* As a percentage of net assets as of December 31, 2004 ** Nonincome producing security. *** Valued at fair value under direction of the Board of Trustees (Note 1A) **** Cost for Federal tax purposes is $178,945,793 and net unrealized appreciation consists of:UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIESInvestment 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)G. Paul Matthews, President
Four Embarcadero Center, Suite 550
San Francisco, CA 94111
(Name and address of agent for service)Registrants telephone number, including area code: 415-788-6036
Date of fiscal year end: December 31
Date of reporting period: December 31, 2004
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, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
The Report to Shareholders is attached herewith.
Matthews Asian Funds
ANNUAL REPORT
DECEMBER 31, 2004
Pacific Tiger Fund
Asian Growth and Income Fund
Korea Fund
China Fund
Japan Fund
Asian Technology Fund
Asia Pacific Fund
Matthews Asian Funds
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A Decade in Asia
Investing in the future
of Asia since 1994
www.matthewsfunds.com
It is important to keep in mind that the views expressed in this report by the Investment Advisor and its portfolio managers should not be construed as investment advice or promises, and may not be relied upon as an indication of trading intent on the part of any of the Matthews Asian Funds.![]()
C O N T E N T S
Message to Shareholders 2 Redemption Fee Policy and Investor Disclosure 5 Morningstar Ratings and Analysis 6 Manager Comments, Performance and
Schedule of Investments: Matthews Pacific Tiger Fund 8 Matthews Asian Growth and Income Fund 12 Matthews Korea Fund 18 Matthews China Fund 24 Matthews Japan Fund 30 Matthews Asian Technology Fund 36 Matthews Asia Pacific Fund 40 Disclosure of Fund Expenses 46 Statement of Assets and Liabilities 48 Statements of Operations 50 Statements of Changes in Net Assets 54 Financial Highlights 58 Notes to Financial Statements 65 Tax Information 73 Report of Independent Registered Public
Accounting Firm 74 Trustees and Officers 75
M E S S A G E T O S H A R E H O L D E R S
FROM THE INVESTMENT ADVISOR
Dear Shareholder,
It is with pleasure that we enclose the first calendar-year annual report of the Matthews Asian Funds following the change of the Funds fiscal year-end from August 31 to December 31. The calendar year just ended was in general a positive period for investors in Asia. The regions economies exhibited strong growth, and most stock markets in the region responded positively. For the year, the MSCI All Country Asia Pacific Free Index gained 18.59% and the MSCI All Country Far East Free ex-Japan Index gained 17.60%. These two indices are broadly representative of the regions equity market performance, expressed in U.S. dollars.
For the seven funds that comprise the Matthews Asian Funds, returns ranged from a gain of 3.88% for the Matthews China Fund to a gain of 23.49% for the Matthews Korea Fund. The Matthews China Funds performance was affected by concerns that after several years of strong growth, the growth rate of mainland Chinas economy would slow in 2004. Although this did not turn out to be the case, investors were wary during the year, and the securities markets associated with China did not fare as well as the broader Asian equity markets. The Matthews China Fund, which invests in companies listed in Hong Kong as well as those elsewhere whose earnings are primarily derived from China, outperformed the MSCI China Free Index during the year but did not outperform its peer group, which includes a number of funds that focus on a broad range of greater China countries. 2004 was also a year in which Japans economy appeared to sustain its recovery following a long period of economic underperformance and, overall, Japan provided a positive contribution to the Asia regions performance.
We are particularly pleased that the first two funds in the fund familys series, the Matthews Pacific Tiger Fund and the Matthews Asian Growth and Income Fund (which is closed to most new investors), are now able to report ten-year performance, both having celebrated their ten-year anniversaries in September 2004. We are also pleased
You will note with this report that Matthews Asian Funds has changed its reporting year to coincide with calendar quarter and year-ends, from our previous fiscal year ended August 31. While this report may physically resemble one that you received just a few months ago, note that it reports on both the four-month period and the full year that ended on December 31, 2004. We recognized that a calendar year-end may provide our shareholders with more consistency with their other holdings as well as ease in comparing performance against other investments.
2 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4 n
that the returns for both Funds were positive for the ten-year period ended December 31, 2004, and that both are among the leaders in their peer group, the Lipper Pacific ex-Japan Funds category, as shown below.
Lipper Pacific ex-Japan Funds
Category Rankings
For the following periods ended 12/31/04
Matthews Pacific Tiger FundOne year 5 out of 56 funds Five year 5 out of 41 funds Ten year 2 out of 16 funds Since inception* 3 out of 15 fundsMatthews Asian Growth and Income Fund
(closed to most new investors)One year 7 out of 56 funds Five year 1 out of 41 funds Ten year 1 out of 16 funds Since inception* 1 out of 15 funds --------------------------------------------------------------------------- * The inception date for both Funds was 9/12/94; however, the Lipper category average is calculated from 8/31/94, the closest calendar month-end to the Funds inception date. Lipper rankings are based on total return with dividends reinvested and do not take into account or reflect sales charges.While the growth rate of individual countries in Asia has varied over the years, we believe that the long-term trend toward rising personal incomes in the region should benefit industries and sectors that derive their earnings from local demand, and many of our regionally diversified portfolios have been positioned accordingly. We also believe that our focus on consumer-related industries in Asia contributed positively to the Funds
G. Paul Matthews Chairman and Chief Investment Officer (left)
Mark W. Headley President and Portfolio Managerabsolute and relative performance in both the current reporting period and over the longer term.
With the continuing growth of the economy of mainland China in recent years and the slow recovery of Japan, the prospects for the region appear relatively bright. But as always, we wish to draw investors attention to the many risks and challenges that still confront the region and that will undoubtedly continue to contribute to the volatility of Asias financial markets.
In our opinion, the opening of Chinas financial markets and currency to the outside world remains one of the regions greatest challenges. The possibility of China revaluing its currency weighed on the minds of
800.789.ASIA [2742] www.matthewsfunds.com 3
M E S S A G E T O S H A R E H O L D E R S
investors in 2004. Needless to say, this is a complicated issue and one that we believe should continue to be at the forefront in 2005. The rising price of oil also presents a particular concern for a region that depends on imported energy. The recent fluctuation in the value of the U.S. dollar also creates uncertainties for regional companies. Political developments in Asia are increasingly affected by Chinas growing economic power, which is creating tensions that will have to find some resolutionmost notably in the area of cross-straits relations with Taiwan. Negotiations between North Korea, the United States and six other Asian countries over North Koreas nuclear ambitions provide a further source of uncertainty.
