      (0.35      (0.28

Net realized gains on investments

     (3.33      (0.10      (1.95      (0.25      (2.06

Total distributions

     (3.54      (0.37      (2.21      (0.60      (2.34

Paid-in capital from redemption fees (Note 4)

     3       3       3       3       0.01   

Net Asset Value, end of year

     $18.42         $21.46         $22.84         $23.47         $21.51   

TOTAL RETURN

     2.41%         (4.42% )       6.84%         11.96%         (18.93%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $709,767         $947,740         $1,286,309         $1,642,090         $1,836,333   

Ratio of expenses to average net assets

     1.14%         1.11%         1.08%         1.12%         1.13%   

Ratio of net investment income (loss) to average net assets

     0.89%         1.09%         1.06%         1.33%         0.93%   

Portfolio turnover4

     66.22%         10.23%         6.29%         9.61%         8.43%   
INSTITUTIONAL CLASS    Year Ended Dec. 31  
   20151      20141      2013      2012      2011  

Net Asset Value, beginning of year

     $21.44         $22.81         $23.45         $21.49         $29.36   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)2

     0.25         0.28         0.26         0.36         0.26   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     0.27         (1.25      1.36         2.25         (5.73

Total from investment operations

     0.52         (0.97      1.62         2.61         (5.47

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.24      (0.30      (0.31      (0.40      (0.34

Net realized gains on investments

     (3.33      (0.10      (1.95      (0.25      (2.06

Total distributions

     (3.57      (0.40      (2.26      (0.65      (2.40

Paid-in capital from redemption fees (Note 4)3

                                       

Net Asset Value, end of year

     $18.39         $21.44         $22.81         $23.45         $21.49   

TOTAL RETURN

     2.50%         (4.22% )       6.97%         12.22%         (18.80%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $24,276         $52,478         $117,678         $390,744         $288,277   

Ratio of expenses to average net assets

     0.99%         0.95%         0.91%         0.91%         0.96%   

Ratio of net investment income (loss) to average net assets

     1.09%         1.27%         1.13%         1.58%         0.99%   

Portfolio turnover4

     66.22%         10.23%         6.29%         9.61%         8.43%   

 

1  Consolidated Financial Highlights. See Note 2-C.
2  Calculated using the average daily shares method.
3  Less than $0.01 per share.
4  The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of share issued.

 

See accompanying notes to financial statements.

 

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Table of Contents

Financial Highlights (continued)

Matthews India Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

INVESTOR CLASS    Year Ended Dec. 31  
   2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $26.46         $16.28         $17.51         $13.59         $21.49   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     (0.05      0.07         0.08         0.11         0.11   

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     0.26         10.29         (1.13      4.17         (7.96

Total from investment operations

     0.21         10.36         (1.05      4.28         (7.85

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.03      (0.05      (0.18      (0.09      (0.07

Net realized gains on investments

     (0.23      (0.14      (0.01      (0.27        

Total distributions

     (0.26      (0.19      (0.19      (0.36      (0.07

Paid-in capital from redemption fees (Note 4)

     0.02         0.01         0.01         2       0.02   

Net Asset Value, end of year

     $26.43         $26.46         $16.28         $17.51         $13.59   

TOTAL RETURN

     0.90%         63.71%         (5.90%      31.54%         (36.48%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $1,151,948         $974,838         $427,861         $607,800         $559,337   

Ratio of expenses to average net assets

     1.11%         1.12%         1.13%         1.18%         1.18%   

Ratio of net investment income (loss) to average net assets

     (0.17%      0.32%         0.48%         0.65%         0.58%   

Portfolio turnover3

     9.51%         14.86%         8.70%         7.03%         3.51%   

INSTITUTIONAL CLASS

   Year Ended Dec. 31  
   2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $26.49         $16.31         $17.53         $13.61         $21.48   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.01         0.09         0.10         0.14         0.16   

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     0.26         10.29         (1.11      4.17         (7.96

Total from investment operations

     0.27         10.38         (1.01      4.31         (7.80

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.06      (0.08      (0.21      (0.12      (0.07

Net realized gains on investments

     (0.23      (0.14      (0.01      (0.27        

Total distributions

     (0.29      (0.22      (0.22      (0.39      (0.07

Paid-in capital from redemption fees (Note 4)

     0.02         0.02         0.01         2       2 

Net Asset Value, end of year

     $26.49         $26.49         $16.31         $17.53         $13.61   

TOTAL RETURN

     1.12%         63.80%         (5.67%      31.74%         (36.35% ) 

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $353,879         $109,331         $3,234         $36,166         $26,920   

Ratio of expenses to average net assets

     0.90%         0.94%         0.95%         0.98%         0.99%   

Ratio of net investment income (loss) to average net assets

     0.02%         0.38%         0.61%         0.87%         0.86%   

Portfolio turnover3

     9.51%         14.86%         8.70%         7.03%         3.51%   

 

1  Calculated using the average daily shares method.
2  Less than $0.01 per share.
3  The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

124    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Japan Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

INVESTOR CLASS    Year Ended Dec. 31  
   2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $15.70         $16.20         $12.27         $11.34         $12.53   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.04         0.05         0.03         0.10         0.07   

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     3.23         (0.48      4.12         0.84         (1.06

Total from investment operations

     3.27         (0.43      4.15         0.94         (0.99

LESS DISTRIBUTIONS FROM:

              

Net investment income

             (0.08      (0.24      (0.01      (0.22

Total distributions

             (0.08      (0.24      (0.01      (0.22

Paid-in capital from redemption fees (Note 4)

     2       0.01         0.02         2       0.02   

Net Asset Value, end of year

     $18.97         $15.70         $16.20         $12.27         $11.34   

TOTAL RETURN

     20.83%         (2.60%      34.03%         8.32%         (7.72%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $1,330,743         $467,854         $312,988         $82,463         $101,369   

Ratio of expenses to average net assets

     0.99%         1.03%         1.10%         1.20%         1.22%   

Ratio of net investment income (loss) to average net assets

     0.22%         0.32%         0.19%         0.81%         0.54%   

Portfolio turnover3

     24.19%         42.52%         22.72%         48.58%         34.94%   
INSTITUTIONAL CLASS    Year Ended Dec. 31  
   2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $15.71         $16.20         $12.26         $11.34         $12.53   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.05         0.09         0.06         0.12         0.06   

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     3.24         (0.50      4.12         0.84         (1.04

Total from investment operations

     3.29         (0.41      4.18         0.96         (0.98

LESS DISTRIBUTIONS FROM:

              

Net investment income

             (0.09      (0.26      (0.04      (0.22

Total distributions

             (0.09      (0.26      (0.04      (0.22

Paid-in capital from redemption fees (Note 4)

     2       0.01         0.02         2       0.01   

Net Asset Value, end of year

     $19.00         $15.71         $16.20         $12.26         $11.34   

TOTAL RETURN

     20.94%         (2.47%      34.27%         8.47%         (7.72%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $618,583         $154,750         $59,702         $22,233         $30,302   

Ratio of expenses to average net assets

     0.87%         0.90%         0.96%         1.04%         1.07%   

Ratio of net investment income (loss) to average net assets

     0.28%         0.58%         0.41%         0.99%         0.46%   

Portfolio turnover3

     24.19%         42.52%         22.72%         48.58%         34.94%   

 

1  Calculated using the average daily shares method.
2  Less than $0.01 per share.
3  The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.

 

See accompanying notes to financial statements.

 

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Table of Contents

Financial Highlights (continued)

Matthews Korea Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

INVESTOR CLASS

   Year Ended Dec. 31  
   2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $5.65         $5.95         $5.64         $4.59         $5.14   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.01         2       2       2       (0.01

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     0.83         (0.05      0.57         1.10         (0.31

Total from investment operations

     0.84         (0.05      0.57         1.10         (0.32

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.01              (0.02              (0.01

Net realized gains on investments

     (0.33      (0.25      (0.24      (0.05      (0.22

Total distributions

     (0.34      (0.25      (0.26      (0.05      (0.23

Paid-in capital from redemption fees (Note 4)2

                                       

Net Asset Value, end of year

     $6.15         $5.65         $5.95         $5.64         $4.59   

TOTAL RETURN

     15.16%         (0.73%      10.11%         24.05%         (6.45%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $147,685         $127,774         $138,830         $141,247         $141,590   

Ratio of expenses to average net assets

     1.10%         1.11%         1.13%         1.16%         1.18%   

Ratio of net investment income (loss) to average net assets

     0.18%         0.04%         0.02%         0.01%         (0.18%

Portfolio turnover3

     20.36%         17.37%         46.20%         34.84%         30.13%   
INSTITUTIONAL CLASS    Year Ended Dec. 31  
   2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $5.68         $5.96         $5.67         $4.61         $5.14   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.02         0.05         2       2       0.17   

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     0.83         (0.08      0.56         1.11         (0.47

Total from investment operations

     0.85         (0.03      0.56         1.11         (0.30

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.02              (0.03              (0.01

Net realized gains on investments

     (0.33      (0.25      (0.24      (0.05      (0.22

Total distributions

     (0.35      (0.25      (0.27      (0.05      (0.23

Paid-in capital from redemption fees (Note 4)2

                                       

Net Asset Value, end of year

     $6.18         $5.68         $5.96         $5.67         $4.61   

TOTAL RETURN

     15.27%         (0.39%      9.87%         24.16%         (6.05%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $59,982         $91,431         $12,283         $8,597         $15,109   

Ratio of expenses to average net assets

     0.93%         0.93%         0.97%         1.00%         1.07%   

Ratio of net investment income (loss) to average net assets

     0.28%         0.87%         (0.03%      (0.07%      3.37%   

Portfolio turnover3

     20.36%         17.37%         46.20%         34.84%         30.13%   

 

1 Calculated using the average daily shares method.
2 Less than $0.01 per share.
3 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of share issued.

 

See accompanying notes to financial statements.

 

126    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Small Companies Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

INVESTOR CLASS

   Year Ended Dec. 31  
   2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $21.46         $19.34         $18.13         $14.77         $21.16   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     0.02         0.09         0.11         0.17         0.15   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

     (2.05      2.11         1.19         3.36         (4.35

Total from investment operations

     (2.03      2.20         1.30         3.53         (4.20

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.03      (0.08      (0.09      (0.09      (0.17

Net realized gains on investments

                             (0.08      (2.04

Total distributions

     (0.03      (0.08      (0.09      (0.17      (2.21

Paid-in capital from redemption fees (Note 4)

     0.01         2       2       2       0.02   

Net Asset Value, end of year

     $19.41         $21.46         $19.34         $18.13         $14.77   

TOTAL RETURN

     (9.43% )       11.39%         7.19%         23.92%         (20.03%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $387,747         $599,082         $407,352         $366,753         $258,944   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     1.48%         1.47%         1.47%         1.50%         1.52%   

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.47%         1.47%         1.47%         1.50%         1.52%   

Ratio of net investment income (loss) to average net assets

     0.08%         0.44%         0.58%         1.06%         0.76%   

Portfolio turnover

     48.29% 3       21.70% 3       37.01% 3       27.95%         19.97%   
 

 

                 Year Ended Dec. 31     

Period Ended

Dec. 31, 20134

 
INSTITUTIONAL CLASS                    2015      2014     

Net Asset Value, beginning of period

                       $21.46         $19.33         $19.44   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

           0.11         0.15         0.18   

Net realized gain (loss) and unrealized appreciation/depreciation on investments and foreign currency

                       (2.10      2.10         (0.16

Total from investment operations

                       (1.99      2.25         0.02   

LESS DISTRIBUTIONS FROM:

              

Net investment income

           (0.08      (0.12      (0.13

Net realized gains on investments

                                         

Total distributions

                       (0.08      (0.12      (0.13

Paid-in capital from redemption fees (Note 4)

                       0.01         2       2 

Net Asset Value, end of period

                       $19.40         $21.46         $19.33   

TOTAL RETURN

                       (9.23% )       11.65%         0.13% 5 

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of period (in 000’s)

                       $222,168         $77,168         $44,769   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

                       1.30%         1.27%         1.25% 6 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

                       1.25%         1.26%         1.25% 6 

Ratio of net investment income (loss) to average net assets

                       0.53%         0.70%         1.39% 6 

Portfolio turnover3

           48.29%         21.70%         37.01% 5 

 

1 Calculated using the average daily shares method.
2 Less than $0.01 per share.
3 The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.
4 Institutional Class commenced operations on April 30, 2013.
5 Not annualized.
6 Annualized.

 

See accompanying notes to financial statements.

 

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Financial Highlights (continued)

Matthews China Small Companies Fund

The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

 

   Year Ended Dec. 31     

Period Ended

Dec. 31, 20111

 
INVESTOR CLASS    2015      2014      2013      2012     

Net Asset Value, beginning of period

     $9.21         $9.89         $7.76         $7.04         $10.00   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)2

     0.08         0.01         0.02         0.03         (0.02

Net realized gain (loss) and unrealized appreciation/depreciation on investments
and foreign currency

     0.27         (0.33      2.22         0.68         (2.96

Total from investment operations

     0.35         (0.32      2.24         0.71         (2.98

LESS DISTRIBUTIONS FROM:

              

Net investment income

     (0.06      (0.02      (0.11      (0.02      (0.01

Return of capital

             (0.34                        

Net realized gains on investments

     (0.72                                

Total distributions

     (0.78      (0.36      (0.11      (0.02      (0.01

Paid-in capital from redemption fees (Note 4)

     0.01         3       3       0.03         0.03   

Net Asset Value, end of period

     $8.79         $9.21         $9.89         $7.76         $7.04   

TOTAL RETURN

     4.07%         (3.33% )       28.85%         10.53%         (29.51% )4 

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of period (in 000’s)

     $21,546         $22,068         $26,674         $10,266         $4,493   

Ratio of expenses to average net assets before any reimbursement, waiver or recapture of expenses by Advisor and Administrator (Note 5)

     2.10%         1.90%         2.04%         3.26%         5.32% 5 

Ratio of expenses to average net assets after any reimbursement, waiver or recapture of expenses by Advisor and Administrator

     1.50%         1.67%         2.00%         2.00%         2.00% 5 

Ratio of net investment income (loss) to average net assets

     0.80%         0.14%         0.17%         0.40%         (0.53% )5 

Portfolio turnover

     72.49%         32.42%         10.28%         34.01%         6.08% 4 

 

1  Investor Class commenced operations on May 31, 2011.
2  Calculated using the average daily shares method.
3  Less than $0.01 per share.
4  Not annualized.
5  Annualized.

 

See accompanying notes to financial statements.

 

128    MATTHEWS ASIA FUNDS


Table of Contents

Matthews Asia Science and Technology Fund

The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.

 

 

 

 

 

   Year Ended Dec. 31  
INVESTOR CLASS    2015      2014      2013      2012      2011  

Net Asset Value, beginning of year

     $13.61         $12.59         $9.29         $8.16         $9.89   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

              

Net investment income (loss)1

     (0.05      2       0.01         0.03         0.02   

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     0.64         1.16         3.30         1.12         (1.74

Total from investment operations

     0.59         1.16         3.31         1.15         (1.72

LESS DISTRIBUTIONS FROM:

              

Net investment income

             (0.06      (0.01      (0.02      (0.02

Net realized gains on investments

     (1.88      (0.08                        

Total distributions

     (1.88      (0.14      (0.01      (0.02      (0.02

Paid-in capital from redemption fees (Note 4)

     2       2       2       2       0.01   

Net Asset Value, end of year

     $12.32         $13.61         $12.59         $9.29         $8.16   

TOTAL RETURN

     4.48%         9.24%         35.61%         14.11%         (17.26%

RATIOS/SUPPLEMENTAL DATA

              

Net assets, end of year (in 000’s)

     $129,763         $125,612         $111,751         $131,629         $153,349   

Ratio of expenses to average net assets

     1.18%         1.16%         1.18%         1.18%         1.21%   

Ratio of net investment income (loss) to average net assets

     (0.33% )       (0.02% )       0.07%         0.30%         0.23%   

Portfolio turnover

     72.85% 3       62.99% 3       62.04% 3       45.76%         65.47%   

 

 

 

   Year Ended Dec. 31     

Period Ended

Dec. 31, 20134

 
INSTITUTIONAL CLASS    2015      2014     

Net Asset Value, beginning of period

     $13.61         $12.58         $10.09   

INCOME (LOSS) FROM INVESTMENT OPERATIONS:

        

Net investment income (loss)1

     (0.02      0.03         0.04   

Net realized gain (loss) and unrealized appreciation/
depreciation on investments and foreign currency

     0.63         1.17         2.48   

Total from investment operations

     0.61         1.20         2.52   

LESS DISTRIBUTIONS FROM:

        

Net investment income

             (0.09      (0.03

Net realized gains on investments

     (1.88      (0.08        

Total distributions

     (1.88      (0.17      (0.03

Paid-in capital from redemption fees (Note 4)2

                       

Net Asset Value, end of period

     $12.34         $13.61         $12.58   

TOTAL RETURN

     4.63%         9.54%         24.99% 5 

RATIOS/SUPPLEMENTAL DATA

        

Net assets, end of period (in 000’s)

     $36,770         $61,088         $49,236   

Ratio of expenses to average net assets

     0.97%         0.95%         1.00% 6 

Ratio of net investment income (loss) to average net assets

     (0.16% )       0.21%         0.56% 6 

Portfolio turnover3

     72.85%         62.99%         62.04% 5 

 

1  Calculated using the average daily shares method.
2  Less than $0.01 per share.
3  The portfolio turnover rate is calculated on the Fund as a whole without distinguishing between classes of shares issued.
4  Institutional Class commenced operations on April 30, 2013.
5  Not annualized.
6  Annualized.

 

See accompanying notes to financial statements.

