Investment Manager Report

October 2011

Dear Fellow Shareholders,

How has the recent bear market affected our investment views for Asia? Are there opportunities we can now seize upon? These questions naturally spring to investors’ minds at times like this. Economic volatility over the past six months has led to declines in Fund performance and sell-offs in the marketplace. However, we take some comfort in the fact that our Funds outperformed their respective benchmarks. As long-term investors, we tend not to place too much emphasis on managing the short-term volatility of the Funds in a daily fashion. We place more emphasis on investing in businesses and securities that we believe can best weather sudden, painful draw-downs caused by investors with shorter-term goals.

The fall in markets over the past three months has been due to various factors: first, Europe’s sovereign debt problems have been the proximate catalyst. These factors have created a consensus that Greece will indeed default. Secondly, compounding these issues, has been a renewed slowdown of the economies of Europe and the U.S. Most of the issues that Asian markets are dealing with recently are not of their own making. Is Asia the baby being thrown out with the bathwater?

I believe the answer is that Asia’s treatment at the hands of global investors may be a little excessive, but is not entirely unfair. After all, Asia came through its own crisis in 1997–98 understanding that it needed to do more to develop its own domestic capital markets—particularly bond markets—but has taken only small steps in that direction. The fear rippling over from Europe also comes at a time when Asian countries are stepping on the monetary brakes.

On the other hand, yes, Asia’s growth prospects are much brighter than those in the West. They are brighter because Asia has shown itself capable of growing productivity at faster rates of growth than any other region of the world. This is partly because they are starting from a lower base. But it is also because they have put in place enough of the right kinds of institutions and market incentives to encourage profitable growth.

Our strategy is to try to tap into these sources of growth. A significant part of the relative performance of our Funds has been our focus on buying businesses for the long term—trying to identify those corporations that grow core earnings or dividends at a reasonable rate and with greater certainty over extended periods of time. We believe these companies are able to attract support in the market in uncertain times. We will not change our stock selection strategy just because of the dislocation in the markets, but we will look more closely at those opportunities that we may have passed over previously because valuations appeared too high.

Asia’s markets began the year with some growth prospects but valuations that offered no protection against bad news. Recent events have simply brought into greater relief the risks that we already knew the global economy was facing. Thus, Asia’s markets appear to be starting the final quarter of the year with still solid, long-run growth prospects, but at valuations that are much cheaper as investors are now more nearsighted than they were in January. Today’s problems have become the focus of analysis and commentary; tomorrow’s opportunities seem to have slipped from view.

As always, we are privileged to serve as your investment advisor.

Robert Horrocks, PhD
Chief Investment Officer
Matthews International Capital Management, LLC