In spite of these and other risks, we continue to believe that the region offers the prospect of strong long-term economic performance. With this in mind, we have been adding to our team of research analysts and portfolio managers, all of whom are focused on the Asian region.
An overview of the year in Asia would not be complete without acknowledging the devastating December 26th earthquake and tsunami in southeast Asia that left overwhelming death and destruction in its wake. Our thoughts are with those who suffered losses in this tragedy. As horrifying as it was, however, it does not appear to have had a significant impact on the economic foundations of the countries in which the Funds invest.
While many uncertainties remain in the region, we are generally encouraged by the continued opening of Asias economies to trade and investment, and we believe that the long-term prospects for the region remain attractive.
Thank you for your continued support of the Matthews Asian Funds.
G. Paul Matthews
Chairman and Chief Investment Officer
Matthews International Capital Management, LLC
Mark W. Headley
President and Portfolio Manager
Matthews International Capital Management, LLCFree e-mail communications on Asia and the Funds are available at www.matthewsfunds.com
n Asia Weekly
n Asia Insight (monthly)
n AsiaNow Special Reports
n Occasional Fund Updates4 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4 n
REDEMPTION FEE POLICY
The Funds assess a redemption fee of 2.00% of the total redemption proceeds if you sell or exchange your shares within 90 days after purchasing them. The redemption fee is paid directly to the Funds and is designed to offset transaction costs associated with short-term trading of Fund shares. The redemption fee does not apply to redemptions of shares held in certain omnibus accounts and retirement plans that cannot currently implement the redemption fee. While these exceptions exist, the Funds are not accepting any new accounts which cannot implement the redemption fee. In addition, the Funds are actively discussing a schedule for implementation of the fee with these providers. For more information on this policy, please see the Funds prospectus.INVESTOR DISCLOSURE
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 markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. 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. Fund Holdings: The Fund holdings shown in this report are as of December 31, 2004. 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 SEC for the first and third quarters of each fiscal year on Form N-Q, the first of which was filed for the quarter ended November 30, 2004. The Funds Form N-Q is available on the SECs website at www.sec.gov and may be reviewed and copied at the Commissions Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Matthews Asian Funds publishes quarterly reports containing the information filed in the form N-Q, copies of which may be obtained by visiting the Funds website at www.matthewsfunds.com or by calling 1-800-789-ASIA [2742]. Proxy Voting Record: The Funds Statement of Additional Information (SAI) containing a description of the policies and procedures that the Matthews Asian Funds use to determine how to vote proxies relating to portfolio securities, along with each Funds proxy voting record relating to portfolio securities held during the 12-month period ended June 30, 2004, is available upon request, at no charge, at the Funds website at www.matthewsfunds.com or by calling 1-800-789-ASIA [2742], or on the SECs website at www.sec.gov.
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. Returns are net of the Funds management fee and other operating expenses. 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 www.matthewsfunds.com.This report is submitted for the general information of the shareholders of the Matthews Asian Funds. It is authorized for distribution only if preceded or accompanied by a current Matthews Asian Funds prospectus. Additional copies of the prospectus may be obtained by calling 800-789- ASIA [2742] or can be downloaded from the Funds website at www.matthewsfunds.com. Please read the prospectus carefully before you invest or send money, as it explains the risks, fees and expenses of investing in the Funds.
The Matthews Asian Funds are distributed by PFPC Distributors, Inc., 760 Moore Road, King of Prussia, PA 19406.
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MORNINGSTAR RATINGS
Derived from a weighted average of a funds three-, five- and ten-year (if applicable) risk-adjusted returns.
Matthews Pacific Tiger Fund
Overall Morningstar rating as of 12/31/04 out of 68 Pacific/Asia ex-Japan Funds
Matthews Asian Growth and Income Fund
(Closed to most new investors)
Overall Morningstar rating as of 12/31/04 out of 68 Pacific/Asia ex-Japan Funds
Matthews Korea Fund
Overall Morningstar rating as of 12/31/04 out of 68 Pacific/Asia ex-Japan Funds
Matthews China Fund
Overall Morningstar rating as of 12/31/04 out of 68 Pacific/Asia ex-Japan Funds
Matthews Japan Fund
Overall Morningstar rating as of 12/31/04 out of 37 Japan Funds
Matthews Asian Technology Fund
Overall Morningstar rating as of 12/31/04 out of 265 Specialty-Technology Funds
Investing in foreign securities may involve certain additional risks including exchange rate fluctuations, reduced liquidity, greater volatility, and less regulation. Past performance does not guarantee future results. Investment return and principal value of mutual funds will vary with market conditions, so that shares, when redeemed, may be worth more or less than their original cost. As of 12/31/04, the 1-year total return for the Matthews Pacific Tiger Fund was 23.34%, the 5-year average annual total return was 8.66%, the 10-year average annual return was 7.38% and since inception (9/12/94) the average annual total return was 6.61%. As of 12/31/04, the Matthews Pacific Tiger Fund received an Overall Morningstar RatingTM of 4 stars out of 68 funds in the Pacific/Asia ex-Japan stock category, 4 stars out of 68 funds for the 3- year period, 4 stars out of 58 funds for the 5-year period, and 4 stars out of 22 funds for the 10-year period. As of 12/31/04, the 1-year total return for the Matthews Asian Growth and Income Fund was 21.44%, the 5- year average annual total return was 16.82%, the 10-year average annual return was 11.99% and since inception (9/12/94) the average annual total return was 11.37%. As of 12/31/04, the Matthews Asian Growth and Income Fund received an Overall Morningstar RatingTM of 5 stars out of 68 funds in the Pacific/Asia ex-Japan stock category, 4 stars out of 68 funds for the 3-year period, 5 stars out of 58 funds for the 5-year period, and 5 stars out of 22 funds for the 10-year period. As of 12/31/04, the 1-year total return for the Matthews Korea Fund was 23.49%, the 5-year average annual total return was 7.51% and since inception (1/3/95) the average annual total return was 2.09%. As of 12/31/04, the Matthews Korea Fund received an Overall Morningstar RatingTM of 2 stars out of 68 funds in the Pacific/Asia ex-Japan stock category, 4 stars out of 68 funds for the 3-year period, 3 stars out of 58 funds for the 5-year period, and 1 star out of 22 funds for the 10-year period. As of 12/31/04, the 1-year total return for the Matthews China Fund was 3.88%, the 5-year average annual total return was 12.33% and since inception (2/19/98) the average annual total return was 7.58%. As of 12/31/04,
6 MATTHEWS ASIAN FUNDS
MORNINGSTAR ANALYST REPORT
Matthews Pacific Tiger Fund
Emerging Asia fans who ignore Matthews Pacific Tiger are making a mistake.