 

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Table of Contents

Notes to Financial Statements

 

1. ORGANIZATION

Matthews Asia Funds (the “Trust”) is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust currently issues seventeen separate series of shares (each a “Fund” and collectively, the “Funds”): Matthews Asia Strategic Income Fund, Matthews Asian Growth and Income Fund, Matthews Asia Dividend Fund, Matthews China Dividend Fund, Matthews Asia Value Fund, Matthews Asia Focus Fund, Matthews Asia Growth Fund, Matthews Pacific Tiger Fund, Matthews Asia ESG Fund, Matthews Emerging Asia Fund, Matthews China Fund, Matthews India Fund, Matthews Japan Fund, Matthews Korea Fund, Matthews Asia Small Companies Fund, Matthews China Small Companies Fund and Matthews Asia Science and Technology Fund. Each Fund except for Matthews China Small Companies Fund currently offers two classes of shares: Investor Class and Institutional Class. Matthews China Small Companies Fund currently offers only Investor Class shares. Each class of shares has identical voting, dividend, liquidation and other rights and the same terms and conditions, except each class may be subject to different class expenses as outlined in the relevant prospectus and each class has exclusive voting rights with respect to matters solely affecting such class.

 

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently followed by the Funds in preparation of their financial statements.

 

A. SECURITY VALUATION: The value of the Funds’ securities is based on market quotations for those securities, or on their fair value determined by the valuation policies approved by the Funds’ Board of Trustees (the “Board”). Market quotations and valuation information are provided by commercial pricing services or securities dealers that are independent of the Funds and Matthews International Capital Management, LLC (“Matthews”), in accordance with procedures established by the Funds’ Board. Foreign exchange-traded securities are valued as of the close of trading on the primary exchange on which they trade. Securities that trade in over-the-counter markets, including most debt securities (bonds), may be valued by other third-party vendors or by using indicative bid quotations from dealers or market makers, or other available market information. Market values for securities are determined based on quotations, market data or other information from the principal (or most advantageous) market on which the security is traded. Market quotations for equity securities used by the Funds include last reported sale prices, or, if such prices are not reported or available, bid and ask prices. Financial futures contracts traded on exchanges are valued at their settlement price. Foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined at the close of business on the New York Stock Exchange (“NYSE”). Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. The Funds may also utilize independent pricing services to assist them in determining a current market value for each security based on sources believed to be reliable.

The Board has delegated the responsibility of making fair value determinations to the Funds’ Valuation Committee (the “Valuation Committee”) subject to the Funds’ pricing policies. When fair value pricing is employed, the prices of securities used by a Fund to calculate its Net Asset Value (“NAV”) may differ from any quoted or published prices for the same securities for that day. All fair value determinations are made subject to the Board’s oversight. Events affecting the value of foreign investments may occur between the time at which they are determined and when the Funds calculate their NAV, which is normally the close of trading on the NYSE. If such events render market quotations unreliable, and the impact of such events can be reasonably determined, the investments will be valued at their fair value in accordance with pricing policies. The fair value of a security held by the Funds may be determined using the services of third-party pricing services to assist in this process.

The books and records of the Funds are maintained in U.S. dollars. Transactions, portfolio securities, and assets and liabilities denominated in a foreign currency are translated and recorded in U.S. dollars at the prevailing exchange rate as of the close of trading on the NYSE. Translation gains or losses resulting from changes in the exchange rate during the reporting period and realized gains and losses on the settlement of foreign currency transactions are reported in the results of operations for the current period. The Funds do not isolate that portion of gains and losses on investments in equity securities that is due to changes in foreign exchange rate from that which is due to changes in market prices of securities.

Foreign securities held by the Funds may be traded on days and at times when the NYSE is closed. Accordingly, the NAV of the Funds may be significantly affected on days when shareholders have no access to the Funds.

 

B. FAIR VALUE MEASUREMENTS: In accordance with the guidance on fair value measurements and disclosures under generally accepted accounting principles in the United States (“U.S. GAAP”), the Funds disclose the fair value of their investments and derivative financial instruments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Various inputs are used in determining the fair value of investments and derivative financial instruments, which are as follows:

Level 1: Quoted prices in active markets for identical securities.

Level 2: Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3: Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments and derivative financial instruments).

Level 3 securities consisted of equities that, as of December 31, 2015, were suspended from trading. As described in Note 2-A, these securities are valued based on their fair value as determined under the direction of the Board. The significant unobservable inputs, the methodology used for valuing such securities, and the characterization of such securities as Level 3 securities are not necessarily an indication of liquidity, or the risk associated with investing in these securities. A significant change in the unobservable inputs could result in a significantly lower or higher value in such Level 3 securities and could impact overall Fund performance. Level 2 equity securities consist primarily of securities that have been fair valued by third-party pricing services (see Note 2-A).

 

130    MATTHEWS ASIA FUNDS


Table of Contents

The summary of inputs used to determine the fair valuation of the Fund’s investments as of December 31, 2015 is as follows:

 

    

Matthews Asia
Strategic
Income Fund

    Matthews Asian
Growth and
Income Fund
    Matthews Asia
Dividend Fund
    Matthews Asia
Value Fund
    Matthews Asia
Focus Fund
    Matthews Asia
Growth Fund
 
Assets:            
Investments:            

Level 1: Quoted Prices

           

China/Hong Kong

    $—        $197,867,028        $167,142,547        $62,871        $784,479        $48,475,813   

Indonesia

           51,939,120        48,424,150                        

Israel

                         30,910                 

Malaysia

                                       7,605,523   

Pakistan

                                       7,644,819   

Philippines

                                       7,216,775   

Singapore

    500,994               32,808,738        39,265                 

Sri Lanka

                                       21,476,137   

Taiwan

           94,900,283        168,714,394                        

United States

                         85,354        711,838          

Level 2: Other Significant Observable Inputs

           

Foreign Government Obligationsa

    5,667,592                                      

Non-Convertible Corporate Bondsa

    42,654,102                                      

Convertible Corporate Bondsa

    8,731,499        256,088,500                               

Common Equities:

           

Australia

           105,059,030        95,770,290               631,448        28,298,302   

Bangladesh

                                       3,879,776   

China/Hong Kong

           651,015,825        1,452,078,652        391,821        3,464,844        40,116,290   

India

                  125,320,782               363,328        86,678,527   

Indonesia

           27,468,842        159,538,645               561,135        74,932,731   

Japan

           182,545,266        1,471,753,968        88,315        348,781        355,621,506   

Luxembourg

                  71,353,674                        

Malaysia

           197,847,166               69,540        944,423          

New Zealand

           57,859,979        50,879,701                        

Norway

           44,496,720                               

Philippines

    265,861        34,106,645        56,871,121                      33,530,546   

Singapore

           396,495,736        160,118,287        36,282        1,087,483          

South Korea

           216,664,405        212,909,163        235,716        638,482        9,286,943   

Switzerland

                                343,049          

Taiwan

           48,674,077        86,978,334        70,347        405,539        12,096,125   

Thailand

           95,361,378        103,919,551        15,956        464,693        11,641,461   

United Kingdom

                         33,523                 

Vietnam

           71,610,012        77,772,211                      12,303,603   

Preferred Equities:

           

South Korea

           109,847,906        164,273,347        160,477                 

Rights:

           

Singapore

           62,215                               

Total Market Value of Investments

    $57,820,048        $2,839,910,133        $4,706,627,555        $1,320,377        $10,749,522        $760,804,877   

 

a Industry, countries, or security types are disclosed on the Schedule of Investments.

 

      Matthews Asia
Strategic
Income Fund
 
Derivative Financial Instruments1   
Assets:   

Level 2: Other Significant Observable Inputs

  

Foreign Currency Exchange Contracts

     $334,847   
Liabilities:   

Level 2: Other Significant Observable Inputs

  

Foreign Currency Exchange Contracts

     (38,273

Total Market Value of Derivative Financial Instruments

     $296,574   

 

1 Derivative financial instruments are foreign currency exchange contracts. Foreign currency exchange contracts are valued at the unrealized appreciation/depreciation on the instrument.

 

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Table of Contents

Notes to Financial Statements (continued)

 

 

     Matthews China
Dividend Fund
    Matthews
China Fund
    Matthews
India Fund
    Matthews
Japan Fund
    Matthews
Korea Fund
    Matthews
China Small
Companies
Fund
 
Assets:            
Investments:            

Level 1: Quoted Prices

           

Common Equities:

           

Consumer Discretionary

    $9,483,287        $45,047,122        $12,656,909        $—        $—        $1,611,171   

Consumer Staples

                  21,813,810                        

Financials

    3,017,053               25,956,908                        

Health Care

                  77,501,570                      1,390,551   

Industrials

    529,008                                    1,135,079   

Information Technology

    4,473,658        34,388,784        64,983,654                      237,188   

Telecommunication Services

    5,279,811                             7,438,682          

Level 2: Other Significant Observable Inputs

           

Common Equities:

           

Consumer Discretionary

    30,063,702        84,752,204        110,512,390        321,696,813        39,622,709        2,128,243   

Consumer Staples

    13,104,130        19,586,079        253,205,307        291,195,265        39,289,156        1,097,450   

Energy

    2,554,135        7,638,084                      4,166,180          

Financials

    34,904,479        261,723,617        378,574,522        204,240,854        26,524,365        2,348,094   

Health Care

    8,449,199        39,182,541        146,401,826        258,666,298        7,195,786        2,085,572   

Industrials

    32,299,023        112,835,631        145,560,032        491,303,686        9,707,182        6,128,006   

Information Technology

    9,919,715        89,166,519        188,492,523        248,737,716        17,434,332        2,519,150   

Materials

    3,928,017               81,510,264        45,855,002        4,535,861          

Telecommunication Services

    10,313,942                                      

Utilities

    8,596,389        17,474,787                             446,090   

Rights:

           

Information Technology

                                       4,607   

Preferred Equities:

           

Consumer Discretionary

                                5,541,022          

Consumer Staples

                                16,528,385          

Energy

                                2,030,053          

Financials

                                6,346,051          

Information Technology

                                8,987,211          

Materials

                                5,831,001          

Level 3: Significant Unobservable Inputs

           

Common Equities:

           

Financials

           20,510,781                               

Information Technology

                                       7,548   

Total Market Value of Investments

    $176,915,548        $732,306,149        $1,507,169,715        $1,861,695,634        $201,177,976        $21,138,749   

 

132    MATTHEWS ASIA FUNDS


Table of Contents
      Matthews Pacific
Tiger Fund
       Matthews
Asia ESG
Fund
       Matthews
Emerging Asia
Fund
       Matthews Asia
Small Companies
Fund
       Matthews Asia
Science and
Technology Fund
 
Assets:                       
Investments:                       

Level 1: Quoted Prices

                      

Common Equities:

                      

Bangladesh

     $—           $—           $12,386,912           $—           $—   

China/Hong Kong

     520,042,996           154,872           837,081           68,191,580           51,249,404   

Indonesia

     16,164,708                     1,781,085           14,349,431           2,446,440   

Malaysia

     73,066,276                               9,066,793             

Pakistan

               125,338           8,018,012                       

Philippines

               135,688           4,871,455           14,581,606             

Singapore

               54,345                                 

Sri Lanka

                         10,461,138                       

United States

     82,983,652                                         3,199,066   

Vietnam

                         13,989,738           2,945,401             

Warrants:

                      

Malaysia

     2,425,945                                           

Thailand

                         17,485                       

Level 2: Other Significant Observable Inputs

                      

Common Equities:

                      

Australia

               87,734           1,699,778                       

Bangladesh

               61,559           11,290,607                       

Cambodia

                         1,781,353                       

China/Hong Kong

     1,550,646,005           1,216,148           15,388,996           125,057,410           21,495,143   

India

     1,323,980,756           887,030           18,972,248           92,403,428           15,940,400   

Indonesia

     410,521,599           118,407           14,876,231           16,168,591             

Japan

               303,449                               18,321,161   

Luxembourg

               86,354                                 

Malaysia

     164,879,101                               15,774,729             

Pakistan

                         25,838,998                       

Philippines

     190,435,871           113,525           5,120,399           10,155,255             

Singapore

     17,101,875           110,956           1,787,119           39,616,214           3,913,880   

South Korea

     1,136,733,504           417,893                     47,786,510           13,938,234   

Sri Lanka

               87,968           4,007,376                       

Switzerland

     172,209,114                                           

Taiwan

     384,788,402           669,460                     100,552,432           11,873,828   

Thailand

     340,109,464           209,681           4,762,212           34,312,819           3,185,411   

Vietnam

     161,219,878                     7,301,102                     1,307,308   

Rights:

                      

Pakistan

                         24,050                       

Taiwan

                                   77,505             

Preferred Equities:

                      

South Korea

                                             11,786,728   

Level 3: Significant Unobservable Inputs

                      

Common Equities:

                      

China/Hong Kong

     82,848,600                                           

Total Market Value of Investments

     $6,630,157,746           $4,840,407           $165,213,375           $591,039,704           $158,657,003   

 

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Table of Contents

Notes to Financial Statements (continued)

 

Foreign securities that are valued based on market quotations are categorized as Level 1 in the fair value hierarchy (see Note 2-B). Certain foreign securities may be fair valued by external pricing services when the Funds determine that events affecting the value of foreign securities which occur between the time at which they are determined and the close of trading on the NYSE render market quotations unreliable. Such fair valuations are typically categorized as Level 2 in the fair value hierarchy. The Funds’ policy is to recognize transfers in and transfers out as of the beginning of the reporting period. At December 31, 2015, the Funds utilized third party pricing services to fair value certain securities, some of which were different than the securities which had been valued by third party pricing services at December 31, 2014. As a result, certain securities held by the Funds were transferred from Level 2 into Level 1 and certain securities held by the Funds were transferred from Level 1 to Level 2 with beginning of period values as follows:

 

      Transfer to Level 1
from Level 2
       Transfer to Level 2
from Level 1
 
Matthews Asia Dividend Fund      $34,007,402           $105,927,798   
Matthews China Dividend Fund                8,897,745   
Matthews Asia Growth Fund      18,212,806             
Matthews Pacific Tiger Fund      61,210,015           152,036,514   
Matthews Emerging Asia Fund      18,094,819           26,857,057   
Matthews India Fund      37,924,647           166,384,965   
Matthews Japan Fund                7,076,440   
Matthews Korea Fund                12,249,730   
Matthews Asia Small Companies Fund      22,542,435           42,161,044   
Matthews Asia Science and Technology Fund                1,997,151   

A reconciliation of Level 3 investments for which significant unobservable inputs were used to determine value are as follows:

 

     Matthews
Pacific Tiger
Fund
   

Matthews
China

Fund

    Matthews
China Small
Companies Fund
    Matthews China
Small
Companies Fund
    Matthews
China Dividend
Fund
    Matthews
China Dividend
Fund
    Matthews
China Dividend
Fund
 
    Common
Equities —
China/
Hong Kong
    Common
Equities —
Financials
    Common
Equities —
Industrials
   

Common
Equities —
Information

Technology

    Common
Equities —
Consumer
Discretionary
    Common
Equities —
Industrials
   

Common
Equities —
Information

Technology

 
Balance as of 12/31/14 (market value)     $—        $—        $898,951        $7,544        $5,999,103        $4,694,035        $3,526,660   
Accrued discounts/premiums                                                 
Realized gain/(loss)     12,131,727        13,393,369        145,383               3,311,999        2,037,781        3,827,643   
Change in unrealized (depreciation)     8,596,172        (8,110,968     (172,985     4        (1,556,432     (2,011,672     (727,248
Purchases            7,545,097        71,642                      1,302,855          
Sales     (24,708,275     (22,502,575     (942,991            (7,754,670     (6,022,999     (6,627,055
Transfers in to Level 3*     86,828,976        30,185,858                                      
Transfers out of Level 3*                                                 
Balance as of 12/31/15 (market value)     $82,848,600        $20,510,781        $—        $7,548        $—        $—        $—   
Net change in unrealized appreciation/depreciation on Level 3 investments held as of 12/31/15**     $8,596,172        ($8,110,968     $—        $4        $—        $—        $—   

 

* The Fund’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
** Included in the related amounts on the Statements of Operations.

Certain foreign securities, for which market quotations are not readily available, may be fair valued and classified as either Level 2 or Level 3. When the underlying inputs include significant observable inputs obtained from sources independent of the Funds, the securities are classified as Level 2. These inputs include evaluated prices from the Funds’ pricing vendors, day-on-day price changes, primary and ancillary pricing sources, and other available independent market indicators of value. When the underlying inputs include significant unobservable inputs and reflect assumptions of market participants, the securities are classified as Level 3. As of December 31, 2015, the Funds that previously used quoted prices or observable inputs now also utilize significant unobservable inputs for certain securities that were suspended from trading. As a result, certain securities held by the Funds that were previously classified as Level 1 or Level 2 were transferred to Level 3. Certain securities held by the Funds that were suspended from trading and classified as Level 3 on December 31, 2014 subsequently resumed trading and were transferred from Level 3 to Level 1, Level 2 or were sold.

 

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Table of Contents

The following table summarizes the valuation techniques used and unobservable inputs developed by the Valuation Committee to determine the fair value of certain, material Level 3 investments:

 

      Value        Valuation
Technique
     Unobservable
Input1
     Range of
Unobservable
Inputs
 
Matthews Pacific Tiger Fund Assets:                  

Common Equity

     $82,848,600         Last Price2 Multiplied by Proxy factor3      Proxy factor3        Less than 5%   
Matthews China Fund Assets:                  

Common Equity

     $20,510,781         Last Price2 Multiplied by Proxy factor3      Proxy factor3        Less than 5%   

 

1 Increase in unobservable input may result in a significant increase to value, while a decrease in unobservable input may result in a significant decrease to value.
2 Last Price could include closing price, last reported sales price, or last fair valued price as described in Note 2-A.
3 Proxy factor considers movement of the Hong Kong Hang Seng Index.

