A strong management team and sound investment process underpin Matthews China Discovery Active ETF's Morningstar Medalist Rating of Bronze. The portfolio maintains a sizable cost advantage over competitors, priced within the second-lowest fee quintile among peers.  

 The strategy’s management team earns an Above Average People Pillar rating. The strategy's sensible investment philosophy earns an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight liquidity exposure and momentum exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And momentum exposure is rooted in holding stocks currently on a winning streak. The strategy's parent organization earns the firm an Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

ACM Research

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. Matthews China Discovery Active ETF earns an Above Average Process Pillar rating. 

The main contributor to the rating is its parent firm's excellent long-term risk-adjusted performance, as shown by the firm's average 10-year Morningstar Rating of 3.7 stars. The parent firm's five-year risk-adjusted success ratio of 57% also bolsters the process. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median Morningstar Risk-Adjusted Return for the period. Their compelling success ratio suggests that the firm does well for investors and that this fund may benefit from that. Lastly, the process is limited by the parent firm's five-year retention rate of 50%, which suggests it could do more to retain its portfolio managers.

 This strategy leans toward smaller, more growth-oriented companies than its average peer in the China Region Morningstar Category. Looking at additional factor exposure, this strategy has consistently tilted toward companies with relatively higher trading volumes in the last few years. This gives the managers more flexibility during bear markets to sell without adversely affecting prices. In recent months, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. This strategy has also demonstrated more exposure to high-momentum stocks over peers in recent years. Momentum is based on the premise that market outperformers will continue to outperform, and laggards will continue to lag. This means that managers are overweighting stocks currently on a winning streak. Compared with category peers, the strategy also had more exposure to the Momentum factor in the most recent month. During the last few years, this strategy has also tilted in favor of high-quality stocks, those that have demonstrated low financial leverage and solid return on equity. This means the fund holds consistently profitable, growing companies with solid balance sheets that may help it endure downturns better than Morningstar Category peers. In this month, the strategy also had more exposure to the Quality factor over its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio is overweight in industrials and real estate relative to the category average by 11.9 and 6.0 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and communication services, underweight the average by 13.8 and 11.8 percentage points of assets, respectively. The strategy owns 53 securities and is less top-heavy than peers. Specifically, 33.2% of the portfolio's assets are concentrated within the top 10 fund holdings, compared to the category’s 36.3% average.

Above Average

Process

Matthews China Discovery Active ETF earns an Above Average People Pillar rating. The team is backed by Andrew Mattock, the longest-tenured manager on the strategy, who provides 18 years of listed portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 3.7 stars, indicating that their risk-adjusted returns exceeded the category average. Despite having a small team, the two listed managers boast 14 years of listed portfolio management experience. As a team, they manage four investment vehicles together, with a Bronze asset-weighted average Morningstar Medalist Rating, indicating the potential to deliver positive alpha in aggregate. 

 Note: The People Pillar rating is indirectly assigned by an analyst. The longest-tenured manager of the fund also manages a different product rated by an analyst. Their analyst-assigned People Pillar rating is combined here with the People scores (algorithmic or analyst-assigned) for the fund’s other managers on a tenure-weighted basis.

People

Matthews International Capital Management still has strengths, but a transforming strategy roster, personnel turnover, and a big decline in assets warrant a drop of its Parent rating to Average from Above Average.

Matthews has a long history of success with funds that focus on Asian equities, but it has overhauled its strategy roster in recent years. Since early 2020, it has liquidated three funds, merged another away, launched its first diversified emerging-markets fund, and converted two of its Asia funds into diversified emerging-markets offerings. It also has opened four active exchange-traded funds in the past 12 months. That's a lot of change, and the firm is unproven in the diversified emerging-markets arena, though the fact that Asian stocks dominate the emerging-markets universe is grounds for optimism.
 
Matthews still has 30 individuals—excluding portfolio strategists and traders—on its investment team, and many are seasoned and skilled. But the firm has lost quite a few managers and analysts since the start of 2020, and the investment team is much smaller than it was. Further, its management team has had notable departures and retirements, such as former CEO William Hackett. Fundholders have pulled sizable amounts from Matthews' funds in recent years, and assets under management fell to $12 billion as of May 31, 2023, from $27 billion as of Dec. 31, 2019.

Average

Parent

Matthews China Discovery Active ETF

MCHS is actively managed, seeking long-term capital appreciation through investments in small- and mid-cap stocks of Chinese companies with perceived sustainable growth potential.

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