Topnotch management gives this fund a superior foundation. Mark Headley has been involved with Asian investments for more than 15 years, including eight years as a manager here. Paul Matthews is even more experienced. He has been running Asia money for 22 years and managing this fund for 10 years. Headley and Matthews are assisted by five veteran investment professionals, and they are looking to add a well-tested India analyst in the coming months. In short, the fund boasts one of the deepest and most seasoned teams in its category.
The fund also has relatively low costs. Fees have declined in recent years as assets have grown, and for the nine months ending May 31, it had an annualized expense ratio of 1.49%nearly 40 basis points lower than that of the average retail, no-load fund in its group. Headley and Matthews tend to move at a measured pace, and that limits trading costs, which are high in emerging markets and arent included in expense ratios.
The two managers provide one of the more distinctive portfolios in the group. They make full use of their country range and readily consider smaller-cap stocks as they pursue growth opportunities. Indeed, the fund now has significantly more exposure to India and Thailand than its peers, and its average market cap is about half the group norm.
Finally, the fund, which has prospered as Asias emerging markets have rebounded in recent months due to good picks in Korea and Hong Kong, has consistently thrived in rallies. And while it often lags in sell-offs, it doesnt always do so and tends to do well in mixed conditions. Overall, it has earned exceptional long-term returns without incurring a lot more volatility than most funds in its wild group.
For all these reasons, this fund is worth a long look from emerging Asia fans.
William Samuel Rocco
Senior Fund Analyst, Morningstar
October 4, 2004
the Matthews China Fund received an Overall Morningstar RatingTM of 4 stars out of 68 funds in the Pacific/Asia ex-Japan stock category, 3 stars out of 68 funds for the 3-year period, and 4 stars out of 58 funds for the 5-year period. As of 12/31/04, the 1-year total return for the Matthews Japan Fund was 22.03%, the 5-year average annual total return was 2.18% and since inception (12/31/98) the average annual total return was 10.87%. As of 12/31/04, the Matthews Japan Fund received an Overall Morningstar RatingTM of 4 stars out of 37 funds in the Japan stock category, 4 stars out of 37 funds for the 3-year period, and 4 stars out of 28 funds for the 5-year period. As of 12/31/04, the 1-year total return for the Matthews Asian Technology Fund was 12.84%, the 5- year average annual return was 10.71%, and since inception (12/27/99) the average annual total return was 10.43%. As of 12/31/04, the Matthews Asian Technology Fund received an Overall Morningstar RatingTM of 4 stars out of 265 funds in the Specialty-Technology category, 5 stars out of 265 funds for the 3-year period, and 4 stars out of 125 funds for the 5-year period. For each fund with at least a three-year history, Morningstar calculates a Morningstar RatingTM based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a funds monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. A funds rating may change at any time based on new data. Ratings are historical and do not represent future performance. Past performance is no guarantee of future results. Reprinted by permission of Morningstar.
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M A T T H E W S P A C I F I C T I G E R F U N D
CO-PORTFOLIO MANAGERS SYMBOL: MAPTXMark W. Headley and G. Paul Matthews
The Matthews Pacific Tiger Fund invests at least 80% of its assets in the common and preferred stocks of companies located in the Pacific Tiger countries of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.
PORTFOLIO MANAGER COMMENTARY
During 2004 the Matthews Pacific Tiger Fund saw a continuation of the positive environment that began with the rally that started in mid-2003. While the year saw major concerns around Chinas growth, rising energy and commodity prices and some higher interest rates, the markets managed to maintain a positive direction.
For the year, the Matthews Pacific Tiger Fund gained 23.34%, outperforming both its benchmark index and the Lipper Pacific ex-Japan Funds category average. The Fund also passed its ten-year anniversary on September 12th. The returns on the year were notably influenced by the performance of unique companies including an Internet firm in Korea and a water purification company in Singapore. By country, Korea was the largest contributor to performance, with Hong Kongbased companies also doing very well. Singapore, India and Indonesia also made significant contributions. Only the China-related companies had a negative impact on returns.
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GROWTH OF A $10,000 INVESTMENT
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.
8 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 9/12/94--------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF DECEMBER 31, 2004 --------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS 10 YRS INCEPTION --------------------------------------------------------------------------------------------------------- Matthews Pacific Tiger Fund 23.34% 22.71% 8.66% 7.38% 6.61% MSCI All Country Far East Free ex-Japan Index(1) 17.60% 15.65% -0.84% -0.05% -1.22%* Lipper Pacific ex-Japan Funds Category Average(2) 16.50% 16.48% 1.68% 3.52% 1.52%* --------------------------------------------------------------------------------------------------------- Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund's NAV, is not adjusted to reflect fair value at 4PM Eastern Time. *Calculated from 8/31/94 -------------------------------------------------------------- OPERATING EXPENSES(3) -------------------------------------------------------------- For the four months ended 12/31/04+ (annualized) 1.36% For Fiscal Year 2004 (ended 8/31/04) 1.48% -------------------------------------------------------------- -------------------------------------------------------------- PORTFOLIO TURNOVER(4) -------------------------------------------------------------- For the four months ended 12/31/04+ (not annualized) 3.82% For Fiscal Year 2004 (ended 8/31/04) 15.16% -------------------------------------------------------------- +For the four months ended 12/31/04 due to Fund's change of fiscal year from 8/31 to 12/31. ---------------------------------------------------- COUNTRY ALLOCATION** ---------------------------------------------------- China/Hong Kong 35.5% South Korea 23.9% Singapore 13.7% Thailand 7.9% India(1) 7.3% Taiwan 5.3% Indonesia 4.6% Philippines 0.1% Cash and other 1.7% ---------------------------------------------------- ---------------------------------------------------- SECTOR ALLOCATION** ---------------------------------------------------- Financials 29.8% Information Technology 17.1% Consumer Discretionary 16.3% Consumer Staples 13.9% Telecommunication Services 8.3% Industrials 7.5% Health Care 4.6% Utilities 0.8% Cash and other 1.7% ---------------------------------------------------- ---------------------------------------------------- MARKET CAP EXPOSURE** ---------------------------------------------------- Large cap (over $5 billion) 30.0% Mid cap ($1-$5 billion) 49.5% Small cap (under $1 billion) 18.8% Cash and other 1.7% ---------------------------------------------------- ** Percentage figures have been rounded to total 100.0% --------------------------------------------------------------------------- NAV NET ASSETS REDEMPTION FEE 12b-1 FEES --------------------------------------------------------------------------- $15.90 $855.2 million 2.00% within 90 days None ---------------------------------------------------------------------------All data is as of December 31, 2004, unless otherwise noted.