 

C. BASIS OF CONSOLIDATION: The accompanying consolidated financial statements of Matthews China Fund and Matthews Asia Dividend Fund (the “Investing Funds”) includes the accounts of the Matthews CF-U Series and Matthews ADF-U Series (the “U Series Funds”), respectively. The U Series Funds are series of Matthews A Share Selections Fund, LLC, a Delaware limited liability company registered under the 1940 Act. All of the interests offered by U Series Funds are exclusively owned by the Investing Funds. The U Series Funds primarily invest in the stocks of Chinese companies listed on Mainland China Stock Exchanges, and traded and denominated in the currency of China, the Renminbi. To allow U Series Funds to invest in China A Shares Matthews has applied for and received a license from the China Securities Regulatory Commission as a Qualified Foreign Institutional Investor (“QFII”) and has been allocated by the State Administration of Foreign Exchange of China an initial quota of $100 million in June 2014, and an additional quota of $440 million in July 2015, representing the equivalent value in Renminbi of China A Shares that the Funds may purchase. Access to the quota will be subject to Matthews’ trade allocation procedures and access allocation procedures. The U Series Funds are subject to the same investment policies and restrictions that apply to Investing Funds. The net assets of Matthews CF-U Series and Matthews ADF-U Series at December 31, 2015, were $78,853,729 and $101,315,686 respectively. Intercompany accounts and transactions, if any, have been eliminated in the consolidation process. The U Series Funds are intended to be disregarded entities for the tax purposes. Therefore, no federal tax provision is required. Consolidated financial statements include expenses that are accrued for and paid by the Investing Funds. These include on-going operational costs as well as costs in connection with the launching of the U Series Funds (see offering cost, note E).

As of April 2015, certain Funds began investing in China A Shares via the Shanghai-Hong Kong Stock Connect, a securities trading and clearing linked program developed by the Hong Kong Exchanges and Clearing Limited, Shanghai Stock Exchange and China Securities Depository and Clearing Corporation Limited, with an aim to achieve mutual stock market access between mainland China and Hong Kong.

 

D. RISKS ASSOCIATED WITH NON-U.S. COMPANIES: Investments by the Funds in the securities of non-U.S. companies may involve investment risks not typically associated with investments in U.S. issuers. These risks include possible political, economic, social and religious instability, inadequate investor protection; changes in laws or regulations of countries within the Asia Pacific region (including both in countries where you invest, as well as in the broader region); international relations with other nations; natural disasters; corruption; and military activity. Foreign securities may be subject to greater fluctuations in price than securities of domestic corporations or the U.S. government. Foreign investing may also include the risk of expropriation or confiscatory taxation, limitation on the removal of funds or other assets, currency crises and exchange controls, the imposition of foreign withholding tax on the interest income payable on such instruments, the possible seizure or nationalization of foreign deposits or assets, or the adoption of other foreign government restrictions that might adversely affect the foreign securities held by the Funds. Additionally, Asia Pacific countries may utilize formal or informal currency exchange controls or “capital controls” that may limit the ability to repatriate investments or income or adversely affect the value of portfolio investments. The economies of many Asia Pacific countries differ from the economies of more developed countries in many respects, such as their rate of growth, inflation, capital reinvestment, resource self-sufficiency and dependence on other economies, financial system stability, the national balance of payments position and sensitivity to changes in global trade. Certain Asia Pacific countries are highly dependent upon and may be affected by developments in the economies of other countries. Non-U.S. companies are subject to different accounting, auditing, and financial reporting standards, practices, and requirements than U.S. companies. There is generally less government regulation of stock exchanges, brokers, and listed companies abroad than in the United States, which may result in less transparency with respect to a company’s operations, and make obtaining information about them more difficult (or such information may be unavailable).

Foreign stock markets may not be as developed or efficient as those in the United States, and the absence of negotiated brokerage commissions in certain countries may result in higher brokerage fees. The time between the trade and settlement dates of securities transactions on foreign exchanges ranges from one day to four weeks or longer and may result in higher custody charges. Custodial arrangements may be less well developed than in the United States. Foreign securities are generally denominated and pay distributions in foreign currencies, exposing the Funds to changes in foreign currency exchange rates. Investing in any country in the Asia Pacific region will also entail risks specific and unique to that country, and these risks can be significant and change rapidly.

Changes in interest rates in each of the countries in which the Funds may invest, as well as interest rates in more-developed countries, may cause a decline in the market value of an investment. Generally, fixed income securities will decrease in value when interest rates rise and can be expected to rise in value when interest rates decline. As interest rates decline, debt issuers may repay or refinance their loans or obligations earlier than anticipated. The issuers of fixed income securities may, therefore, repay principal in advance. This would force the Funds to reinvest the proceeds from the principal prepayments at lower rates, which reduces the Funds’ income.

As of December 31, 2015, Chinese law permits a QFII, such as Matthews, to repatriate an Investment Quota (including the proceeds of the Investment Quota) once every seven days. Previously, repatriation by a QFII was limited to once every 30 days (and other types of QFIIs may operate under greater or different repatriation restrictions). As a result of this restriction, the Company sought and has been granted by the U.S. Securities and Exchange Commission an exemption (the “Exemptive Order”) from the provisions of Section 22(e) of the 1940 Act and Rule 22c-1 thereunder to the extent necessary to permit the Company to operate as an “extended payment fund.” As extended payment funds, the U Series Funds (see Note 2-C) will only redeem Interests on a periodic basis, which, pursuant to the Exemptive Order, shall be no less frequent than on one day each month.

 

E. OFFERING COSTS: Offering costs are amortized on a straight-line basis over one year from each Fund’s respective commencement of operations. In the event that any of the initial shares are redeemed during the period of amortization of the Fund’s offering costs, the redemption proceeds will be reduced by any such unamortized offering costs in the same proportion as the number of shares being redeemed bears to the number of those shares outstanding at the time of redemption.

 

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Table of Contents

Notes to Financial Statements (continued)

 

 

F. DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of Matthews Asian Growth and Income Fund and Matthews China Dividend Fund to distribute net investment income on a semi-annual basis and capital gains, if any, annually. It is the policy of Matthews Asia Dividend Fund and Matthews Asia Strategic Income Fund to distribute net investment income on a quarterly basis and capital gains, if any, annually. Each of the other Funds distributes a net investment income and capital gains, if any, annually. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. GAAP.

The tax character of distributions paid for the fiscal year ended December 31, 2015 and December 31, 2014 were as follows:

 

YEAR ENDED DECEMBER 31, 2015      Ordinary
Income
       Net Long-Term
Capital Gains
       Total Taxable
Distributions
 
Matthews Asia Strategic Income Fund        $1,925,044           $—           $1,925,044   
Matthews Asian Growth and Income Fund        89,571,608           134,712,377           224,283,985   
Matthews Asia Dividend Fund        93,118,771           71,669,071           164,787,842   
Matthews China Dividend Fund        4,110,069           7,709,592           11,819,661   
Matthews Asia Value Fund        2,329                     2,329   
Matthews Asia Focus Fund        112,053           61,165           173,218   
Matthews Pacific Tiger Fund        131,749,094           685,544,217           817,293,311   
Matthews Asia ESG Fund        37,405                     37,405   
Matthews Emerging Asia Fund        81,591           432,972           514,563   
Matthews China Fund        10,545,675           127,726,027           138,271,702   
Matthews India Fund        1,967,432           13,471,979           15,439,411   
Matthews Korea Fund        956,216           12,118,013           13,074,229   
Matthews Asia Small Companies Fund        1,500,557                     1,500,557   
Matthews China Small Companies Fund        162,446           1,862,709           2,025,155   
Matthews Asia Science and Technology Fund                  25,836,171           25,836,171   

 

YEAR ENDED DECEMBER 31, 2014    Ordinary
Income
       Net Long-Term
Capital Gains
       Return of
Capital
       Total Taxable
Distributions
 
Matthews Asia Strategic Income Fund      $2,114,388           $—           $—           $2,114,388   
Matthews Asian Growth and Income Fund      82,852,338           102,451,370                     185,303,708   
Matthews Asia Dividend Fund      79,977,573                     21,987,983           101,965,556   
Matthews China Dividend Fund      4,550,194           709,195                     5,259,389   
Matthews Asia Focus Fund      112,525                               112,525   
Matthews Asia Growth Fund      15,440,617                               15,440,617   
Matthews Pacific Tiger Fund      47,680,793           360,777,613                     408,458,406   
Matthews Emerging Asia Fund      618,186           5,141                     623,327   
Matthews China Fund      12,883,867           4,848,647                     17,732,514   
Matthews India Fund      1,848,612           5,587,798                     7,436,410   
Matthews Japan Fund      3,325,554                               3,325,554   
Matthews Korea Fund                9,796,584                     9,796,584   
Matthews Asia Small Companies Fund      2,665,812                               2,665,812   
Matthews China Small Companies Fund      50,571                     828,820           879,391   
Matthews Asia Science and Technology Fund      929,241           1,142,588                     2,071,829   

 

G. INVESTMENT TRANSACTIONS AND INCOME: Securities transactions are accounted for on the date the securities are purchased or sold or on the following business day. Gains or losses on the sale of securities are determined on the identified cost basis. Interest income is recorded on the accrual basis. Dividend income is generally recorded on the ex-dividend date. Dividend income for certain issuers headquartered in countries which the Funds invest may not be recorded until approved by the shareholders (which may occur after the ex-dividend date) if, in the judgment of management, such dividends are not reasonably determined as of the ex-dividend date. Income and realized and unrealized gains or losses on investments are allocated to each class of shares based on its relative net assets. Interest income, including amortization and accretion of premiums and discounts on debt securities, is recognized daily on an accrual basis. For convertible securities, premiums attributable to the conversion feature are not amortized.

The Funds may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which they invest. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Funds invest. When a capital gain tax is determined to apply, the Funds record an estimated deferred tax liability in an amount that may be payable if the securities were disposed of on the valuation date.

 

H. FUND EXPENSE ALLOCATIONS: The Funds account separately for the assets, liabilities and operations of each Fund. Direct expenses of each Fund or class are charged to that Fund or class while general expenses are allocated pro-rata among the Funds based on net assets or other appropriate methods.

 

I. CASH, CASH OVERDRAFTS, AND FOREIGN CURRENCY: The U Series Funds are required by the local market to maintain a cash reserve. The cash reserve is based upon a fixed ratio of the QFII’s approved investment quota, which is defined as the amount remitted into its special renminbi (RMB) cash account. The fixed ratio is set at 0.08 percent for the Shanghai and 0.06 percent for the Shenzhen market. When any of the Funds’ cash balances are overdrawn, a Fund is charged an overdraft fee by the custodian of 1.00% above the 30-day LIBOR rate on outstanding balances. These amounts, if any, are included in “Other expenses” on the Statements of Operations.

 

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Table of Contents
J. USE OF ESTIMATES: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.

 

3. DERIVATIVE FINANCIAL INSTRUMENTS

Matthews Asia Strategic Income Fund engages in derivative transactions for a variety of purposes, including managing interest rate, currency and credit exposure. In particular, the Fund may seek to take on currency exposure by using derivatives such as currency forwards, and the Fund may also employ a currency overlay strategy in an effort to enhance returns and moderate volatility. Derivative financial instruments and transactions in which the Fund may engage include financial futures contracts and/or forward foreign currency exchange contracts. The currency overlay strategy involves long and short positions on one or more currencies. As a result, the Fund’s exposure to a currency could exceed the value of the Fund’s assets and the Fund could be exposed to currency risk whether or not it holds a bond or other instrument denominated in that currency. The gross notional value of derivative financial instruments and transactions could exceed the value of the Fund’s net assets, although the net market value of these instruments and transactions, on a marked-to-market basis, at most times, is expected to be substantially lower. The primary risks associated with the use of derivative financial instruments are: (i) Matthews may not correctly predict the direction of currency exchange rates, interest rates, security prices, or other economic factors; (ii) Matthews may not correctly predict changes in the value of derivative financial instruments and related underlying instruments or assets, which may result in disproportionately increased losses and/or reduced opportunities for gains; (iii) imperfect correlation between the change in market value of the securities held by the Fund and the price of financial futures contracts; (iv) the lack of, or a reduction in the liquidity of, any secondary market for the instrument, and the resulting inability to close the position (or exit the position) when desired; (v) losses, which are potentially unlimited, due to unanticipated market movements; (vi) the value of the instrument may change unfavorably due to movements in the value of the referenced foreign currencies; (vii) the Fund may suffer disproportionately heavy losses relative to the amount invested; (viii) changes in the value of the derivatives may not match or fully offset changes in the value of hedged or related portfolio securities, thereby failing to achieve the hedging or investment purpose for the derivative transaction; and (ix) the other party to the instrument may fail to fulfill its obligation.

Financial Futures Contracts: Financial futures contracts are agreements between the Fund and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and at a specified date. Depending on the terms of the particular contract, futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on settlement date.

Pursuant to the contract, the Fund agrees to receive from or pay an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized appreciation or depreciation. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

Forward Foreign Currency Exchange Contracts: A forward foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The Matthews Asia Strategic Income Fund does not offset financial assets and financial liabilities on forward foreign currency contracts in the statement of assets and liabilities as they are not subject to netting arrangements.

Derivative Financial Instruments Categorized by Risk Exposure:

As of December 31, 2015, the fair values of derivative financial instruments were as follows:

 

     Statement of Assets and Liabilities Location   Matthews Asia
Strategic
Income Fund
 
 

Asset Derivatives

 
Forward foreign currency exchange contracts   Unrealized appreciation on forward foreign currency exchange contracts     $334,847   
 

Liability Derivatives

 
Forward foreign currency exchange contracts   Unrealized depreciation on forward foreign currency exchange contracts     (38,273
   

 

 

 

Total

      $296,574   
   

 

 

 

For the fiscal year ended December 31, 2015, the effects of derivative financial instruments on the Statements of Operations were as follows:

 

Derivative type   Statement of Operations Location   Matthews
Asia Strategic
Income Fund
 

Net Realized Gain (Loss)

   
Interest rate contracts:    

Financial futures contracts

  Net realized gain (loss) on financial futures contracts     ($88,422
   

 

 

 

Net Change in Unrealized Appreciation (Depreciation)

   
Interest rate contracts:    

Financial futures contracts

  Net change in unrealized appreciation/depreciation on financial futures contracts     ($12,891
   

 

 

 
Foreign currency contracts:    

Foreign currency exchange contracts

  Net change in unrealized appreciation/depreciation on foreign currency related translations     $296,574   
   

 

 

 

Notional amounts disclosed on the Matthews Asia Strategic Income Fund’s Schedule of Investments are indicative of the activity during the period which forward foreign currency contracts were held, October 6, 2015 - December 31, 2015.

 

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Table of Contents

Notes to Financial Statements (continued)

 

 

4. CAPITAL SHARE TRANSACTIONS

Each Fund is authorized to issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share.

 

    

Year Ended December 31, 2015

     Year Ended December 31, 2014  
      Shares      Amount      Shares      Amount  

MATTHEWS ASIA STRATEGIC INCOME FUND

           

Investor Class

           

Shares sold

     1,323,678         $13,608,885         2,868,763         $30,387,264   

Shares issued through reinvestment of distributions

     156,283         1,568,876         170,890         1,792,188   

Shares redeemed

     (2,031,972      (20,725,933      (1,006,520      (10,564,074

Net increase (decrease)

     (552,011      ($5,548,172      2,033,133         $21,615,378   

Institutional Class

           

Shares sold

     514,725         $5,309,238         8,500         $90,318   

Shares issued through reinvestment of distributions

     34,909         350,189         28,064         294,191   

Shares redeemed

     (205,825      (2,100,037      (11,064      (115,367

Net increase (decrease)

     343,809         $3,559,390         25,500         $269,142   

MATTHEWS ASIAN GROWTH AND INCOME FUND

           

Investor Class

           

Shares sold

     25,916,582         $466,448,198         42,335,422         $806,641,528   

Shares issued through reinvestment of distributions

     9,143,700         150,474,022         6,792,538         123,896,096   

Shares redeemed

     (76,976,258      (1,349,111,339      (53,031,955      (997,653,204

Net increase (decrease)

     (41,915,976      ($732,189,119      (3,903,995      ($67,115,580

Institutional Class

           

Shares sold

     11,883,290         $212,136,578         17,734,558         $339,731,302   

Shares issued through reinvestment of distributions

     3,858,797         63,544,851         2,873,664         52,402,976   

Shares redeemed

     (30,034,472      (523,307,730      (14,176,690      (266,541,558

Net increase (decrease)

     (14,292,385      ($247,626,301      6,431,532         $125,592,720   

MATTHEWS ASIA DIVIDEND FUND

           

Investor Class

           

Shares sold

     35,125,000         $570,435,753         27,074,172         $421,810,410   

Shares issued through reinvestment of distributions

     5,242,086         83,243,373         3,452,211         55,280,782   

Shares redeemed

     (51,950,453      (827,708,599      (74,520,827      (1,151,165,817

Net increase (decrease)

     (11,583,367      ($174,029,473      (43,994,444      ($674,074,625

Institutional Class

           

Shares sold

     52,931,529         $860,637,014         47,197,289         $735,042,714   

Shares issued through reinvestment of distributions

     2,615,057         41,384,032         1,435,590         22,955,772   

Shares redeemed

     (60,382,643      (945,927,066      (46,762,733      (729,427,226

Net increase (decrease)

     (4,836,057      ($43,906,020      1,870,146         $28,571,260   

MATTHEWS CHINA DIVIDEND FUND

           

Investor Class

           

Shares sold

     9,804,629         $151,536,779         3,469,549         $46,973,569   

Shares issued through reinvestment of distributions

     724,059         10,466,697         293,612         3,935,098   

Shares redeemed

     (7,269,925      (106,195,533      (4,184,807      (55,511,036

Net increase (decrease)

     3,258,763         $55,807,943         (421,646      ($4,602,369

Institutional Class

           

Shares sold

     1,122,001         $16,210,502         1,028,815         $13,795,976   

Shares issued through reinvestment of distributions

     78,571         1,153,826         84,509         1,131,935   

Shares redeemed

     (2,376,571      (35,363,363      (624,547      (8,338,287

Net increase (decrease)

     (1,175,999      ($17,999,035      488,777         $6,589,624   

 

