In the Matthews Emerging Markets Equity Fund, we are looking for companies that can adapt and thrive across a broad range of conditions, so our approach to identifying good companies has remained consistent. There are five key attributes of companies that we generally like. We call these the “Five Cs”—competitive position, capital allocation, capital structure, cash flow and character. These attributes help us determine whether the business is being run appropriately for the long term, including for shareholders like ourselves who are not in a control position. 2020 taught us that things can change in ways that aren't easily forecast or perceived and underscored the importance of the quality of companies’ business models and management teams. So our focus is really on quality companies who are capable of managing the volatility that is inherent in emerging markets economies. We also seek to maintain a portfolio construction that is diversified given the inherent difficulty of predicting the future.
How do you generate new ideas and conduct research when physical travel is limited?
Idea generation can come from multiple places. First, it can come from looking at companies who are related to our existing holdings like competitors, suppliers or customers. Colleagues who work directly on our emerging markets strategies, as well as the broader Matthews Asia investment team, are also a great source of idea generation. Finally, just reading and thinking broadly is important. We don't need one hundred good ideas at the same time; we really need four or five great ideas to pursue in any given time period.
During the pandemic, our analysis of companies transitioned to virtual meetings with companies due to travel restrictions. In my experience, investment management is often a fairly introverted activity, and so our ability to research and concentrate wasn't really effected by the virtual environment. What I think the virtual environment did do is to somewhat rearrange the research process. Previously, we might go to a country, such as South Korea, and we might meet a financial services company one day and a semiconductor company the next. In the virtual environment, it's been a little bit easier to say, "Let's focus a little bit more thematically. Let's meet five different food retailers in five different geographies and see what they do similar, what they do different." So there are certain advantages to the virtual environment. From my perspective, the year was successful in terms of adapting to the virtual environment, but we’re hoping to get back on the road again soon.
What trends did you notice that were accelerating in the pandemic?
In looking at our investment universe, we tried to determine which companies would either benefit or see their business not disproportionately impacted by the global pandemic. That led us to a few sectors where we saw natural acceleration in the businesses - e-commerce, for instance, or certain software providers. The key now is to sort those companies into the ones whose competitive advantage was changed in a catalytic, structural sense.