1 The MSCI All Country Far East Free ex-Japan Index is a free floatadjusted market capitalizationweighted index of the stock markets of Hong Kong, Taiwan, Singapore, Korea, Indonesia, Malaysia, Philippines, Thailand and China that excludes securities not available to foreign investors. As of 12/31/04, 7.3% of the assets in the Matthews Pacific Tiger Fund were invested in India, which is not included in the MSCI All Country Far East Free ex-Japan Index. Source: Bloomberg. 2 As of 12/31/04, the Lipper Pacific ex-Japan Funds Category Average consisted of 56 funds for the one-year period, 52 funds for the three-year period, 41 funds for the five-year period, 16 funds for the ten-year period, and 13 funds since 8/31/94. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods. 3 Includes management fee, shareholder services fees, waivers, reimbursements, recoupments and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales, proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 9
M A T T H E W S P A C I F I C T I G E R F U N D
Portfolio manager commentary,
continued from page 8The Funds industry exposure remains dominated by our focus on consumer/ retail, finance and technology. While technologys contribution was positive, the consumer/retail and financial positions were the primary contributors to the Funds positive performance. Consumption across the region has been generally improving since the shock of the SARS epidemic in 2003. Most countries have seen steady or improving employment, and there have been no significant economic or political shocks that might hurt consumer confidence. Financials generally showed solid performance for the year with rising asset values, particularly property, providing a positive backdrop for the banking sector, in particular. The Funds technology positions were mixed, representing some of the Funds more notable wins and losses.
There have been no major changes to the Funds strategy in recent years, with the exception of increased exposure to the Indian market. The Fund continues to follow an all-capitalization growth-at-a-reasonable price methodology. Most of our decision-making is done on a company-by-company basis, although the broader economic and political considerations are not ignored.
In late January 2005, Mark W. Headley was named Lead Manager of the Fund. Mr. Headley served as Co-Manager of the Fund since 1996. No other changes to the Funds management occurred.
SCHEDULE OF INVESTMENTS
EQUITIES: 98.28%*SHARES VALUE ================================================================= CHINA/HONG KONG: 35.46% Swire Pacific, Ltd. A Shares 3,618,000 $30,255,506 Giordano International, Ltd. 45,315,000 28,420,984 Dah Sing Financial Group 3,653,600 28,320,477 Television Broadcasts, Ltd. 5,320,700 24,711,464 Lenovo Group, Ltd. 78,708,000 23,543,138 Shangri-La Asia, Ltd. 16,230,000 23,281,765 Hang Lung Group, Ltd. 10,168,000 20,014,718 PICC Property and Casualty Co., Ltd. H Shares ** 55,040,000 19,118,979 Cosco Pacific, Ltd. 7,484,000 15,501,801 Travelsky Technology, Ltd. H Shares 18,217,000 14,765,220 Sa Sa International Holdings, Ltd. 22,582,000 12,129,458 China Mobile HK, Ltd. 3,114,217 10,557,279 Moulin International Holdings, Ltd. 12,964,000 8,839,697 BYD Co., Ltd. H Shares 3,292,500 8,726,006 Vitasoy International Holdings, Ltd. 26,670,750 7,463,061 China Mobile HK, Ltd. ADR 413,250 7,091,370 Asia Satellite Telecommunications Holdings, Ltd. 3,716,100 7,075,736 Huaneng Power International, Inc. ADR 229,000 6,874,580 China Pharmaceutical Group, Ltd. 24,935,000 6,576,363 ----------- Total China/Hong Kong 303,267,602 =================================================================10 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
SHARES VALUE ================================================================= SOUTH KOREA: 23.90% AmorePacific Corp. 113,910 $28,554,526 Hana Bank 1,108,837 27,635,234 Hite Brewery Co., Ltd. 279,057 23,048,081 Samsung Electronics Co., Ltd. 42,293 18,405,136 Samsung Securities Co., Ltd. 725,660 17,594,731 S1 Corp. 487,120 17,175,309 Nong Shim Co., Ltd. 65,388 15,759,569 Kookmin Bank ** 335,620 13,130,419 Pulmuone Co., Ltd. 236,540 11,881,839 LG Home Shopping, Inc. 171,963 10,631,406 SK Telecom Co., Ltd. 53,405 10,163,046 SK Telecom Co., Ltd. ADR 263,000 5,851,750 Kookmin Bank ADR ** 115,300 4,505,924 ----------- Total South Korea 204,336,970 ================================================================= SINGAPORE: 13.71% Venture Corp., Ltd. 2,976,800 29,000,135 DBS Group Holdings, Ltd. 2,899,750 28,604,850 Fraser and Neave, Ltd. 2,573,550 25,702,386 Hyflux, Ltd. 12,418,125 22,597,777 Parkway Holdings, Ltd. 12,339,000 11,340,298 ----------- Total Singapore 117,245,446 ================================================================= THAILAND: 7.87% Bangkok Bank Public Co., Ltd. 10,497,700 30,785,044 Advanced Info Service Public Co., Ltd. 10,810,000 29,754,335 Serm Suk Public Co., Ltd. 12,031,000 6,746,818 ---------- Total Thailand 67,286,197 ================================================================= INDIA: 7.30% Infosys Technologies, Ltd. 312,974 15,116,825 Hero Honda Motors, Ltd. 1,019,800 13,466,076 HDFC Bank, Ltd. 1,085,883 13,026,830 Cipla, Ltd. 1,759,625 12,907,307 Bank of Baroda 1,415,000 7,860,202 ---------- Total India 62,377,240 ================================================================= SHARES VALUE ================================================================= TAIWAN: 5.34% Hon Hai Precision Industry Co., Ltd. 6,496,688 $30,041,307 Taiwan Semiconductor Manufacturing Co., Ltd. 9,836,045 15,625,048 ----------- Total Taiwan 45,666,355 ================================================================= INDONESIA: 4.59% PT Astra International, Inc. 14,291,730 14,780,566 PT Bank Central Asia 38,758,500 12,421,927 PT Ramayana Lestari Sentosa 144,477,000 12,062,448 ---------- Total Indonesia 39,264,941 ================================================================= PHILIPPINES: 0.11% SM Prime Holdings, Inc. 7,030,000 964,472 ------- Total Philippines 964,472 ================================================================= TOTAL INVESTMENTS: 98.28% 840,409,223 (Cost $636,464,735***) CASH AND OTHER ASSETS, LESS LIABILITIES: 1.72% 14,743,490 ---------- NET ASSETS: 100.00% $855,152,713 =================================================================* As a percentage of net assets as of December 31, 2004 ** Nonincome producing security *** Cost for Federal tax purposes is $636,990,265 and net unrealized appreciation consists of:Gross unrealized appreciation..............