138    MATTHEWS ASIA FUNDS


Table of Contents
    

Year Ended December 31, 2015

     Year Ended December 31, 2014  
      Shares      Amount      Shares      Amount  

MATTHEWS ASIA VALUE FUND*

           

Investor Class

           

Shares sold

     161,193         $1,602,501         

Shares issued through reinvestment of distributions

     179         1,748         

Shares redeemed

     (34      (333                  

Net increase (decrease)

     161,338         $1,603,916                     

Institutional Class

           

Shares sold

     14,500         $145,000         

Shares issued through reinvestment of distributions

     60         581         

Shares redeemed

                                 

Net increase (decrease)

     14,560         $145,581                     

MATTHEWS ASIA FOCUS FUND

           

Investor Class

           

Shares sold

     250,574         $2,466,477         435,111         $4,372,718   

Shares issued through reinvestment of distributions

     8,502         74,221         5,515         55,145   

Shares redeemed

     (411,977      (3,802,344      (305,685      (2,951,262

Net increase (decrease)

     (152,901      ($1,261,646      134,941         $1,476,601   

Institutional Class

           

Shares sold

     85,035         $790,900         562,972         $5,679,393   

Shares issued through reinvestment of distributions

     11,279         98,578         5,697         57,082   

Shares redeemed

     (152,717      (1,345,220      (75,633      (749,792

Net increase (decrease)

     (56,403      ($455,742      493,036         $4,986,683   

MATTHEWS ASIA GROWTH FUND

           

Investor Class

           

Shares sold

     10,116,539         $220,731,758         8,352,421         $176,815,714   

Shares issued through reinvestment of distributions

                     364,634         7,679,192   

Shares redeemed

     (11,770,308      (246,526,119      (8,456,299      (177,869,893

Net increase (decrease)

     (1,653,769      ($25,794,361      260,756         $6,625,013   

Institutional Class

           

Shares sold

     5,203,260         $112,251,892         3,166,264         $68,111,071   

Shares issued through reinvestment of distributions

                     233,352         4,937,721   

Shares redeemed

     (6,990,514      (146,485,176      (564,454      (12,120,100

Net increase (decrease)

     (1,787,254      ($34,233,284      2,835,162         $60,928,692   

MATTHEWS PACIFIC TIGER FUND

           

Investor Class

           

Shares sold

     18,629,799         $505,974,505         13,461,553         $362,907,557   

Shares issued through reinvestment of distributions

     11,411,932         263,383,421         5,254,231         139,026,894   

Shares redeemed

     (29,132,577      (758,670,355      (22,276,690      (585,489,213

Net increase (decrease)

     909,154         $10,687,571         (3,560,906      ($83,554,762

Institutional Class

           

Shares sold

     66,516,041         $1,778,275,629         41,237,653         $1,119,555,511   

Shares issued through reinvestment of distributions

     11,636,136         268,329,315         5,592,016         147,852,921   

Shares redeemed

     (99,756,044      (2,521,022,303      (44,056,685      (1,135,705,206

Net increase (decrease)

     (21,603,867      ($474,417,359      2,772,984         $131,703,226   

MATTHEWS ASIA ESG FUND**

           

Investor Class

           

Shares sold

     482,804         $4,562,170         

Shares issued through reinvestment of distributions

     1,806         16,466         

Shares redeemed

     (132,628      (1,222,043                  

Net increase (decrease)

     351,982         $3,356,593                     

Institutional Class

           

Shares sold

     186,254         $1,805,130         

Shares issued through reinvestment of distributions

     2,307         20,899         

Shares redeemed

     (4,586      (41,516                  

Net increase (decrease)

     183,975         $1,784,513                     

 

* Investor Class and Institutional Class commencement of operations on November 30, 2015.
** Investor Class and Institutional Class commencement of operations on April 30, 2015.

 

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Table of Contents

Notes to Financial Statements (continued)

 

    

Year Ended December 31, 2015

     Year Ended December 31, 2014  
      Shares      Amount      Shares      Amount  

MATTHEWS EMERGING ASIA FUND

           

Investor Class

           

Shares sold

     3,222,545         $37,424,394         6,358,977         $71,447,277   

Shares issued through reinvestment of distributions

     29,906         334,053         44,331         513,799   

Shares redeemed

     (2,594,387      (29,676,907      (719,405      (7,920,065

Net increase (decrease)

     658,064         $8,081,540         5,683,903         $64,041,011   

Institutional Class

           

Shares sold

     4,382,373         $50,726,364         1,672,829         $18,713,467   

Shares issued through reinvestment of distributions

     16,011         179,162         9,076         105,103   

Shares redeemed

     (1,342,327      (15,050,048      (44,825      (498,178

Net increase (decrease)

     3,056,057         $35,855,478         1,637,080         $18,320,392   

MATTHEWS CHINA FUND

           

Investor Class

           

Shares sold

     5,141,080         $120,488,105         4,652,101         $101,501,385   

Shares issued through reinvestment of distributions

     6,355,104         116,616,158         752,109         16,034,960   

Shares redeemed

     (17,118,626      (385,888,737      (17,574,642      (379,926,583

Net increase (decrease)

     (5,622,442      ($148,784,474      (12,170,432      ($262,390,238

Institutional Class

           

Shares sold

     628,563         $14,774,529         572,587         $12,475,109   

Shares issued through reinvestment of distributions

     234,182         4,290,241         55,031         1,172,155   

Shares redeemed

     (1,990,574      (45,026,079      (3,338,212      (72,711,685

Net increase (decrease)

     (1,127,829      ($25,961,309      (2,710,594      ($59,064,421

MATTHEWS INDIA FUND

           

Investor Class

           

Shares sold

     30,620,097         $867,318,320         18,378,382         $428,347,047   

Shares issued through reinvestment of distributions

     408,995         10,507,217         251,419         6,614,834   

Shares redeemed

     (24,282,755      (667,371,469      (8,069,436      (172,617,142

Net increase (decrease)

     6,746,337         $210,454,068         10,560,365         $262,344,739   

Institutional Class

           

Shares sold

     9,976,872         $279,880,654         4,119,011         $103,116,285   

Shares issued through reinvestment of distributions

     23,353         601,584         4,649         122,448   

Shares redeemed

     (768,413      (21,157,535      (195,207      (3,155,297

Net increase (decrease)

     9,231,812         $259,324,703         3,928,453         $100,083,436   

MATTHEWS JAPAN FUND

           

Investor Class

           

Shares sold

     53,437,657         $989,896,404         14,683,754         $236,544,033   

Merger

                     9,304,606         143,006,665   

Shares issued through reinvestment of distributions

                     136,979         2,162,925   

Shares redeemed

     (13,073,985      (233,136,140      (13,641,932      (216,980,228

Net increase (decrease)

     40,363,672         $756,760,264         10,483,407         $164,733,395   

Institutional Class

           

Shares sold

     25,203,856         $462,758,856         7,921,739         $130,732,643   

Merger

                     117,933         1,814,627   

Shares issued through reinvestment of distributions

                     27,262         430,732   

Shares redeemed

     (2,491,900      (44,833,156      (1,901,165      (30,655,635

Net increase (decrease)

     22,711,956         $417,925,700         6,165,769         $102,322,367   

MATTHEWS KOREA FUND

           

Investor Class

           

Shares sold

     7,063,187         $45,732,771         2,855,980         $17,811,596   

Shares issued through reinvestment of distributions

     1,247,048         7,432,409         958,127         5,298,441   

Shares redeemed

     (6,893,554      (42,613,047      (4,561,112      (27,333,556

Net increase (decrease)

     1,416,681         $10,552,133         (747,005      ($4,223,519

Institutional Class

           

Shares sold

     1,949,647         $12,656,326         15,224,562         $92,211,027   

Shares issued through reinvestment of distributions

     33,764         202,244         294,354         1,633,663   

Shares redeemed

     (8,378,869      (48,454,588      (1,475,555      (8,735,102

Net increase (decrease)

     (6,395,458      ($35,596,018      14,043,361         $85,109,588   

 

140    MATTHEWS ASIA FUNDS


Table of Contents
    

Year Ended December 31, 2015

     Year Ended December 31, 2014  
      Shares      Amount      Shares      Amount  

MATTHEWS ASIA SMALL COMPANIES FUND

           

Investor Class

           

Shares sold

     8,497,848         $182,977,362         12,269,745         $256,739,667   

Shares issued through reinvestment of distributions

     23,288         441,546         91,722         1,980,278   

Shares redeemed

     (16,455,313      (348,268,552      (5,510,122      (113,024,665

Net increase (decrease)

     (7,934,177      ($164,849,644      6,851,345         $145,695,280   

Institutional Class

           

Shares sold

     11,287,130         $246,873,661         1,637,024         $34,046,110   

Shares issued through reinvestment of distributions

     47,417         898,076         11,551         249,394   

Shares redeemed

     (3,476,347      (67,815,813      (368,351      (7,588,297

Net increase (decrease)

     7,858,200         $179,955,924         1,280,224         $26,707,207   

MATTHEWS CHINA SMALL COMPANIES FUND

           

Investor Class

           

Shares sold

     766,278         $7,633,873         1,079,235         $10,536,592   

Shares issued through reinvestment of distributions

     202,804         1,752,230         91,585         856,321   

Shares redeemed

     (911,884      (8,642,334      (1,472,901      (14,353,449

Net increase (decrease)

     57,198         $743,769         (302,081      ($2,960,536

MATTHEWS ASIA SCIENCE AND TECHNOLOGY FUND

           

Investor Class

           

Shares sold

     2,583,487         $36,194,231         2,001,250         $26,712,471   

Shares issued through reinvestment of distributions

     1,321,498         16,095,853         92,181         1,261,036   

Shares redeemed

     (2,600,415      (35,098,196      (1,740,481      (22,680,601

Net increase (decrease)

     1,304,570         $17,191,888         352,950         $5,292,906   

Institutional Class

           

Shares sold

     248,176         $3,444,526         533,868         $6,731,909   

Shares issued through reinvestment of distributions

     320,936         3,915,412         55,365         756,846   

Shares redeemed

     (2,079,401      (31,121,491      (12,051      (169,548

Net increase (decrease)

     (1,510,289      ($23,761,553      577,182         $7,319,207   

Currently, a 2.00% redemption fee will be assessed on the sale or exchange of shares of the Matthews Emerging Asia Fund, Matthews Asia Small Companies Fund and Matthews China Small Companies Fund (collectively, the “Covered Funds”) within 90 days after the date an investor purchases shares of the Covered Funds. The imposition of redemption fees pursuant to the Funds’ Short-Term Trading Redemption Fee Policy for the Covered Funds may assist the Covered Funds in discouraging market timing activity.

The redemption fee is imposed to discourage market timing and short-term buying and selling of shares of the Covered Funds, which can disrupt the management of the Covered Funds’ investment portfolios and may have detrimental effects on the Covered Funds and other shareholders, and to allocate the costs the Covered Funds incur as a result of short-term trading and market timing. This fee is payable directly to the Covered Funds.

To determine whether the redemption fee applies, the Covered Funds do not count the day that you purchased your shares, and first redeem the shares that you have held the longest.

The Covered Funds may grant an exemption from the redemption fee when the Covered Funds have previously received assurances that transactions do not involve a substantial risk of the type of harm that the policy is designed to avoid. The Covered Funds may also waive the imposition of redemption fees in certain circumstances. For more information on this policy, please see the Funds’ prospectuses. The redemption fees returned to the assets of the Funds are stated in the Statements of Changes in Net Assets.

 

5. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

Matthews, a registered investment advisor under the 1940 Act, provides the Funds with investment management services. Pursuant to an Investment Advisory Agreement dated August 13, 2004, as amended (the “Advisory Agreement”), the Funds pay Matthews (i) for management and advisory services; and (ii) for certain administrative services, an annual fee as a percentage of average daily net assets. Under the Advisory Agreement each of the Funds, other than Matthews Asia Strategic Income Fund, Matthews Emerging Asia Fund, Matthews Asia Small Companies Fund, and Matthews China Small Companies Fund (the “Family-Priced Funds”), pays Matthews 0.75% of their aggregate average daily net assets up to $2 billion, 0.6834% of their aggregate average daily net assets over $2 billion up to $5 billion, 0.65% of their aggregate average daily net assets over $5 billion up to $25 billion, 0.64% of their aggregate average daily net assets over $25 billion up to $30 billion, 0.63% of their aggregate average daily net assets over $30 billion up to $35 billion, 0.62% of their aggregate average daily net assets over $35 billion up to $40 billion, 0.61% of their aggregate average daily net assets over $40 billion up to $45 billion, and 0.60% of their aggregate average daily net assets over $45 billion. Matthews Asia Strategic Income Fund pays Matthews an annual fee of 0.65% of its annual average daily net assets pursuant to the Advisory Agreement. Each of the Matthews Emerging Asia Fund, Matthews Asia Small Companies Fund, and the Matthews China Small Companies Fund pays Matthews an annual fee of 1.00% of the average daily net assets of such Fund up to $1 billion and 0.95% of the average daily net assets of such Fund over $1 billion pursuant to the Advisory Agreement. Each Fund paid Matthews a monthly fee of one-twelfth (1/12) of the management fee of the Fund’s average daily net asset value.

Pursuant to a fee waiver letter agreement, effective as of September 1, 2014, between the Trust, on behalf of the Family-Priced Funds, and Matthews (as amended from time to time, the “Fee Waiver Agreement”), for each Family-Priced Fund, Matthews has agreed to waive a portion of the fee payable under the Advisory Agreement and a portion of the fee payable under the Administration and Shareholder Services Agreement, if any Family-Priced Fund’s average daily net assets are over $3 billion, as follows: for every $2.5 billion average daily net assets of a Family-Priced Fund that are

 

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over $3 billion, the fee rates that otherwise would be applied for calculating fees payable under the Advisory Agreement and the Administration and Shareholder Services Agreement for such Family-Priced Fund with respect to such excess average daily net assets will be each reduced by 0.01%, in each case without reducing such fee rate below 0.00%.

Under a written agreement between the Funds and Matthews (the “Operating Expenses Agreement”), Matthews agrees to waive fees and reimburse expenses to a Fund if its expense ratio exceeds a certain percentage level. Effective April 30, 2015 for all Funds, except Matthews Asia Strategic Income Fund and Matthews China Small Companies Fund, this level is 1.25% for the Institutional Class. Matthews agrees to reduce the expense ratio by waiving an equal amount of non-class specific expenses for the Investor Class. Because certain expenses of the Investor Class may be higher than Institutional Class and class specific expenses may be waived solely for the Institutional Class, total annual Fund expenses for the Investor Class may exceed 1.25%. For Matthews Asia Strategic Income Fund this level is 0.90% for Institutional Class. Matthews agrees to reduce the expense ratio by waiving an equal amount of non-class expenses for the Investor Class. Because certain expenses of the Investor Class may be higher that the Institutional Class and class specific expenses may be waived solely for the Institutional Class, total annual Fund expenses for the Investor Class may exceed 0.90%. For Matthews China Small Companies Fund this level is 1.50% for the Investor Class. Prior to May 1, 2014 for Matthews China Fund, Matthews India Fund, Matthews Japan Fund, Matthews Korea Fund, Matthews Asia Small Companies Fund, Matthews China Small Companies Fund and Matthews Asia Science and Technology Fund, this level was 2.00%. For Matthews Asian Growth and Income Fund, Matthews Asia Growth Fund and Matthews Pacific Tiger Fund, this level was 1.90%. For Matthews Asia Dividend Fund and Matthews China Dividend Fund, this level was 1.50%. For Matthews Asia Strategic Income Fund, Matthews Asia Focus Fund and Matthews Emerging Asia Fund, Matthews agreed to waive fees and reimburse expenses to each Fund if its expense ratio exceeded 1.25%, 1.75%, and 2.00%, respectively, for the Institutional Class and agreed to reduce the expense ratio by an equal amount for the Investor Class. In turn, if a Fund’s expenses fall below the level noted within three years after Matthews has made such a reimbursement, the Fund may reimburse Matthews up to an amount of the recoupment available not to exceed its expense limitation. For each Fund other than the Matthews Asia Value Fund, this agreement will continue through at least April 30, 2017 and may be extended for additional periods not exceeding one year. This agreement will continue through April 30, 2018 for the Matthews Asia Value Fund, and may be extended for additional periods not exceeding one year.

On December 31, 2015, the amounts subject to possible future recoupment under the expense limitation agreement are as follows:

 

     Expiring December 31,  
      2016        2017        2018  
Matthews Asia Strategic Income Fund      $41,268           $79,504           $113,621   
Matthews Asia Value Fund                          41,279   
Matthews Asia Focus Fund      87,951           62,897           87,252   
Matthews Asia ESG Fund                          183,985   
Matthews Emerging Asia Fund      76,881           152,283           452,048   
Matthews Asia Small Companies Fund                15,270           113,037   
Matthews China Small Companies Fund      7,801           63,212           133,327   

Matthews Asia Strategic Income Fund and Matthews China Small Companies Fund had $161,965 and $76,425, respectively, of recoupment that expired on December 31, 2015. Matthews Asian Growth and Income Fund, Matthews Pacific Tiger Fund, Matthews India Fund and Matthews Japan Fund had no amounts available for recoupment and no amounts recouped during the year ended December 31, 2015.

