Portfolio Targets. Matthews typically sets portfolio targets across key parameters including currency, interest rate exposure, credit exposure, and asset type. Currency decisions are driven by the appreciation or depreciation potential of particular currencies. Duration decisions are made by comparing relative interest rates, the strategy employed to achieve that duration, and anticipated changes in relative interest rates. Credit allocation decisions are made by overweighting or underweighting exposures to different credit qualities. Finally, asset allocation decisions are made based on the relative attractiveness of various asset classes including sovereign, corporate, and convertible securities.
Idea Generation. After setting portfolio targets, Matthews typically generates investment ideas internally through its focus on the fundamentals of securities, issuers and markets. Matthews identifies a core investable universe consisting primarily of instruments issued by governments, quasi-governmental entities, supra-national institutions and companies in the Asian region. This universe may include instruments denominated in local currencies and other currencies (including U.S. dollars, euro, Chinese yuan, British pound and Japanese yen). Matthews narrows this investable universe based on a fundamental analysis of the issuer. For corporate issuers, this includes a financial statement analysis of cash flows, profit margins, leverage and other factors. For governmental and quasi-governmental issuers, Matthews’ analysis includes debt sustainability factors, inflation and currency stability.
Issuer Selection. After narrowing the investable universe, Matthews conducts a deeper review of issuers and securities to address the critical uncertainties that may surround an investment opportunity. For corporate bonds, Matthews considers the sustainability of the issuer’s capital structure in the context of its business model. The process typically involves an analysis of financial statements, meetings with management and stakeholders, and a review of the legal, regulatory and competitive environments in which the issuer operates and the security is issued. The analogous process for governmental, quasi-governmental and supra-national issues includes an analysis of fundamental factors, which may include consumption trends, investments, government spending, exports, imports, employment, credit growth, inflation, monetary policy, currency stability, debt sustainability, political development and stability, and legal, regulatory and market structures.
Security Selection. The primary driver of security selection is Matthews’ relative conviction along the key dimensions of credit, interest rate, and currency. For issuers of whom Matthews has developed a favorable investment thesis along all three dimensions, Matthews may hold local-currency denominated and/or foreign-currency denominated bonds of the same underlying issuer. Matthews seeks to identify securities of an issuer (whether governmental, quasi-governmental or corporate) that will help Matthews achieve each strategy’s investment objective within the context of its overall portfolio construction. Relative value analysis is another critical component in security selection. Relative value analysis seeks to identify securities that are undervalued or overvalued: (i) compared to securities of similar issuers, (ii) compared to securities of the same issuer at different parts of the yield curve, and (iii) compared to securities of the same issuer in different parts of the issuer’s capital structure.
Although we seek to develop the conviction to invest in issuers for the long term, many factors may result in selling a security. These factors include client needs for liquidity, economic, political or market events (e.g., changes in financial or credit conditions or military action), changes in relative valuation (to both an issuer's growth prospects and to other issuers) or management malfeasance or other unethical conduct. We constantly monitor valuations in the context of growth expectations and we typically will trim positions where valuations have risen significantly, rather than sell a holding outright. Generally, our long-term investment horizon leads to reduced portfolio turnover.