$214,760,588 Gross unrealized depreciation.............. (11,341,630) ------------ Net unrealized appreciation................$203,418,958 ============ADR American Depositary ReceiptSee accompanying notes to financial statements.
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M A T T H E W S A S I A N G R O W T H A N D I N C O M E F U N D
PORTFOLIO MANAGER SYMBOL: MACSX
G. Paul Matthews
The Matthews Asian Growth and Income Fund invests at least 80% of its assets in the dividend-paying equity securities and convertible bonds of companies located in Asia, which includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.
Note: This fund is closed to most new investors.
PORTFOLIO MANAGER COMMENTARY
The Matthews Asian Growth and Income Fund gained 21.44% in 2004, outperforming both its benchmark index and the Lipper Pacific ex-Japan Funds category average. During the year, the Funds emphasis on income-producing equities throughout the Asian region proved beneficial as investors continued to seek relatively stable sources of income.
Securities of companies that have historically paid above-average dividends performed well, and the Funds primary contribution to returns came from its investments in Hong Kong, Korean and Singaporean listed securities with above-average dividend yields. The component of the portfolio invested in convertible bonds performed less well than the equity component during the year, as fixed incomerelated investments underperformed during the period.
(continued on page 14)
GROWTH OF A $10,000 INVESTMENT
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.12 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 9/12/94--------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF DECEMBER 31, 2004 --------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS 10 YRS INCEPTION --------------------------------------------------------------------------------------------------------- Matthews Asian Growth and Income Fund 21.44% 22.43% 16.82% 11.99% 11.37% MSCI All Country Far East Free ex-Japan Index(1) 17.60% 15.65% -0.84% -0.05% -1.22%* Lipper Pacific ex-Japan Funds Category Average(2) 16.50% 16.48% 1.68% 3.52% 1.52%* --------------------------------------------------------------------------------------------------------- Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund's NAV, is not adjusted to reflect fair value at 4PM Eastern Time. *Calculated from 8/31/94 -------------------------------------------------------------- OPERATING EXPENSES(3) -------------------------------------------------------------- For the four months ended 12/31/04+ (annualized) 1.31% For Fiscal Year 2004 (ended 8/31/04) 1.44% -------------------------------------------------------------- -------------------------------------------------------------- PORTFOLIO TURNOVER(4) -------------------------------------------------------------- For the four months ended 12/31/04+ (not annualized) 7.32% For Fiscal Year 2004 (ended 8/31/04) 17.46% -------------------------------------------------------------- +For the four months ended 12/31/04 due to Fund's change of fiscal year from 8/31 to 12/31. ---------------------------------------------------- COUNTRY ALLOCATION** ---------------------------------------------------- China/Hong Kong 39.4% South Korea 18.9% Singapore 11.4% Thailand 6.2% Taiwan 5.3% Japan(1) 4.7% India(1) 2.5% Indonesia 2.4% United Kingdom(1) 2.3% Australia(1) 1.7% Malaysia 1.1% Cash and other 4.1% ---------------------------------------------------- ---------------------------------------------------- SECTOR ALLOCATION** ---------------------------------------------------- Financials 29.3% Telecommunication Services 17.6% Consumer Discretionary 16.9% Utilities 12.6% Industrials 6.8% Consumer Staples 6.7% Energy 3.2% Materials 1.5% Health Care 1.3% Cash and other 4.1% ---------------------------------------------------- ---------------------------------------------------- BREAKDOWN BY SECURITY TYPE** ---------------------------------------------------- Common Equities 74.6% International Dollar Bonds 17.3% Preferred Equities 4.0% Cash and other 4.1% ---------------------------------------------------- ---------------------------------------------------- MARKET CAP EXPOSURE** ---------------------------------------------------- Large cap (over $5 billion) 53.4% Mid cap ($1-$5 billion) 30.5% Small cap (under $1 billion) 12.0% Cash and other 4.1% ---------------------------------------------------- **Percentage figures have been rounded to total 100.0% ---------------------------------------------------------------- NAV NET ASSETS REDEMPTION FEE 12b-1 FEES ---------------------------------------------------------------- $15.82 $1.24 billion 2.00% within 90 days None ----------------------------------------------------------------All data is as of December 31, 2004, unless otherwise noted.