Investment advisory fees charged, waived fees and reimbursed additional expenses for the year ended December 31, 2015, were as follows:

 

      Gross Advisory Fees        Advisory Fees
Waived and
Reimbursed in
Excess of the
Expense Limitation
       Net Advisory Fee/
Reimbursement
 
Matthews Asia Strategic Income Fund      $438,698           ($113,621        $325,077   
Matthews Asian Growth and Income Fund      25,621,034           (86,260        25,534,774   
Matthews Asia Dividend Fund      35,306,056           (244,805        35,061,251   
Matthews China Dividend Fund      1,183,701                     1,183,701   
Matthews Asia Value Fund      771           (41,279        (40,508
Matthews Asia Focus Fund      95,048           (87,252        7,796   
Matthews Asia Growth Fund      5,989,698                     5,989,698   
Matthews Pacific Tiger Fund      54,519,201           (857,693        53,661,508   
Matthews Asia ESG Fund      15,886           (183,985        (168,099
Matthews Emerging Asia Fund      1,661,519           (452,048        1,209,471   
Matthews China Fund      6,216,536                     6,216,536   
Matthews India Fund      10,143,432                     10,143,432   
Matthews Japan Fund      7,785,999                     7,785,999   
Matthews Korea Fund      1,359,009                     1,359,009   
Matthews Asia Small Companies Fund      7,188,942           (113,037        7,075,905   
Matthews China Small Companies Fund      223,822           (133,327        90,495   
Matthews Asia Science and Technology Fund      1,174,937                     1,174,937   

Certain officers and Trustees of the Funds are also officers and directors of Matthews. All officers serve without compensation from the Funds. The Funds paid the Independent Trustees $967,000 in aggregate for regular compensation during the year ended December 31, 2015.

The Funds have an Administration and Shareholder Services Agreement dated August 13, 2004, as amended (the “Shareholder Services Agreement” or “Services Agreement”), in which the Funds pay an annual administration and shareholder servicing fee to Matthews, as a percentage of the average

 

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daily net assets of each Fund in aggregate, computed and prorated on a daily basis. Under the Shareholder Services Agreement, the Funds in the aggregate pay Matthews 0.25% of their aggregate average daily net assets up to $2 billion, 0.1834% of their aggregate average daily net assets over $2 billion up to $5 billion, 0.15% of their aggregate average daily net assets over $5 billion up to $7.5 billion, 0.125% of their aggregate average daily net assets over $7.5 billion up to $15 billion, 0.11% of their aggregate average daily net assets over $15 billion up to $22.5 billion, 0.10% of their aggregate average daily net assets over $22.5 billion up to $25 billion, 0.09% of their aggregate average daily net assets over $25 billion up to $30 billion, 0.08% of their aggregate average daily net assets over $30 billion up to $35 billion, 0.07% of their aggregate average daily net assets over $35 billion up to $40 billion, 0.06% of their aggregate average daily net assets over $40 billion up to $45 billion, and 0.05% of their aggregate average daily net assets over $45 billion.

Administration and shareholder servicing fees charged, for the year ended December 31, 2015, were as follows:

 

      Gross
Administration and
Shareholder
Servicing Fees
       Administration and
Shareholder
Servicing Fees
Waived in Excess of
Expense Limitation
       Net
Administration and
Shareholder
Servicing Fees
 
Matthews Asia Strategic Income Fund      $94,329           $—           $94,329   
Matthews Asian Growth and Income Fund      5,389,839           (86,260        5,303,579   
Matthews Asia Dividend Fund      7,429,497           (244,805        7,184,692   
Matthews China Dividend Fund      248,951                     248,951   
Matthews Asia Value Fund      167                     167   
Matthews Asia Focus Fund      19,988                     19,988   
Matthews Asia Growth Fund      1,260,375                     1,260,375   
Matthews Pacific Tiger Fund      11,459,861           (857,693        10,602,168   
Matthews Asia ESG Fund      3,397                     3,397   
Matthews Emerging Asia Fund      232,258                     232,258   
Matthews China Fund      1,306,491                     1,306,491   
Matthews India Fund      2,137,111                     2,137,111   
Matthews Japan Fund      1,647,370                     1,647,370   
Matthews Korea Fund      286,380                     286,380   
Matthews Asia Small Companies Fund      1,003,109                     1,003,109   
Matthews China Small Companies Fund      31,234                     31,234   
Matthews Asia Science and Technology Fund      247,195                     247,195   

In addition to the fees paid to the Funds’ transfer agent, the Funds bear the cost of fees paid to certain service providers or intermediaries, including supermarkets, which provide transfer agency, record-keeping and shareholder servicing to certain shareholders. These fees are referred to as intermediary service fees on the statement of assets and liabilities as well as the statement of operations. Additional information concerning these services and fees is contained in the Funds’ prospectuses.

BNY Mellon Investment Servicing (US) Inc. (“BNY Mellon”), an indirect wholly owned subsidiary of The Bank of New York Mellon Corporation, serves as the Funds’ administrator, and in that capacity, performs various administrative and accounting services for each Fund. BNY Mellon also serves as the Funds’ transfer agent, dividend disbursing agent and registrar. An officer of BNY Mellon serves as Assistant Treasurer to the Funds. Total fees accrued by the Funds for administration and accounting services for the year ended December 31, 2015 were as follows:

 

      Administration and
Accounting Fees
 
Matthews Asia Strategic Income Fund      $5,399   
Matthews Asian Growth and Income Fund      308,810   
Matthews Asia Dividend Fund      506,832   
Matthews China Dividend Fund      14,287   
Matthews Asia Value Fund      9   
Matthews Asia Focus Fund      1,146   
Matthews Asia Growth Fund      72,251   
Matthews Pacific Tiger Fund      657,337   
Matthews Asia ESG Fund      192   
Matthews Emerging Asia Fund      13,297   
Matthews China Fund      151,438   
Matthews India Fund      122,373   
Matthews Japan Fund      94,121   
Matthews Korea Fund      16,399   
Matthews Asia Small Companies Fund      57,520   
Matthews China Small Companies Fund      1,791   
Matthews Asia Science and Technology Fund      14,165   

Brown Brothers Harriman & Co. serves as the Funds’ custodian. Foreside Funds Distributors LLC, serves as the Funds’ distributor in the United States pursuant to an Underwriting Agreement. Matthews Asia Funds are distributed in Latin America by HMC Partners.

 

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Cross trades for the year ended December 31, 2015, were executed by the Funds pursuant to Rule 17a-7 under the 1940 Act. Cross trading is the buying or selling of portfolio securities between funds to which Matthews International Capital Management, LLC serves as investment advisor. At its regularly scheduled quarterly meetings, the Board reviews such transactions as of the most recent calendar quarter for compliance with the requirements and restrictions set forth by Rule 17a-7.

As of December 31, 2015, Matthews and its affiliates held 370,411 shares of the Matthews China Small Companies Fund, representing approximately 15% of that Fund’s outstanding shares.

As of December 31, 2015, Matthews and its affiliates held 1,383,209 shares of the Matthews Asia Strategic Income Fund, representing approximately 22% of that Fund’s outstanding shares.

As of December 31, 2015, Matthews and its affiliates held 168,743 shares of the Matthews Asia Focus Fund, representing approximately 13% of that Fund’s outstanding shares.

As of December 31, 2015, Matthews and its affiliates held 190,905 shares of the Matthews Asia ESG Fund, representing approximately 36% of that Fund’s outstanding shares.

As of December 31, 2015, Matthews and its affiliates held 94,249 shares of the Matthews Asia Value Fund, representing approximately 54% of that Fund’s outstanding shares.

 

6. INVESTMENTS

The value of investment transactions made for affiliated and unaffiliated holdings for the year ended December 31, 2015 were as follows:

 

      Affiliated Purchases        Proceeds from
Affiliated Sales
       Unaffiliated Purchases        Proceeds from
Unaffiliated Sales
 
Matthews Asia Strategic Income Fund      $—           $—           $32,426,493           $35,548,979   
Matthews Asian Growth and Income Fund                          618,817,959           1,769,760,356   
Matthews Asia Dividend Fund      54,833,390           20,899,575           1,801,464,058           2,116,590,663   
Matthews China Dividend Fund                          165,523,862           135,565,439   
Matthews Asia Value Fund                          1,483,256           142,595   
Matthews Asia Focus Fund                          3,130,891           4,301,722   
Matthews Asia Growth Fund                          254,991,531           289,389,778   
Matthews Pacific Tiger Fund      93,097,520           53,825,246           900,070,011           1,954,956,485   
Matthews Asia ESG Fund                          5,763,880           752,324   
Matthews Emerging Asia Fund                          64,115,814           19,237,728   
Matthews China Fund                          603,874,891           883,485,745   
Matthews India Fund      35,942,361           1,405,655           581,072,943           140,772,015   
Matthews Japan Fund      40,967,075           483,811           1,332,314,980           275,182,437   
Matthews Korea Fund                          40,847,176           79,089,909   
Matthews Asia Small Companies Fund      14,394,911                     344,866,333           329,445,055   
Matthews China Small Companies Fund                          15,706,729           16,488,564   
Matthews Asia Science and Technology Fund                          125,297,215           158,100,070   

 

7. HOLDINGS OF 5% VOTING SHARES OF PORTFOLIO COMPANIES

The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting shares. During the year ended December 31, 2015, the Funds below held 5% or more of the outstanding voting shares of the noted portfolio companies. During this period, other Funds in the Trust may also have held voting shares of the issuers at levels below 5%.

Investments in affiliates:

A summary of transactions in securities of issuers affiliated with a Fund for the year ended December 31, 2015 is as follows:

 

     Shares Held at
Dec. 31, 2014
    Shares
Purchased
   

Shares

Sold

    Shares Held at
Dec. 31, 2015
    Value at
Dec. 31, 2015
    Dividend
Income
Jan. 1, 2015–
Dec. 31, 2015
    Net Realized
Gain (Loss)
Jan. 1, 2015–
Dec. 31, 2015
 
MATTHEWS ASIAN GROWTH AND INCOME FUND             
Name of Issuer:              

CITIC Telecom International Holdings, Ltd.†

    188,818,250               188,818,250               $—        $—        $—   
               

Total Affiliates

            $—        $—        $—   
               
MATTHEWS ASIA DIVIDEND FUND             
Name of Issuer:              

Anritsu Corp.

    6,853,300        1,204,800        493,600        7,564,500        $49,563,094        $1,492,743        ($2,212,956)   

Ascendas India Trust

    55,065,000               1,594,300        53,470,700        32,808,738        2,052,190        (272,425

Breville Group, Ltd.

    10,847,453               203,434        10,644,019        57,515,357        2,157,910        (499,012

CapitaLand Retail China Trust, REIT

    52,179,400               8,947,000        43,232,400        45,342,034        3,589,911        4,816,676   

China Machinery Engineering Corp. H Shares

           55,225,000        1,414,000        53,811,000        39,262,849        1,787,189        (206,234

Greatview Aseptic Packaging Co., Ltd.

    110,945,000               1,915,000        109,030,000        49,294,621        2,861,572        (305,699

Minth Group, Ltd.

    61,267,000               1,732,000        59,535,000        118,275,877        4,009,279        2,322,239   

Pigeon Corp.†

    2,377,800        4,755,600 ††      3,327,300        3,806,100                        

Springland International Holdings, Ltd.†

    138,171,000               138,171,000                               

St. Shine Optical Co., Ltd. †

    2,674,000        1,057,000        1,348,000        2,383,000                        

Xingda International Holdings, Ltd. H Shares†

    87,141,000               87,141,000                               

Yuexiu Transport Infrastructure, Ltd.

    109,490,000               168,000        109,322,000        68,286,284        4,092,447        403   
               

Total Affiliates

            $460,348,854        $22,043,241        $3,642,992   
               

 

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     Shares Held at
Dec. 31, 2014
    Shares
Purchased
   

Shares

Sold

    Shares Held at
Dec. 31, 2015
    Value at
Dec. 31, 2015
    Dividend
Income
Jan. 1, 2015–
Dec. 31, 2015
    Net Realized
Gain (Loss)
Jan. 1, 2015–
Dec. 31, 2015
 
MATTHEWS PACIFIC TIGER FUND             
Name of Issuer:              

Cheil Worldwide, Inc.

    6,420,440               266,143        6,154,297        $107,636,527        $—        $2,266,723   

Dongbu Insurance Co., Ltd.†

    4,020,500               771,381        3,249,119                        

Fuyao Glass Industry Group Co., Ltd. H Shares

           31,836,000               31,836,000        76,461,314                 

Green Cross Corp.

    1,008,655               161,783        846,872        131,010,777        905,087        6,200,002   

Hyflux, Ltd.

    65,284,280               22,199,750        43,084,530        17,101,875        1,108,752        (14,588,250

Synnex Technology International Corp.

    102,065,354               3,874,000        98,191,354        95,267,555        10,701,054        (876,059

Tata Power Co., Ltd.

    162,545,436        13,000,000        9,925,000        165,620,436        169,173,116        3,553,739        (12,399,093
               

Total Affiliates

            $596,651,164        $16,268,632        ($19,396,677)   
               
MATTHEWS INDIA FUND             
Name of Issuer:              

eClerx Services, Ltd.

    1,189,293        2,005,664 †††      59,376        3,135,581        $67,149,179        $1,268,206        $251,540   

VST Industries, Ltd.

    855,933        359,771               1,215,704        31,082,796        1,310,066          
               

Total Affiliates

            $98,231,975        $2,578,272        $251,540   
               
MATTHEWS JAPAN FUND             
Name of Issuer:              

AIT Corp.

    678,700        499,000        47,400        1,130,300        $10,956,219        $352,952        $142,916   

Daiken Medical Co., Ltd.

    711,600        1,043,600               1,755,200        14,950,699        179,257          

eGuarantee, Inc.

    401,000        440,800               841,800        18,101,879        104,565          

MORESCO Corp.

    400,300        374,200               774,500        10,886,881        204,126          

N Field Co., Ltd.

    276,800        729,600               1,006,400        10,682,592        41,827          
               

Total Affiliates

            $65,578,270        $882,727        $142,916   
               
MATTHEWS ASIA SMALL COMPANIES FUND             
Name of Issuer:              

Ezwelfare Co., Ltd.†

    742,858        131,365        874,223               $—        $—        $—   

FineTek Co., Ltd.

           3,208,920 †††      16,000        3,192,920        7,205,664        368,679        (32,275

SaraminHR Co., Ltd.†

    682,434               682,434                               

PT Wismilak Inti Makmur†

    107,640,100        6,710,500        25,088,700        89,261,900                        
               

Total Affiliates

            $7,205,664        $368,679        ($32,275)   
               

 

Issuer was not an affiliated company as of December 31, 2015.
†† Includes stock split during the period.
††† Includes stock dividend during the period.

 

8. INCOME TAX INFORMATION INCOME AND WITHHOLDING TAXES

It is the policy of the Funds to comply with all requirements of the Internal Revenue Code of 1986, as amended (“the Code”), applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders. The Funds have met the requirements of the Code applicable to regulated investment companies for the year ended December 31, 2015. Therefore, no federal income tax provision is required.

Management has analyzed the Funds’ tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Funds’ financial statements. The Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

 

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Notes to Financial Statements (continued)

 

As of December 31, 2015, the components of accumulated earnings/deficit on tax basis were as follows:

 

     

Undistributed

Ordinary Income

      

Undistributed

Long-Term

Capital Gains

      

Capital Loss

Carryforwards

 
Matthews Asia Strategic Income Fund      $—           $—           ($1,535,532
Matthews Asian Growth and Income Fund                40,554,606             
Matthews Asia Dividend Fund                            
Matthews China Dividend Fund                645,489             
Matthews Asia Value Fund      16,386                       
Matthews Asia Focus Fund      80,691                     (637,245
Matthews Asia Growth Fund      6,045,112                     (19,506,205
Matthews Pacific Tiger Fund      15,495,421                       
Matthews Asia ESG Fund      27,652                     (29,988
Matthews Emerging Asia Fund      276,735                     (883,817
Matthews China Fund                19,701,557             
Matthews India Fund      112,375           11,087,490             
Matthews Japan Fund      2,671,495                     (64,759,904
Matthews Korea Fund      2,182,168           7,169,413             
Matthews Asia Small Companies Fund      1,244,171                     (12,769,786
Matthews China Small Companies Fund      1,346           747,896             
Matthews Asia Science and Technology Fund                10,439,580             

 

     

Late Year

Losses*

      

Other Temporary

Differences

      

Unrealized

Appreciation

(Depreciation)**

      

Total Accumulated

Earnings/Deficit

 
Matthews Asia Strategic Income Fund      ($179,842        $—           ($3,229,900        ($4,945,274
Matthews Asian Growth and Income Fund      (366,546                  206,388,329           246,576,389   
Matthews Asia Dividend Fund      (32,923,665        (27,008        488,373,725           455,423,052   
Matthews China Dividend Fund      (87,749                  4,701,890           5,259,630   
Matthews Asia Value Fund                          (25,360        (8,974
Matthews Asia Focus Fund                          (1,533,983        (2,090,537
Matthews Asia Growth Fund                          129,242,658           115,781,565   
Matthews Pacific Tiger Fund                          1,414,766,421           1,430,261,842   
Matthews Asia ESG Fund                          (151,962        (154,298
Matthews Emerging Asia Fund                (212,031        4,579,398           3,760,285   
Matthews China Fund      (2,902,517                  73,032,675           89,831,715   
Matthews India Fund                (11,653        240,416,115           251,604,327   
Matthews Japan Fund                          165,208,185           103,119,776   
Matthews Korea Fund                          63,301,929           72,653,510   
Matthews Asia Small Companies Fund                          29,673,107           18,147,492   
Matthews China Small Companies Fund                          600,246           1,349,488   
Matthews Asia Science and Technology Fund                          38,871,441           49,311,021   

 

* The Funds have elected to defer certain qualified late-year losses and recognize such losses in the next fiscal year.
** The differences between book-basis and tax-basis unrealized appreciation/depreciation is attributable primarily to the tax deferral of losses on wash sales and passive foreign investment company (PFIC) mark to market adjustments.

 

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As of December 31, 2015, the Funds have capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates as follows:

 

                       Amount With No Expiration*           
LOSSES DEFERRED EXPIRING IN:    2016        2017       

Short-term

Losses

      

Long-term

Losses

       Total  
Matthews Asia Strategic Income Fund      $—           $—           $1,535,532           $—           $1,535,532   
Matthews Asia Focus Fund                          128,568           508,677           637,245   
Matthews Asia Growth Fund                19,506,205                               19,506,205   
Matthews Asia ESG Fund                          29,988                     29,988   
Matthews Emerging Asia Fund                                    883,817           883,817   
Matthews Japan Fund      20,727,478           44,032,426                               64,759,904   
Matthews Asia Small Companies Fund                          12,769,786                     12,769,786   

 

* Post-Enactment Losses: Must be utilized prior to losses subject to expiration.