1 The MSCI All Country Far East Free ex-Japan Index is a free floatadjusted market capitalizationweighted index of the stock markets of Hong Kong, Taiwan, Singapore, Korea, Indonesia, Malaysia, Philippines, Thailand and China that excludes securities not available to foreign investors. As of 12/31/04, 2.5% of the assets in the Matthews Asian Growth and Income Fund were invested in India, 4.7% of the Funds assets were invested in Japan, 1.7% of the Funds assets were invested in Australia, and 2.3% of the Funds assets were invested in the United Kingdom, which are not included in the MSCI All Country Far East Free ex-Japan Index. Source: Bloomberg. 2 As of 12/31/04, the Lipper Pacific ex-Japan Funds Category Average consisted of 56 funds for the one-year period, 52 funds for the three-year period, 41 funds for the five-year period, 16 funds for the ten-year period, and 13 funds since 8/31/94. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods. 3 Includes management fee, shareholder services fees, waivers, reimbursements, recoupments and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales, proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 13
M A T T H E W S A S I A N G R O W T H A N D I N C O M E F U N D
Portfolio manager commentary,
continued from page 12Many investors in Asia anticipated an increase in interest rates for their local currencies following the moves by the U.S. Federal Reserve to raise U.S rates. The Fund has exposure to a number of different currencies in Asia, some of which remain directly or indirectly linked to the U.S. dollar. Changes in the level of the U.S. dollar had a mixed impact on the portfolio and, generally speaking, the Fund was a modest beneficiary of dollar weakness during the year.
The Fund was broadly diversified across the Asian region during the year, but its highest geographical exposure was to Hong Kong, South Korea and Singapore, all of which enjoyed relatively strong performance for the year. Investments in mainland China and Thailand performed less well. Following the strong relative performance of higher-yielding equities over the past year, the average dividend yields available in the region have declined. In the medium term, further relative appreciation will likely require an increase in the absolute payment of dividends. The Funds exposure to convertible bonds is likely to be increased, particulary in the event that issuance of such issues accelerates from recent levels.
In late January 2005, G. Paul Matthews was named Lead Manager of the Fund and Andrew T. Foster was named Co-Manager. Mr. Matthews served as Manager since the Funds inception in September 1994. No other changes to the Funds management occurred.
SCHEDULE OF INVESTMENTS
COMMON EQUITIES: 74.57%*SHARES VALUE =========================================================================== CHINA/HONG KONG: 29.61% Hongkong Land Holdings, Ltd. 15,727,700 $41,678,405 Hong Kong & China Gas Co., Ltd. 13,382,000 27,632,397 Hongkong Electric Holdings, Ltd. 5,914,500 27,012,756 CLP Holdings, Ltd. 4,518,200 25,983,370 Citic Pacific, Ltd. 8,118,000 23,081,489 Shangri-La Asia, Ltd. 15,641,400 22,437,424 Television Broadcasts, Ltd. 4,017,000 18,656,559 Cafe de Coral Holdings, Ltd. 15,985,100 18,508,890 Hang Seng Bank, Ltd. 1,291,000 17,937,937 MTR Corp., Ltd. 10,532,800 16,870,801 Wharf Holdings, Ltd. 4,553,000 15,932,688 Giordano International, Ltd. 24,585,000 15,419,395 PCCW, Ltd. 20,721,000 13,129,236 Cheung Kong Infrastructure Holdings, Ltd. 4,475,500 12,926,484 Hengan Int'l Group Co., Ltd. 18,148,000 11,907,524 Hang Lung Group, Ltd. 5,693,000 11,206,116 Sun Hung Kai Properties, Ltd. 1,098,000 10,983,108 PetroChina Co., Ltd. ADR 202,250 10,858,803 Vitasoy Int'l Holdings, Ltd. 31,031,000 8,683,155 PetroChina Co., Ltd. H Shares 15,666,000 8,364,283 I-Cable Communications, Ltd. 12,707,000 4,740,930 China Hong Kong Photo Products Holdings, Ltd. 14,998,003 1,254,207 Lerado Group Holding Co., Ltd. 6,396,000 979,215 ----------- Total China/Hong Kong 366,185,172 ===========================================================================14 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
SHARES VALUE =========================================================================== SOUTH KOREA: 11.59% Shinhan Financial Group Co., Ltd. 1,127,590 $25,488,413 Korea Gas Corp. 549,690 17,045,063 KT Corp. ADR 631,800 13,779,558 Hana Bank 503,940 12,559,556 Sindo Ricoh Co., Ltd. 158,630 10,113,582 Korean Reinsurance Co. 2,186,690 9,917,416 Korea Electric Power Corp. 381,080 9,884,078 KT Corp. 224,270 8,990,731 Korea Electric Power Corp. ADR 620,950 8,221,378 SK Telecom Co., Ltd. ADR 368,300 8,194,675 G2R Inc. 340,870 5,844,709 SK Telecom Co., Ltd. 25,010 4,759,438 Daehan City Gas Co., Ltd. 280,300 4,291,688 Samchully Co., Ltd. 66,410 4,163,455 ----------- Total South Korea 143,253,740 =========================================================================== SINGAPORE: 11.42% Singapore Post, Ltd. 58,914,000 32,126,377 Fraser and Neave, Ltd. 2,877,820 28,741,171 Singapore Press Holdings, Ltd. 7,725,500 21,773,972 Singapore Exchange, Ltd. 17,952,000 19,688,794 CapitalMall Trust REIT 17,659,900 19,043,823 Singapore Telecommunications, Ltd. 9,169,643 13,371,577 Parkway Holdings, Ltd. 6,749,000 6,202,745 Yellow Pages, Ltd.** 219,000 236,162 ----------- Total Singapore 141,184,621 =========================================================================== THAILAND: 6.22% Advanced Info Service Public Co., Ltd. 7,370,000 20,285,795 PTT Public Co., Ltd. 4,554,700 20,269,669 BEC World Public Co., Ltd. 37,359,000 15,088,139 Bangkok Bank Public Co., Ltd. 4,196,300 12,305,865 Charoen Pokphand Foods Public Co., Ltd. 63,787,000 6,202,471 Thai Reinsurance Public Co., Ltd. 25,672,800 2,734,100 Charoen Pokphand Foods Public Co., Ltd. Warrants, Expires 7/21/05 ** 638,000 22,320 ---------- Total Thailand 76,908,359 =========================================================================== SHARES VALUE =========================================================================== JAPAN: 4.71% Japan Retail Fund Investment Corp. REIT 2,632 $22,226,692 Japan Real Estate Investment Corp. REIT 2,258 19,046,295 Nippon Building Fund, Inc. REIT 1,987 16,954,388 ---------- Total Japan 58,227,375 =========================================================================== INDIA: 2.45% Hindustan Lever, Ltd. 5,902,230 19,583,122 Hero Honda Motors, Ltd. 812,300 10,726,116 ---------- Total India 30,309,238 =========================================================================== INDONESIA: 2.35% PT Telekomunikasi Indonesia ADR 745,500 15,670,410 PT Tempo Scan Pacific 12,357,000 10,117,231 PT Ramayana Lestari Sentosa 38,722,500 3,232,959 ---------- Total Indonesia 29,020,600 =========================================================================== UNITED KINGDOM: 2.27% HSBC Holdings PLC ADR 290,500 24,733,170 HSBC Holdings PLC 196,800 3,367,435 ---------- Total United Kingdom 28,100,605 =========================================================================== TAIWAN: 2.24% Chunghwa Telecom Co., Ltd. ADR 1,252,200 26,358,810 Chunghwa Telecom Co., Ltd. 648,000 1,273,986 ---------- Total Taiwan 27,632,796 =========================================================================== AUSTRALIA: 1.71% AXA Asia Pacific Holdings, Ltd. 6,585,658 21,125,737 ---------- Total Australia 21,125,737 =========================================================================== TOTAL COMMON EQUITIES (Cost $667,082,779) 921,948,243 ===========================================================================See footnotes on page 17.
800.789.ASIA [2742] www.matthewsfunds.com 15
M A T T H E W S A S I A N G R O W T H A N D I N C O M E F U N D
SCHEDULE OF INVESTMENTS (continued)
PREFERRED EQUITIES: 4.04%*SHARES VALUE =========================================================================== SOUTH KOREA: 4.04% Hyundai Motor Co., Ltd., Pfd. 721,890 $20,153,227 Hyundai Motor Co., Ltd., 2nd Pfd. 510,230 15,303,943 LG Chem Ltd., Pfd. 242,450 5,925,411 Samsung Fire & Marine Insurance Co., Ltd., Pfd. 142,820 5,366,787 LG Household & Health Care, Ltd., Pfd. 177,830 3,349,773 ---------- Total South Korea 50,099,141 =========================================================================== TOTAL PREFERRED EQUITIES (Cost $26,476,044) 50,099,141 ===========================================================================INTERNATIONAL DOLLAR BONDS: 17.30%*
FACE AMOUNT VALUE =========================================================================== CHINA/HONG KONG: 9.91% China Mobile Hong Kong, Ltd., Cnv. 2.250%, 11/03/05 $47,650,000 $47,292,625 PCCW Capital II, Ltd., Cnv. 1.000%, 01/29/07 28,740,000 32,188,800 Shangri-La Finance, Ltd., Cnv. 0.000%, 03/15/09 14,722,000 17,813,620 Hang Lung Properties, Ltd., Cnv. 5.500%, 12/29/49 11,120,000 12,788,000 BCA Finance, Ltd. 0.000%, 11/28/08 5,800,000 4,988,000 Tingyi (C.I.) Holding Corp., Cnv. 3.500%, 06/04/05 3,500,000 3,871,875 PCCW Capital, Ltd., Cnv. 3.500%, 12/05/05 3,000,000 3,571,890 ----------- Total China/Hong Kong 122,514,810 =========================================================================== SOUTH KOREA: 3.24% Korea Deposit Insurance Corp., Cnv. 2.250%, 10/11/05 25,486,000 31,793,785 KT Corp., Cnv. 5.875%, 06/24/14 7,800,000 8,282,118 ---------- Total South Korea 40,075,903 =========================================================================== TAIWAN: 3.08% Cathay Financial Holding Co., Cnv. 0.000%, 05/20/07 22,042,000 28,516,837 Sinopac Holdings Co., Cnv. 0.000%, 07/12/07 7,177,000 9,536,439 ---------- Total Taiwan 38,053,276 =========================================================================== MALAYSIA: 1.07% Prime Venture Labuan, Ltd., Cnv. 1.000%, 12/12/08 12,740,000 13,265,525 ---------- Total Malaysia 13,265,525 ===========================================================================16 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
VALUE =========================================================================== TOTAL INTERNATIONAL DOLLAR BONDS $213,909,514 (Cost $204,525,806) --------------------------------------------------------------------------- TOTAL INVESTMENTS: 95.91%* 1,185,956,898 (Cost $898,084,629***) CASH AND OTHER ASSETS, LESS LIABILITIES: 4.09% 50,534,390 ---------- NET ASSETS: 100.00% $1,236,491,288 ===========================================================================* As a percentage of net assets as of December 31, 2004 ** Nonincome producing security *** Cost for Federal tax purposes is $920,138,148 and net unrealized appreciation consists of:Gross unrealized appreciation.............$271,607,465 Gross unrealized depreciation............. (5,788,715) ------------ Net unrealized appreciation...............$265,818,750 ============ADR American Depositary Receipt
Cnv. Convertible
Pfd. Preferred
REIT Real Estate Investment Trust
See accompanying notes to financial statements.
800.789.ASIA [2742] www.matthewsfunds.com 17
M A T T H E W S K O R E A F U N D
CO-PORTFOLIO MANAGERS SYMBOL: MAKOXG. Paul Matthews and Mark W. Headley
The Matthews Korea Fund invests at least 80% of its assets in the common and preferred stocks of companies located in South Korea.
PORTFOLIO MANAGER COMMENTARY
Both the Matthews Korea Fund and the Korean market enjoyed a strong year in 2004. For the year, the Fund gained 23.49%, underperforming its benchmark index but outperforming the Lipper Pacific ex-Japan Funds category average. The Korean market saw strong performance from such sectors as energy and commodities, to which the Fund has typically had little or no exposure. The general environment was one of significant concerns over a possible slowing in Chinas growth, the ongoing credit card debacle in the domestic economy, and the current governments somewhat hapless sense of economic policy.