The following Funds utilized capital loss carryforwards in the current year:

 

     

Utilized

Capital Loss

Carryforwards

 
Matthews Asia Strategic Income Fund      $131,018   
Matthews Asia Dividend Fund      182,779,099   
Matthews Asia Growth Fund      6,923,705   
Matthews Japan Fund      23,506,272   
Matthews China Small Companies Fund      734,068   

Under the Regulated Investment Company Modernization Act of 2010, the Funds are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to any losses incurred in pre-enactment taxable years, which generally expire after eight years from when they are incurred. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law.

U.S. GAAP requires that certain components of net assets be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or NAV. The permanent differences are primarily attributable to investments in PFICs, non-deductible expenses, foreign currency reclassification, capital gains tax, re-characterization of distributions, adjustments on distributions related to taxable spinoffs and the utilization of accumulated earnings and profits distributed to shareholders on redemptions of shares as part of the dividends paid deduction for income tax purposes. For the year ended December 31, 2015, permanent differences in book and tax accounting have been reclassified to paid-in capital, undistributed net investment income (loss) and accumulated realized gain (loss) as follows:

 

     

Increase/

(Decrease)

Paid-in-Capital

      

Increase/(Decrease)

Undistributed Net

Investment

Income/(Loss)

      

Increase/(Decrease)

Accumulated

Realized
Gain/(Loss)

 
Matthews Asia Strategic Income Fund      $—           ($1,086,626        $1,086,626   
Matthews Asian Growth and Income Fund                3,866,071           (3,866,071
Matthews Asia Dividend Fund      (96,561        43,531,280           (43,434,719
Matthews China Dividend Fund                1,446,644           (1,446,644
Matthews Asia Value Fund      (7,928        6,940           988   
Matthews Asia Focus Fund                21,510           (21,510
Matthews Asia Growth Fund                6,930,533           (6,930,533
Matthews Pacific Tiger Fund      119,162,538           (12,995,390        (106,167,148
Matthews Asia ESG Fund      (52,457        53,774           (1,317
Matthews Emerging Asia Fund                4,068           (4,068
Matthews China Fund      13,916,644           (1,012,648        (12,903,996
Matthews India Fund                2,246,623           (2,246,623
Matthews Japan Fund                2,153,144           (2,153,144
Matthews Korea Fund      1,742,351           (329,260        (1,413,091
Matthews Asia Small Companies Fund      (1,113        (247,960        249,073   
Matthews China Small Companies Fund      234,960           7,710           (242,670
Matthews Asia Science and Technology Fund      3,039,193           507,410           (3,546,603

 

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Notes to Financial Statements (continued)

 

 

9. SUBSEQUENT EVENTS

Effective February 1, 2016, Mizuho Bank, Ltd. (“Mizuho”), acquired an ownership interest in Matthews equal to approximately 16% of the outstanding units of Matthews previously held by a broad group of existing equity holders. Along with that transaction, Matthews adopted a new governance structure, through eliminating the managing member roles and expanding and providing additional authority to its Board of Directors. The governance changes constituted a change of control of Matthews and, therefore, technically resulted in an “assignment” of the Investment Advisory Agreement then in effect for each Fund, and its automatic termination as required by its terms and the Investment Company Act of 1940. The shareholders of each Fund approved a new Investment Advisory Agreement with Matthews, which became effective on February 1, 2016 upon the closing of those transactions and the automatic termination of the prior Investment Advisory Agreement. The new Investment Advisory Agreement has substantively the same terms as the prior Investment Advisory Agreement, including the same fee rates, except for the commencement and renewal dates.

 

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Report of Independent Registered

Public Accounting Firm

To the Board of Trustees and Shareholders of

Matthews Asia Funds:

In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Matthews Asia Strategic Income Fund, Matthews Asian Growth and Income Fund, Matthews Asia Dividend Fund, Matthews China Dividend Fund, Matthews Asia Value Fund, Matthews Asia Focus Fund, Matthews Asia Growth Fund, Matthews Pacific Tiger Fund, Matthews Asia ESG Fund, Matthews Emerging Asia Fund, Matthews China Fund, Matthews India Fund, Matthews Japan Fund, Matthews Korea Fund, Matthews Asia Small Companies Fund, Matthews China Small Companies Fund and Matthews Asia Science and Technology Fund (hereinafter referred as the “Funds”) at December 31, 2015, and the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (consolidated financial statements and consolidated financial highlights for Matthews China Fund and Matthews Asia Dividend Fund) (hereinafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2015 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers, LLP

San Francisco, California

February 26, 2016

 

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Tax Information (unaudited)

 

For shareholders who do not have a December 31, 2015 tax year-end, this notice is for informational purposes. For the period January 1, 2015 to December 31, 2015, the Funds report the following items with regard to distributions paid during the period. All reportings are based on financial information available as of the date of this annual report and, accordingly, are subject to change. For each item, it is the intention of each Fund to report the maximum amount permitted under the Internal Revenue Code and the regulations thereunder.

1. Qualified Dividend Income

The Funds report a portion of the ordinary income distributed during the year ended December 31, 2015 as Qualified Dividend Income (“QDI”) as defined in the Internal Revenue code as follows:

 

      QDI Portion  
Matthews Asia Strategic Income Fund      1.94%   
Matthews Asian Growth and Income Fund      64.31%   
Matthews Asia Dividend Fund      100.00%   
Matthews China Dividend Fund      63.25%   
Matthews Asia Value Fund      0.00%   
Matthews Asia Focus Fund      80.43%   
Matthews Asia Growth Fund      0.00%   
Matthews Pacific Tiger Fund      44.66%   
Matthews Asia ESG Fund      56.53%   
Matthews Emerging Asia Fund      100.00%   
Matthews China Fund      81.42%   
Matthews India Fund      100.00%   
Matthews Japan Fund      0.00%   
Matthews Korea Fund      94.96%   
Matthews Asia Small Companies Fund      100.00%   
Matthews China Small Companies Fund      29.76%   
Matthews Asia Science and Technology Fund      0.00%   

2. Dividends Received Deduction

The Funds report a Dividend Received Deduction pursuant to Section 854 of the Internal Revenue Code for the year ended December 31, 2015 as follows:

 

Matthews Asia Strategic Income Fund      0.00%   
Matthews Asian Growth and Income Fund      2.31%   
Matthews Asia Dividend Fund      3.45%   
Matthews China Dividend Fund      4.04%   
Matthews Asia Value Fund      0.00%   
Matthews Asia Focus Fund      12.50%   
Matthews Asia Growth Fund      0.00%   
Matthews Pacific Tiger Fund      1.27%   
Matthews Asia ESG Fund      0.00%   
Matthews Emerging Asia Fund      0.00%   
Matthews China Fund      0.00%   
Matthews India Fund      0.00%   
Matthews Japan Fund      0.00%   
Matthews Korea Fund      0.00%   
Matthews Asia Small Companies Fund      0.00%   
Matthews China Small Companies Fund      0.00%   
Matthews Asia Science and Technology Fund      0.00%   

 

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3. Long-Term Capital Gain Distributions

The Funds report Long-Term Capital Gain distributions pursuant to Section 852(b)(3) of the Internal Revenue Code for the year ended December 31, 2015 as follows:

 

      Long-Term Capital Gains  
Matthews Asian Growth and Income Fund      $134,712,377   
Matthews Asia Dividend Fund      71,669,071   
Matthews China Dividend Fund      7,709,592   
Matthews Asia Focus Fund      61,165   
Matthews Pacific Tiger Fund      685,544,217   
Matthews Emerging Asia Fund      432,972   
Matthews China Fund      127,726,027   
Matthews India Fund      13,471,979   
Matthews Korea Fund      12,118,013   
Matthews China Small Companies Fund      1,862,709   
Matthews Asia Science and Technology Fund      25,836,171   

4. Foreign Taxes Paid

The Funds have elected to pass through to their shareholders the foreign taxes paid for year ended December 31, 2015 as follows:

 

      Foreign Source Income      Foreign Taxes Paid  
Matthews Asia Strategic Income Fund      $3,829,016         $84,023   
Matthews Asian Growth and Income Fund      136,221,960         5,652,434   
Matthews Asia Dividend Fund      162,653,864         10,381,648   
Matthews China Dividend Fund      5,790,247         210,539   
Matthews Asia Value Fund      5,764         812   
Matthews Asia Focus Fund      387,991         13,720   
Matthews Pacific Tiger Fund      219,250,295         10,976,450   
Matthews Asia ESG Fund      50,415         6,267   
Matthews Emerging Asia Fund      3,364,160         286,590   
Matthews China Fund      19,900,425         103,503   
Matthews Korea Fund      3,088,190         509,194   
Matthews Asia Small Companies Fund      12,765,019         1,056,228   
Matthews China Small Companies Fund      529,412         11,589   

5. Qualified Interest Income

The Funds report a portion of the net income dividends distributed during the year ended December 31, 2015, as Qualified Interest Income (QII), as defined in the Internal Revenue Code as follows:

 

      QII Portion  
Matthews Asia Strategic Income Fund      3.46%   
Matthews Asian Growth and Income Fund      0.02%   
Matthews Asia Dividend Fund      0.02%   
Matthews China Dividend Fund      0.16%   
Matthews Asia Value Fund      0.17%   
Matthews Asia Focus Fund      0.07%   
Matthews Asia Growth Fund      0.00%   
Matthews Pacific Tiger Fund      0.03%   
Matthews Asia ESG Fund      0.00%   
Matthews Emerging Asia Fund      0.05%   
Matthews China Fund      0.02%   
Matthews India Fund      0.03%   
Matthews Japan Fund      0.00%   
Matthews Korea Fund      0.07%   
Matthews Asia Small Companies Fund      0.05%   
Matthews China Small Companies Fund      0.05%   
Matthews Asia Science and Technology Fund      0.00%   

 

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Tax Information (unaudited) (continued)

 

6. Qualified Short Term Capital Gain Dividends

The Funds report a portion of the short term capital gain dividends distributed during the year ended December 31, 2015, as Qualified Short-Term Gain, as defined in the Internal Revenue Code as follows:

 

      Short-Term Gains  
Matthews Asia Strategic Income Fund      0.00%   
Matthews Asian Growth and Income Fund      100.00%   
Matthews Asia Dividend Fund      0.00%   
Matthews China Dividend Fund      100.00%   
Matthews Asia Value Fund      0.00%   
Matthews Asia Focus Fund      0.00%   
Matthews Asia Growth Fund      0.00%   
Matthews Pacific Tiger Fund      0.00%   
Matthews Asia ESG Fund      0.00%   
Matthews Emerging Asia Fund      0.00%   
Matthews China Fund      100.00%   
Matthews India Fund      100.00%   
Matthews Japan Fund      0.00%   
Matthews Korea Fund      100.00%   
Matthews Asia Small Companies Fund      0.00%   
Matthews China Small Companies Fund      0.00%   
Matthews Asia Science and Technology Fund      0.00%   

 

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Approval of Investment Advisory Agreements (unaudited)

 

The Funds, which are series of the Trust, have retained Matthews International Capital Management, LLC (“Matthews”) to manage their assets pursuant to the Advisory Agreement (the “Current Agreement”), which has been approved by the Board of Trustees of the Funds, including the Independent Trustees. Following an initial term with respect to each Fund upon its commencement of operations, the Current Agreement continues in effect from year-to-year provided that the continuance is specifically approved at least annually by the vote of the holders of at least a majority of the outstanding shares of the Funds, or by the Board of Trustees, and, in either event, by a majority of the Independent Trustees of the Trust casting votes in person at a meeting called for that purpose.

At a meeting held on July 15, 2015, the Board, including the Independent Trustees of the Trust, approved a new Investment Advisory Agreement (the “New Agreement”), to take effect with respect to each Fund for an initial term of two years upon consummation of the proposed change of control transaction involving Matthews that was previously described in a recent proxy statement sent to shareholders of each Fund in connection with a special shareholders meeting (the “Transaction”). Because the consummation date of the Transaction was not yet set, at a meeting held on August 26, 2015, the Board, including the Independent Trustees of the Trust, approved the continuance of the Current Agreement, with respect to each Fund, for an additional one-year period ending August 31, 2016, or the earlier consummation of the Transaction.

Materials reviewed - In response to a detailed information request sent on behalf of the Independent Trustees by their independent legal counsel, Matthews addressed a range of information relating to the New Agreement, including, but not limited to, the Transaction, the expected benefits and costs to shareholders of the Funds, the expected changes in the management and operations of Matthews after the Transaction, and Matthews’ management and investment teams serving the Funds. Matthews’ response also included extensive materials regarding each Fund’s investment results, independently prepared advisory fee and expense comparisons to other mutual funds, advisory fee comparisons to advisory fees charged by Matthews to its institutional clients, and financial and profitability information regarding Matthews. Matthews’ profitability was compared to a peer group of investment advisers, and changes over time were reviewed. Furthermore, throughout the course of the year since the last renewal of the Current Agreement, the Independent Trustees received a wide variety of materials relating to the services provided by Matthews, including reports on each Fund’s investment results, portfolio composition, portfolio trading practices, shareholder services, and other information relating to the nature, extent, and quality of services provided by Matthews to the Funds. In addition to the information furnished by Matthews, the Trustees were provided with legal memoranda discussing their fiduciary duties related to the approval of the New Agreement as well as considerations relevant to the Transaction.

The Independent Trustees later reviewed updated performance, expense and other information requested on behalf of

the Independent Trustees as part of considering and acting to renew the Current Agreement.

Review process - The Independent Trustees reviewed advice regarding legal and industry standards provided by their independent legal counsel. The Independent Trustees discussed the approval of the New Agreement and the renewal of the Current Agreement with representatives of Matthews and in private sessions at which no representatives of Matthews were present. In deciding to recommend the approval of the New Agreement and renewal of the Current Agreement with respect to each Fund, the Independent Trustees did not identify any single or particular piece of information that, in isolation, was the controlling factor. This summary describes the most important, but not all, of the factors considered by the Board and the Independent Trustees.

 

T The nature, extent and quality of the services provided by Matthews under the Advisory Agreement. The Trustees considered the experience and qualifications of the personnel at Matthews who are responsible for providing services to the Funds and who are responsible for the daily management of the Funds’ portfolios. The Trustees noted that Matthews has continued to expand its professional staff at both senior and junior levels over the past several years, and has enjoyed relative stability of its senior executive and portfolio management. They also reviewed Matthews’ recent hiring to further strengthen current capabilities and to support future potential growth of assets and the expansion of its business. Among other improved capabilities, the Trustees noted recent and planned enhancements to communications with intermediaries and investors, as well as various marketing efforts. The Trustees noted various initiatives such as efforts to access the China A-share market, investing in other emerging or frontier markets and continuing to develop greater access to other investors such as institutional retirement plans in Latin America. The Trustees have noted on-going enhancements to governance, risk and valuation practices.

The Trustees viewed Matthews as well positioned to provide high quality services to the Funds under various market conditions, as demonstrated by the past volatile and challenging securities markets that have caused either contracting revenues or rapidly expanding assets at different times. The Trustees attributed much of that past stability to Matthews’ emphasis on preserving and enhancing portfolio management team resources, careful business planning and management, as well as its solid financial condition and strong cash reserves. As in past years, the Trustees considered the technical capabilities of Matthews, including design and implementation of a disaster recovery and business continuity infrastructure. The Trustees also considered the Chief Compliance Officer’s report regarding Matthews’ compliance resources, risk assessment and other compliance initiatives and programs. One recent example noted by the Trustees was extensive employee training. The Trustees concluded that Matthews has implemented a robust and diligent compliance process, and demonstrates a strong commitment to a culture of compliance.

 

 

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Approval of Investment Advisory Agreements (unaudited) (continued)

 

The Trustees concluded that Matthews had the quality of personnel and other investment resources essential to performing its duties under the Advisory Agreement, and that the nature, overall quality, cost and extent of such management services are fully satisfactory.

 

T The investment performance of Matthews. The Trustees reviewed the short-term and long-term performance of each Fund on both an absolute basis and in comparison to peer funds and benchmark indices. The Trustees noted the challenging conditions of various Asian markets in 2012 and part of 2013, as well as more recent market challenges. The Trustees expect that the performance of certain Funds will lag the market averages in some short-term periods because of Matthews’ emphasis on consistent long-term returns from investments in less cyclical companies. The Trustees also emphasized longer-term performance, which they believe is more important than short isolated periods for purposes of evaluating Matthews’ success in meeting Fund and shareholder objectives. To the extent of any concerns about performance with respect to any particular period for a Fund, the Trustees noted that Matthews had provided a satisfactory explanation for that performance and explained its reasons for maintaining a consistent investment philosophy. In addition, the Trustees recognized actions taken by Matthews such as changes to the portfolio management team responsible for the Matthews China Fund and other China-focused investments. The Trustees also reviewed both the peer comparison measures compiled by Lipper Inc. (“Lipper”) and ratings by Morningstar, Inc. (“Morningstar”) for each Fund for various periods ending March 31, 2015 and selected updated information for various periods ending June 30, 2015.

The Trustees noted the difficulty of fairly benchmarking performance for certain of the Funds as well as the difficulty of establishing appropriate peer groups for certain of the Funds. The Trustees also gave more weight to each Fund’s longer-term investment performance given the long-term investment philosophy of each Fund. On that basis, the Trustees concluded that they were satisfied with the Funds’ overall performance records. The Trustees also reviewed Matthews’ trading policies and efforts to obtain best overall execution for the Funds in the various markets in which the Funds trade securities. The Trustees noted the relatively low turnover rates in the various equity Funds and Matthews’ consistent adherence to its long-standing investment approach, which emphasizes fundamental bottom-up driven investment selection in light of its view of regional economic conditions.

For Matthews Asia Growth Fund, the Trustees noted that the Fund’s performance compared very favorably against its peers for the one-year, three-year, five-year, ten-year and since-inception periods. The Fund ranked in the first or second quintile against its peer group funds for those periods.

For Matthews Asia Dividend Fund, the Trustees noted that the Fund had performed well against its peer group during the one-year, three-year, five-year and since

inception periods, ranking in the first or second quintile for those periods.

For Matthews Pacific Tiger Fund, the Trustees noted that the Fund’s performance was favorable in the one-year, three-year, five-year, ten-year and since-inception periods, ranking in the first quintile for those periods against the Lipper peer group.

For Matthews Asian Growth and Income Fund, the Trustees noted that the Fund outperformed its peer group during the five-year, ten-year and since-inception periods, ranking in the first or second quintile for those periods. Although the performance for the one-year and three-years periods was below the median, it was still satisfactory.

For Matthews Asia Science and Technology Fund, the Trustees noted that the Fund’s performance was more favorable than the median return of its peer funds over the one-year, three-year and since-inception periods, but less favorable than the average return of its peer funds over the five-year and ten-year periods. The Trustees noted the absence of a directly comparable peer group because the funds in the peer group invested globally, rather than being limited to Asia. The Trustees also acknowledged Matthews’ explanation about the very volatile asset class in which the Fund invests, which can produce variable relative results. The Trustees remained satisfied with Matthews’ explanation of its investment strategy and process for this Fund.

For Matthews China Fund, the Trustees noted that the Fund had outperformed the median of its peer funds over the ten-year and since-inception periods, ranking in the first or second quintile for the ten-year and since inception periods. The Trustees expressed some concern about other periods, with the one-year period below median in the fourth quintile, and the three-year and five-year periods in the lowest quintile. The Trustees focused on the more recent weak performance, which had been discussed extensively with Matthews. The Trustees noted changes to the portfolio management team for this Fund as well as Matthews’ explanation of its investment strategy and process. They will remain attentive to the Fund’s progress in improving relative performance.

For Matthews India Fund, the Trustees noted that the Fund had outperformed its peer funds over the one-year, three-year, five-year and since inception periods, ranking in the first quintile for those periods.

For Matthews Japan Fund, the Trustees noted that the Fund’s performance was favorable compared to its peer funds over the one-year, three-year, five-year, ten-year and since-inception periods, ranking in the first or second quintile.

For Matthews Korea Fund, the Trustees noted that the Fund had enjoyed favorable performance above the median for the one-, three-, five-, ten-year and since

 

 

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inception periods, which was satisfactory as compared to its broader Lipper peer group for various periods. They consider the broader peer group, which consists of Pacific-oriented funds excluding Japan, as much too broad to be a useful peer group for a Korea-focused fund. For that reason, the Trustees placed greater weight on relative performance against a benchmark index.

For Matthews Asia Small Companies Fund, the Trustees noted that the Fund ranked in the top quintile among its peer groups for the three-year, five-year and since-inception periods, and in the second quintile for the one-year period. The Trustees noted that the peer group included global and international small cap funds, which the Trustees considered to be of limited use in evaluating the Fund’s satisfactory performance.

For Matthews China Dividend Fund, the Trustees noted that the Fund had ranked in the first or second quintile of its peer group for the three-year, five-year and since inception periods, but was below the median for the one-year period with positive performance.

For Matthews China Small Companies Fund, the Trustees noted that the Fund’s performance was below the median in its peer group for the three-year, five-year and since inception periods. The Trustees recognized that small capitalization strategies, particularly for a China-focused fund, can produce highly variable results. The Trustees regarded the peer group of China funds as less useful because of the small capitalization mandate for this Fund within a China-focused peer group. The Trustees also noted changes to the portfolio management team for this Fund.

For Matthews Asia Strategic Income Fund, the Trustees noted that the Fund performance had ranked in the first or second quintile for the one- and three-year periods, but below the median peer groups since inception. The Trustees recognized that the peer groups included mostly broader emerging market hard currency debt funds not focused on Asia, meaning the Fund’s relative performance could be more dependent on the relative performance of the Asian debt markets than portfolio management activity. The Trustees regarded the Fund’s performance as satisfactory.

For Matthews Emerging Asia Fund, Matthews Asia Focus Fund and Matthews Asia ESG Fund, the brief period since inception has not afforded sufficient performance to conduct a meaningful comparison to any peer group. The Trustees believe, however, that the relative past performance of other Funds managed by Matthews’ provides additional support for their renewal of the Current Agreement and approval of the New Agreement with respect to these three Funds.

 

T The extent to which Matthews realizes economies of scale as the Funds grow larger and whether Fund investors benefit from any economies of scale. The Trustees discussed Matthews’ ongoing investment in its technology,
  systems, staffing and other aspects of its business that can benefit the Funds, which is an acceptable way for Matthews to share economies of scale with the Funds and their shareholders. The Trustees considered the new personnel hired over the past year, as well as planned hiring, and the extent to which that hiring could be expected to benefit shareholders. The Trustees also recognize that the Funds’ total assets have fluctuated over the past few years, especially in certain strategies, which has also affected any economies of scale that could be enjoyed. The Trustees concluded that the advisory fee structure with breakpoints for the group-priced Funds (other than the individually priced Funds, which at the time of approval were the two small company focused Funds, the Emerging Asia Fund and the fixed-income Fund), and the new breakpoint for most of those individually priced Funds (other than the fixed-income Fund), enhances the ability of the Funds and their shareholders to benefit from past and future potential economies of scale, and continues to be appropriate given the size and objectives of the Funds. The Trustees further noted that additional economies of scale are shared with shareholders of the Funds through fee waivers and/or expense reimbursements pursuant to the Operating Expenses Agreement, fee waivers pursuant to the Fee Waiver Agreement, and the breakpoints in the fees payable under the Services Agreement, all of which will not be changed as a result of the Transaction or the approval of the New Agreement. As a result, the Trustees remain satisfied about the extent to which economies of scale have been and will continue to be shared with the Funds and their shareholders.

 

T The costs of the services provided by Matthews and others. The Trustees considered the advisory fees and total fees and expenses of each Fund in comparison to the advisory fees and other fees and expenses of other funds in each Fund’s relevant peer group. The Trustees considered both the gross advisory fee rates charged by Matthews, as well as the effective advisory fee rates after taking into consideration the fees waived and expenses reimbursed pursuant to the Operating Expenses Agreement and the Fee Waiver Agreement, noting that the advisory fee rates under the New Agreement are identical to those under the Current Agreement and that the fee waiver and expense reimbursement arrangements reflected in the Operating Expenses Agreement and the Fee Waiver Agreement will continue to be in place following the consummation of the Transaction. The Trustees found that the contractual advisory rates (excluding administrative services) for the Funds were very competitive and generally lower than those of the relevant peer group averages for most of the Funds. The Trustees also found that the total expense ratios paid by shareholders of the Funds, which are most representative of a shareholder’s net experience, were also very competitive, with all but the relatively newer or smaller Funds ranking below the peer group averages.

The Trustees also compared Matthews’ advisory fees with those of Matthews’ separate accounts and other investment products, noting that the Funds’ advisory expenses were

 

 

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Approval of Investment Advisory Agreements (unaudited) (continued)

 

not disadvantageous (not being substantially higher than the separate accounts’ rates). The Trustees agreed that total expenses appeared to be appropriate in comparison and taking into account the services differences between these products and the Funds, including the differences in the frequency of net asset value calculations and other operational and compliance activities. The Trustees considered various specific Fund expenses, including the custody fees and transfer agent fees. The Trustees noted that Matthews’ continued efforts in recent years had resulted in, for many of the Funds, reduced expenses in some categories. The Trustees concluded that Matthews’ advisory fee rates and the Funds’ expense ratios are reasonable in light of comparative performance and expense and advisory fee information for each of the Funds.

For each of the Funds, the Trustees noted that, subject to the considerations and exceptions noted below, the contractual advisory fee rates, the total expense ratio, and the effective or net advisory fee rates were all lower than or not materially above the median of the funds in each Fund’s peer group.

For Matthews Asia Small Companies Fund, the Trustees noted that the gross advisory fee rate was equal to the peer group median, but actual total expenses excluding Rule 12b-1 and actual advisory fees were higher than the peer group median. The Trustees were pleased to note, however, that the actual total expenses and non-management expenses were below the peer group medians. The Trustees expect that the Fund’s comparative position should improve as the Fund grows.

For Matthews China Small Companies Fund, the Trustees noted that the gross advisory fee rate, actual advisory fee rate and total expenses were above the median. The Trustees expect that the Fund’s comparative position should improve as the Fund grows.

For Matthews Asia Strategic Income Fund, the Trustees noted that the gross advisory fee rate, but not the actual advisory fees, are lower than the peer group median, as well as the actual total expenses in part as the result of the expense limitation in effect.

For Matthews Emerging Asia Fund, Matthews Asia Focus Fund and Matthews Asia ESG Fund, the brief period since inception means that the Funds remain small and subject to subsidies under expense limitation agreements. The contractual advisory fee rate and actual advisory fee rate for the Matthews Emerging Asia Fund is above the peer group median. For the Matthews Asia Focus Fund the contractual advisory fee is below the median but the actual advisory fee is above the median for the peer group. For the Matthews Asia ESG Fund, the contractual advisory fee and the actual advisory fee are below the median for the peer group. With respect to these fees as well as total expense levels, these Funds remain new and relatively small and there is not sufficient peer group expense information to conduct a meaningful comparison to any peer group. The Trustees

remain comfortable with the expense levels set under the expense limitation agreement for these Funds.

 

T The profits to be realized by Matthews and its affiliates from the relationships with the Funds. The Trustees reviewed the profitability of Matthews on both an absolute basis and in comparison to other investment advisers. The Trustees noted that Matthews’ pretax profit margin appeared to be reasonable in relation to other advisors. The Trustees also noted that Matthews appeared to be sufficiently profitable to operate as a viable investment management firm, able to honor its obligations as a sponsor of the Funds, including the Funds that did not generate a profit for Matthews, without earning excessive profits from any particular Fund or from the overall relationship with the Funds. The Trustees noted that, with fluctuations in asset levels in some prior years, volatility in revenues and profitability could be expected from time to time, but also noted the continued expenditures on personnel and other resources. The Trustees noted an increase in profitability in some prior years, but they are aware of the continued volatility of markets and asset levels that can result in continued fluctuations of profitability. The Trustees further noted that Matthews’ continued upgrading of its trading, research, compliance, and other technological systems should increase Matthews’ capacity, speed and reliability in providing services to the Funds as they grow, which further supports the long-term viability of the Funds and Matthews. The Trustees also considered that the additional benefits derived by Matthews from its relationship with the Funds are limited solely to permissible research and brokerage benefits received in exchange for “soft dollars.” After that review, the Trustees determined that the profitability level for Matthews with respect to the Current Agreement and the New Agreement should be fair and reasonable in consideration of the services it provides and will provide to the Funds.

No single factor was determinative of the Board’s decision to approve the Current Agreement and the New Agreement, but rather the Trustees based their determination on the total mix of information available to them. After considering the factors described above, the Board concluded that the terms of the advisory arrangements are fair and reasonable to each Fund in light of the services that Matthews provides, its costs and reasonably foreseeable Fund asset levels, and that each Fund’s shareholders received and would receive reasonable value in return for the advisory fees paid. The Independent Trustees concluded separately that continuance of the Current Agreement and approval of the New Agreement was supported by reasonable and impartial records and information, including the performance of the Funds in relation to their peer groups, the services provided by Matthews, and the competitive expense structure, and that the continuance of the Current Agreement and approval of the New Agreement with respect to each Fund would be in the best interests of each Fund and its shareholders. In addition, the consensus of the Board and the Independent Trustees, based on the information presented with respect to the consid-

 

 

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eration of the New Agreement, was that there would be no “unfair burden” imposed on the Funds as a result of the Transaction within the meaning of Section 15(f) of the 1940 Act.

Each of the Current Agreement and the New Agreement may be terminated by the Trustees on behalf of the Funds or by Matthews upon 60 days’ prior written notice without penalty. Each of the Current Agreement and New Agreement will also terminate automatically in the event of its assignment, as defined in the 1940 Act.

 

 

The Matthews Asia Value Fund (the “Fund”), which is a new series of the Trust, has retained Matthews International Capital Management, LLC (“Matthews”) to manage its assets pursuant to the Advisory Agreement, which has been approved by the Board of Trustees of the Fund, including the Independent Trustees. Following an initial term with respect to the Fund upon its commencement of operations, the Advisory Agreement continues in effect from year-to-year provided that the continuance is specifically approved at least annually by the vote of the holders of at least a majority of the outstanding shares of the Fund, or by the Board of Trustees, and, in either event, by a majority of the Independent Trustees of the Trust casting votes in person at a meeting called for that purpose.

At a meeting held on November 18, 2015, the Board, including the Independent Trustees of the Trust, approved the Advisory Agreement, with respect to the Fund, for an initial term through August 31, 2016 or the earlier of the completion of a proposed change of control transaction involving Matthews. The Board, including the Independent Trustees of the Trust, also approved a new Advisory Agreement with respect to the Fund for an initial term of two years to take effect upon the closing of that change of control transaction. Both agreements are referred to together as the “Advisory Agreements.”

The Independent Trustees reviewed and discussed the information provided by Matthews at that and prior meetings. The Independent Trustees were assisted in their deliberations by their independent legal counsel. Below is a summary of the factors considered by the Board in approving the Advisory Agreements with respect to the Fund.

 

T The nature, extent and quality of the services provided by Matthews under the Advisory Agreements. The Trustees considered the experience and qualifications of the personnel at Matthews who would be responsible for providing services to the Fund and would be responsible for the daily management of the Fund’s portfolio. The Trustees noted that Matthews has continued to expand its professional staff at both senior and junior levels over the past several years, and has enjoyed relative stability of its senior executive and portfolio management. The Trustees noted Matthews’ on-going commitment to governance, compliance, risk and valuation practices. The Trustees viewed Matthews as well positioned to provide high quality services to the Fund under various market conditions, as demonstrated by the past volatile and challenging secu-
  rities markets that have caused either contracting revenues or rapidly expanding assets at different times. The Trustees concluded that Matthews has the quality of personnel and other investment resources essential to performing its duties under the Advisory Agreements, and that the nature, overall quality, cost and extent of such management services are expected to be satisfactory and reliable.

 

T The investment performance of Matthews. The Trustees are familiar with the short-term and long-term performance of other series of the Trust on both an absolute basis and in comparison to peer funds and benchmark indices. This is a new Fund without any prior performance. The Trustees also emphasized longer-term performance goals, which they believe are more important than short isolated periods for purposes of evaluating Matthews’s success in meeting Fund and shareholder objectives. The Trustees concluded that Matthews has the potential to generate acceptable long-term performance for the Fund.

 

T The extent to which Matthews realizes economies of scale as the Fund grows larger and whether Fund investors benefit from any economies of scale. Because the Fund is new, it is not expected to recognize economies of scale for some time. The Trustees expect to monitor the Fund’s growth and evaluate economies of scale at future renewals of the Advisory Agreement in effect at that time. They expect that the Fund will benefit from existing economies of scale because of the family pricing of certain series of the Trust, including the Fund, including recently negotiated breakpoints. Additional fee reductions were adopted under the Administration and Shareholder Services Agreement for all series of the Trust for each increment of $5 billion of additional assets over $25 billion, with the lowest fee rate on assets over $45 billion. As a result, the Trustees remain satisfied about the extent to which economies of scale would be shared with the Fund and its shareholders.

 

T The costs of the services provided by Matthews and others. The Trustees considered the advisory fees and total fees and expenses of the Fund in comparison to the advisory fees and other fees and expenses of other funds in the Trust, noting that the Fund does not have a fully suitable peer group for its specialty strategy. The Trustees noted that the expense limitation that would apply is the same as has been applied to certain other new series of the Trust, and that the administrative fee would be based on the combined family pricing for the Trust. Also, the total expense ratio to be paid by investors in the Fund, which is most representative of an investor’s net experience, would be reasonable.

 

T

The profits to be realized by Matthews and its affiliates from the relationships with the Fund. The Trustees recognized that, as a new fund with expense limitations in place, it is unlikely that the Fund will generate profits for Matthews initially and may not do so until the Fund has experienced some significant growth. The Trustees also considered that the additional benefits expected to be

 

 

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Approval of Investment Advisory Agreements (unaudited) (continued)

 

  derived by Matthews from its relationship with the Fund are limited solely to research benefits received in exchange for “soft dollars.”

No single factor was determinative of the Board’s decision to approve the Advisory Agreements, but rather the Trustees based their determination on the total mix of information available to them. After considering the factors described above, the Board concluded that the terms of the advisory arrangements would be fair and reasonable to the Fund in light of the services that Matthews is expected to provide, and that the Fund’s shareholders are expected to receive reasonable value in return for the advisory fees paid. For these reasons, the approval of the Advisory Agreements with respect to the Fund would be in the best interests of the Fund and its shareholders.

Each Advisory Agreement may be terminated by the Trustees on behalf of the Fund or by Matthews upon 60 days’ prior written notice without penalty. Each Advisory Agreement will also terminate automatically in the event of its assignment, as defined in the 1940 Act.

 

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Trustees and Officers of the Funds (unaudited)

The operations of each Fund are under the direction of the Board of Trustees. The Board of Trustees establishes each Fund’s policies and oversees and reviews the management of each Fund. The Board meets regularly to review the activities of the officers, who are responsible for the day-to-day operations of the Funds. The Statement of Additional Information, which includes additional information about Fund Trustees, is available without charge by calling 800.789.2742 or by visiting the Funds’ website, matthewsasia.com. The Trustees and executive officers of the Funds, their year of birth, business address and principal occupations during the past five years are set forth below:

 

Name, Year of Birth,

Address and Position(s)

Held with Trust

  

Term of

Office and

Length of

Time Served1

  

Principal Occupation(s)

During Past 5 Years

  

Number of

Portfolios in
Fund Complex
Overseen by
Trustee

   Other Trusteeships/Directorships
(number of portfolios) Held by Trustee
INDEPENDENT TRUSTEES         

JONATHAN F. ZESCHIN

Born 1953

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Chairman of the Board of

Trustees and Trustee

  

Trustee

since 2007 and

Chairman

of the

Board

since 2014

   Partner (since 2009), Essential Investment Partners, LLC (investment advisory and wealth management); President (since 2000), Essential Advisers Inc. (financial holding company); Managing Partner (since 1998), JZ Partners LLC (consulting).    19   

Director (since 2013), Matthews A Share

Selections Fund, LLC (2 Portfolios); Trustee and Chairman of the Board, DCA Total Return Fund (2005–2011) (1 Portfolio) and DCW Total Return Fund (2007–2010) (1 Portfolio); Trustee (2002–2007), ICON Funds (17 Portfolios); Director (2002-2004), Wasatch Funds (10 portfolios)

TOSHI SHIBANO

Born 1950

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Trustee

   Since 2003   

Faculty (since 2000), General Electric’s

John F. Welch Leadership Center;

President (since 1995), Strategic Value

Creation, Inc. (executive development

programs); Faculty Director and Executive Education Lecturer (since 1995), Center for Executive Education, Haas School of Business, UC Berkeley; Adjunct Professor (2000–2011), Columbia Graduate School of Business; Associate Professor (2001–2005), Thunderbird School of Global Management; Visiting Assistant Professor (2000), Stanford Graduate School of Business; Assistant Professor (1995–2000), University of Chicago Graduate School of Business; Assistant Professor (1988–1995), Haas School of Business, UC Berkeley.

   19    Director (since 2013), Matthews A Share Selections Fund, LLC (2 Portfolios)

RHODA ROSSMAN

Born 1958

Four Embarcadero

Center Suite 550

San Francisco, CA 94111

Trustee

   Since 2006    Vice President, Corporate Investment Officer (2007–2010); Senior Vice President and Treasurer (2003–2007), The PMI Group, Inc. (mortgage insurer).    19    Director (since 2013), Matthews A Share Selections Fund, LLC (2 Portfolios)

RICHARD K. LYONS

Born 1961

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Trustee

   Since 2010   

Dean (since 2008), Haas School of

Business, UC Berkeley; Chief Learning

Officer (2006–2008), Goldman Sachs

(investment banking and investment

management); Executive Associate Dean (2005–2006), Acting Dean (2004–2005), Professor (2000–2004), Associate Professor (1996–2000), Assistant Professor (1993–1996), Haas School of Business, UC Berkeley.

   19    Director (since 2013), Matthews A Share Selections Fund, LLC (2 Portfolios); Trustee (2001–2006), Barclays Global Investor Funds and Master Investment Portfolios (15 Portfolios); Director (2000–2006), iShares, Inc. (24 Portfolios) and iShares Trust (over 70 Portfolios); Trustee (1994–2006) and Chairman of the Board (2000–2006), Matthews International Funds (9 Portfolios)

 

1 Each Trustee serves for an indefinite term, until retirement age or until his/her successor is elected. Officers serve at the pleasure of the Board of Trustees.

 

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Name, Year of Birth,

Address and Position(s)

Held with Trust

  

Term of

Office and

Length of

Time Served1

   Principal Occupation(s)
During Past 5 Years
  

Number of

Portfolios in

Fund Complex

Overseen by

Trustee

   Other Trusteeships/Directorships
(number of portfolios) Held by Trustee
INDEPENDENT TRUSTEES         

CHRISTOPHER LEE

Born 1967

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Trustee

   Since 2015   

Lecturer (part-time) (since 2013), The Chinese University of Hong Kong; Private Investor and Partner (since 2012), FAA Investments (financial holding company); Managing Director, Asia Region, and Head of Global Markets Investment Products & db-X (2010–2012), Deutsche Bank AG (financial services); Managing Director, Equity Risk Management Products, and Head of Intermediary Business (2002–2010), UBS AG (financial services); Vice President, Global Markets & Investment Bank (2000–2002), Vice President, International Private Clients Group (1997–2000), Associate, Debt and

Equity Markets Group (1995–1997),

Merrill Lynch & Co., Inc. (brokerage

and investment management).

   19    Director (since 2015), Matthews A Share Selections Fund, LLC (2 Portfolios); Director (since 2013), Asian Masters Fund (Australia) (1 Portfolio); Trustee (since 2013), African Wildlife Foundation; Trustee (since 2010), Oakland Museum of California

GALE K. CARUSO

Born 1957

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Trustee

   Since 2015    Formerly President and Chief Executive Officer (1999–2003), Zurich Kemper Life (life insurance and annuities); Chairman, President and Chief Executive Officer (1994–1999), Scudder Canada Investor Services, Ltd. (investment management); Managing Director (1986–1999), Scudder Kemper Investments, Inc. (investment management).    19   

Director (since 2015), Matthews A Share Selections Fund, LLC (2 portfolios); Trustee (since 2006), Pacific Select Fund (58 Portfolios) and Pacific Life Funds (33 Portfolios); Director (2005–2012), Make-A-Wish Foundation of Maine; Director

(2005–2009), LandAmerica Financial

Group, Inc.; Director (2001–2003),Make- A-Wish of Northern Illinois; former member of the Board of Directors, Illinois Life Insurance Council.

Name, Year of Birth,

Address and Position(s)

Held with Trust

   Term of
Office and
Length of
Time Served1
   Principal Occupation(s) During Past 5 Years   

Number of

Portfolios in

Fund Complex

Overseen by

Trustee

   Other Trusteeships/Directorships (number of
portfolios) Held by Trustee
INTERESTED TRUSTEES2         

G. PAUL MATTHEWS

Born 1956

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Trustee

   Since 2007    Director (since 1996), Chairman (1996–2009), Managing Member (1996–2016), Portfolio Manager (1996–2012), Chief Investment Officer (1991–2007), Matthews (investment management); President (1994–2007), Matthews International Funds (registered investment company).    19    Director (since 2013), Matthews A Share Selections Fund, LLC (2 Portfolios); Director (since 2004), Matthews Asian Selections Funds PLC (Ireland) (1 Portfolio); Trustee (2001–2004) and Trustee and Chairman of Board (1994–1998), Matthews International Funds (7 Portfolios).

WILLIAM J. HACKETT

Born 1967

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Trustee and

President

   President since 2008 and Trustee since 2015    Chief Executive Officer (since 2009), President and Secretary (since 2007), Matthews (investment management); President (since 2013), Matthews A Share Selections Fund, LLC (registered investment company); Director (since 2010), Matthews Global Investors S.à r.l. (Luxembourg) (investment management); Director (since 2010), Matthews Global Investors (Hong Kong) Limited (investment management); Partner (2002–2007), Deloitte & Touche, LLP (accounting).    19    Chairman (since 2010), Matthews Asia Funds SICAV (Luxembourg) (13 Portfolios); Director (since 2009), Matthews Asian Selections Funds, PLC (Ireland) (1 Portfolio).

 

1 Each trustee serves for an indefinite term, until retirement age or until his/her successor is elected. Officers serve at the pleasure of the Board of Trustees.
2 A trustee is considered an “interested person” of the Trust as defined under the 1940 Act because of an ownership interest in the Advisor or an office held with the Trust or the Advisor.

 

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Name, Year of Birth,

Address and Position(s)

Held with Trust

  

Term of Office

and Length of

Time Served1

   Principal Occupation(s) During Past 5 Years   

Other Trusteeships/

Directorships

(number of

portfolios)

Held by Officer

OFFICERS WHO ARE NOT TRUSTEES   

ROBERT J. HORROCKS, PHD

Born 1968

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Vice President

   Since 2009    Chief Investment Officer (since 2009), Director of Research (2008–2009), Matthews (investment management); Head of Research (2006–2008), Mirae Asset Management (investment management); Chief Investment Officer (2003–2006), Everbright Pramerica (investment management).    None

JOHN P. McGOWAN

Born 1964

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Vice President and

Secretary

   Since 2005    Senior Vice President of Business Administration (since 2009), Chief Administrative Officer (2007–2008), Chief Operating Officer (2004–2007), Matthews (investment management); Vice President and Secretary (since 2013), Matthews A Share Selections Fund, LLC (registered investment company); Director (since 2010), Matthews Asia Funds SICAV (Luxembourg) (investments); Director (since 2010), Matthews Global Investors S.à r.l. (Luxembourg) (investment management); Director (since 2004), Matthews Asian Selections Funds, PLC (Ireland) (investments).   

Director,

Matthews Asian

Selections Funds

Plc (1 Portfolio);

Director,

Matthews Asia

Funds SICAV (Luxembourg) (13 Portfolios).

SHAI A. MALKA

Born 1973

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Treasurer

   Since 2005    Vice President of Fund Accounting and Operations (since 2010), Senior Manager of Fund Accounting and Operations (2004–2009), Matthews (investment management); Treasurer (since 2013), Matthews A Share Selections Fund, LLC (registered investment company).    None

DAVID MONROE

Born 1963

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Vice President

   Since 2014    General Counsel (since 2015), Deputy General Counsel (2014), Matthews (investment management); Chief Legal Officer (2006–2013), Nikko Asset Management Co., Ltd. (investment management).    None

MANOJ K. POMBRA

Born 1964

Four Embarcadero Center

Suite 550

San Francisco, CA 94111

Chief Compliance Officer

and Anti-Money

Laundering Officer

   Since 2005    Chief Compliance Officer and Anti-Money Laundering Officer (since 2005), Matthews (investment management); Senior Manager, Mutual Fund Compliance/Manager Portfolio Compliance (2001–2005), Franklin Templeton Investments (investment management).    None

 

1 Each trustee serves for an indefinite term, until retirement age or until his/her successor is elected. Officers serve at the pleasure of the Board of Trustees.

 

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Matthews Asia Funds    

INVESTMENT ADVISOR

Matthews International Capital Management, LLC

Four Embarcadero Center, Suite 550

San Francisco, CA 94111

800.789.ASIA

 

CUSTODIAN

Brown Brothers Harriman & Co.

50 Milk Street

Boston, MA 02109

 

ACCOUNT SERVICES

Matthews Asia Funds

P.O. Box 9791

Providence, RI 02940

800.789.ASIA

 

LEGAL COUNSEL

Paul Hastings LLP

55 Second Street, 24th Floor

San Francisco, CA 94105

 

LOGO

 

P.O. Box 9791  |  Providence, RI 02940  |  matthewsasia.com  |  800.789.ASIA (2742)

 

Matthews Asia Funds are distributed in the United States by Foreside Funds Distributors LLC, Berwyn, Pennsylvania

Matthews Asia Funds are distributed in Latin America by HMC Partners

 

LOGO

 

AR-1215-192M


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Item 2. Code of Ethics.

 

  (a)

The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party.

 

  (c)

There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description.

 

  (d)

The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item’s instructions.

Item 3. Audit Committee Financial Expert.

 

  (a)

As of the end of the period covered by the report, the registrant’s board of directors has determined that the registrant has two audit committee financial experts serving on its audit committee, Toshi Shibano and Jonathan F. Zeschin, and that both are “independent.”

 

  (b)

Prof. Shibano is a member of the Faculty of the General Electric Corporate Leadership Development Center and also serves as Executive Education Lecturer at the Haas School of Business at the University of California, Berkeley. He was an Adjunct Professor at the Columbia Graduate School of Business and has served on the faculties of Thunderbird American Graduate School of International Management, Stanford Graduate School of Business, the University of Chicago School of Business and the Australian Graduate School of Management at the University of New South Wales. He regularly reviews current research in accounting both for use in instruction of courses and for internal faculty evaluation. He has experience analyzing and evaluating financial statements at the appropriate level of complexity through his professional activities on the educational faculties referenced above.


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Prof. Shibano also has extensive experience in executive education worldwide (Hong Kong, Taiwan, Singapore, Finland, Italy, Mexico, India) and has developed innovative new programs in financial analysis, management control systems and strategy implementation. Prof. Shibano has published in the Journal of Accounting Research, the Journal of Accounting and Economics, the Rand Journal of Economics, and the Journal of Applied Corporate Finance, on the topics of strategic audit risk, accounting standard setting, international accounting standards, tax minimization, foreign currency risk management, and organizational structure. Prof. Shibano received his MBA from the Haas School at UC Berkeley and earned his PhD at the Stanford Graduate School of Business, earning the highest academic honors in both programs. Prof. Shibano has gained additional accounting expertise as the Audit Committee Chair of Matthews International Funds.

 

      

Mr. Zeschin is Partner of Essential Investment Partners, LLC, a wealth management and investment advisory firm. He is also the portfolio manager for that firm’s Essential Growth Portfolio. Essential Investment Partners, LLC succeeded to the business of Essential Advisers, Inc. He is Managing Partner of JZ Partners, LLC, a business consulting firm for investment managers. Prior to forming Essential Advisers, Inc., Mr. Zeschin held senior executive positions with Founders Asset Management, Inc., Invesco Fund Group, and Stein Roe & Farnham, Inc. Mr. Zeschin holds a Masters of Management from the Kellogg School at Northwestern University, with majors in Finance and Marketing, and a Bachelor in Business Administration in Accounting with distinction from the University of Michigan. He holds a Certified Public Accountant certificate from the state of Illinois and is a Certified Financial Planner certificant. Mr. Zeschin is a former chair of the ICI’s Accounting Treasurer’s Committee and a former member of the AICPA Investment Companies committee. Mr. Zeschin is currently the chairman of the Board of Trustees to two NYSE listed closed-end funds. He has served on the audit committees of mutual fund boards since 2002. He has experience analyzing and evaluating financial statements at the appropriate level of complexity through his professional activities on the educational faculties referenced above. Mr. Zeschin has gained additional expertise as a member of the Audit Committee of Matthews International Funds.

Item 4. Principal Accountant Fees and Services.

Audit Fees

 

  (a)

The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $446,520 in 2014 and $525,698 in 2015.

Audit-Related Fees

 

  (b)

The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item are $0 in 2014 and $0 in 2015.


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Tax Fees

 

  (c)

The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $114,858 in 2014 and $124,963 in 2015. Tax fees include services provided by the principal accountant for tax return preparations.

All Other Fees

 

  (d)

The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 in 2014 and $0 in 2015.

 

(e)(1)

Disclose the audit committee’s pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.

Pre-Approval of Auditor Services.

Pre-Approval Requirements. Before the Auditor is engaged by the Trust to render audit related or permissible non-audit services, either:

 

  (i)

The Audit Committee shall pre-approve all audit related services and permissible non-audit services (e.g., tax services) to be provided to the Trust; or

 

  (ii)

The Audit Committee shall establish policies and procedures governing the Auditor’s engagement. Any such policies and procedures must (1) be detailed as to the particular service and (2) not involve any delegation of the Audit Committee’s responsibilities to the Adviser. The Audit Committee may delegate to one or more of its members the authority to grant pre-approvals. The pre-approval policies and procedures shall include the requirement that the decisions of any member to whom authority is delegated under this Section 4(e) shall be presented to the full Audit Committee at its next scheduled meeting.

De Minimis Exceptions to Pre-Approval Requirements. Pre-approval for a service provided to the Trust other than audit, review or attest services is not required if: (1) the aggregate amount of all such non-audit services provided to the Trust constitutes not more than 5 percent of the total amount of revenues paid by the Trust to the Auditor during the fiscal year in which the non-audit services are provided; (2) such services were not recognized by the Trust at the time of the engagement to be non-audit services; and (3) such services are promptly brought to the attention of the Audit Committee and are approved by the Audit Committee or by one or more members of the Audit Committee to whom authority to grant such approvals has been delegated by the Audit Committee.

Pre-Approval of Non-Audit Services Provided to the Adviser and Certain Control Persons. With respect to services that have a direct impact on the operations or financial reporting of the Trust, the Audit Committee shall pre-approve all such non-audit services proposed to be provided by the Auditor to (i) the Adviser and (ii) any entity controlling, controlled by, or under common control with the Adviser that provides ongoing services to the Trust.


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Application of De Minimis Exception: The de minimis exceptions set forth above under Section 4(e)(ii) apply to pre-approvals under this Section 4(e)(iii) as well, except that the “total amount of revenues” calculation for Section 4(e)(iii) services is based on the total amount of revenues paid to the Auditor by the Trust and any other entity that has its services approved under this Section (i.e., the Adviser or any control person).

 

(e)(2)

The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:

(b) Not applicable.

(c) 100%.

(d) Not applicable.

 

  (f)

The percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was 0%

 

  (g)

The aggregate non-audit fees billed by the registrant’s accountant for services rendered to the registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant was $466,862 in 2014 and $353,683 in 2015.

 

  (h)

The registrant’s audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.

Item 5. Audit Committee of Listed Registrants.

Not applicable.

Item 6. Investments.

 

(a)

Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form.


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(b) Not applicable.

 

Item 7.   Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

 

Item 8. Portfolio

Managers of Closed-End Management Investment Companies.

Not applicable.

 

Item 9.   Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.

Item 11. Controls and Procedures.

 

  (a)

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

  (b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.


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Item 12. Exhibits.

 

  (a)(1)    Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto.
  (a)(2)    Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
  (a)(3)    Not applicable.
  (b)    Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.

 

(12.other) Not applicable.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant)                            Matthews International Funds                                              
By (Signature and Title)*     /s/ William J. Hackett                                                            
         William J. Hackett, President  
         (principal executive officer)  
Date      3/8/2016                                                                                                                    

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)*     /s/ William J. Hackett                                                           
         William J. Hackett, President  
         (principal executive officer)  
Date      3/8/2016                                                                                                                 

By (Signature and Title)*     /s/ Shai Malka                                                                     

 
         Shai Malka, Treasurer  
         (principal financial officer)  
Date      3/8/2016                                                                                                                 

 

*  Print the name and title of each signing officer under his or her signature.