While Korea has faced numerous challenges, we continue to see the ongoing overhaul of the financial system and the generally more open and market-oriented economy to be indicators of continued progress. That major foreign entities now control a significant portion of the Korean banking system is a profound development
(continued on page 20)
GROWTH OF A $10,000 INVESTMENT
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.18 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 1/3/95---------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF DECEMBER 31, 2004 ---------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION ---------------------------------------------------------------------------------------------- Matthews Korea Fund 23.49% 21.20% 7.51% 2.09% KOSPI Index(1) 27.12% 19.02% -0.28% -3.30% Lipper Pacific ex-Japan Funds Category Average(2) 16.50% 16.48% 1.68% 3.52%* ---------------------------------------------------------------------------------------------- Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund's NAV, is not adjusted to reflect fair value at 4PM Eastern Time. *Calculated from 12/31/94 ------------------------------------------------------------ OPERATING EXPENSES(3) ------------------------------------------------------------ For the four months ended 12/31/04+ (annualized) 1.31% For Fiscal Year 2004 (ended 8/31/04) 1.50% ------------------------------------------------------------ ------------------------------------------------------------ PORTFOLIO TURNOVER(4) ------------------------------------------------------------ For the four months ended 12/31/04+ (not annualized) 6.53% For Fiscal Year 2004 (ended 8/31/04) 18.40% ------------------------------------------------------------ +For the four months ended 12/31/04 due to Fund's change of fiscal year from 8/31 to 12/31. ------------------------------------------------------------ COUNTRY ALLOCATION** ------------------------------------------------------------ South Korea 99.7% Cash and other 0.3% ------------------------------------------------------------ ------------------------------------------------------------ SECTOR ALLOCATION** ------------------------------------------------------------ Financials 21.0% Information Technology 20.7% Consumer Discretionary 18.3% Consumer Staples 12.5% Telecommunication Services 8.4% Industrials 8.2% Health Care 7.9% Utilities 1.9% Materials 0.8% Cash and other 0.3% ------------------------------------------------------------ ------------------------------------------------------------ MARKET CAP EXPOSURE** ------------------------------------------------------------ Large cap (over $5 billion) 36.8% Mid cap ($1-$5 billion) 30.8% Small cap (under $1 billion) 32.1% Cash and other 0.3% ------------------------------------------------------------ **Percentage figures have been rounded to total 100.0% --------------------------------------------------------------------- NAV NET ASSETS REDEMPTION FEE 12b-1 FEES --------------------------------------------------------------------- $4.08 $127.8 million 2.00% within 90 days None ---------------------------------------------------------------------All data is as of December 31, 2004, unless otherwise noted.
1 The South Korea Stock Price Index (KOSPI) is a capitalization-weighted index of all common stocks listed on the Korea Stock Exchange. Source: Bloomberg. 2 As of 12/31/04, the Lipper Pacific ex-Japan Funds Category Average consisted of 56 funds for the one-year period, 52 funds for the three-year period, 41 funds for the five-year period, and 16 funds since 12/31/94. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods. 3 Includes management fee, shareholder services fees, waivers, reimbursements, recoupments and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales, proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 19
M A T T H E W S K O R E A F U N D
Portfolio manager commentary,
continued from page 18for a country that was once referred to as the Hermit Kingdom.
During the year, the majority of the Funds positive returns came from consumer- and financial-related companies. The Fund also did well in its health care positions, an area where Korea shows a rare potential in the Asian equity universe. Individual technology-related companies performed well, but most of the losses suffered during the year were in that sector.
Korea continues to show uneven economic performance. Millions of consumers remain mired in credit card debt following a borrowing binge that began in 2001; this substantial outstanding consumer debt remains a real problem for the economy. However, in contrast to many economies in 2004, the Korean central bank was in a position to lower interest rates in the face of perceived weakness.
Overall, we continue to believe that the Korean market offers some of the better valuations in the region. Such attractive valuations have to be balanced against Koreas historic volatility, continued challenges in corporate governance, and its highly irrational neighbor, North Korea.
SCHEDULE OF INVESTMENTS
EQUITIES: SOUTH KOREA: 99.66%*SHARES VALUE =========================================================================== FINANCIALS: 21.03% Commercial Banks: 14.84% Hana Bank 263,594 $6,569,480 Kookmin Bank ** 156,102 6,107,159 Shinhan Financial Group Co., Ltd. 212,012 4,792,389 Kookmin Bank ADR ** 38,339 1,498,288 ---------- 18,967,316 ---------- Insurance: 3.16% Samsung Fire & Marine Insurance Co., Ltd. 51,373 4,044,532 ---------- Capital Markets: 3.03% Samsung Securities Co., Ltd. 159,625 3,870,351 ---------- Total Financials 26,882,199 =========================================================================== INFORMATION TECHNOLOGY: 20.66% Semiconductors & Semiconductor Equipment: 12.18% Samsung Electronics Co., Ltd. 28,141 12,246,446 Mtekvision Co., Ltd. ** 57,380 1,806,982 Samsung Electronics Co., Ltd., Pfd. 5,260 1,516,721 ---------- 15,570,149 ---------- Internet Software & Services: 2.62% NHN Corp. 41,440 3,342,581 ---------- Software: 2.33% NCsoft Corp. ** 36,746 2,974,609 ---------- Electronic Equipment & Instruments: 2.11% Daeduck GDS Co., Ltd. 164,500 1,493,721 Amotech Co., Ltd. 117,970 1,207,962 --------- 2,701,683 --------- Computers & Peripherals: 1.42% LG.Philips LCD Co., Ltd. ADR ** 101,000 1,816,990 ---------- Total Information Technology 26,406,012 ===========================================================================20 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
SHARES VALUE =========================================================================== CONSUMER DISCRETIONARY: 18.31% Media: 6.37% CJ Entertainment, Inc. 234,441 $3,736,743 Cheil Communications, Inc. 22,330 3,246,392 G2R, Inc. 67,430 1,156,185 ---------- 8,139,320 ---------- Automobiles: 5.95% Hyundai Motor Co. 86,641 4,645,069 Hyundai Motor Co., Pfd. 106,110 2,962,306 ---------- 7,607,375 ---------- Multiline Retail: 3.24% Hyundai Department Store Co., Ltd. 96,300 3,144,262 Taegu Department Store Co., Ltd. 133,110 988,810 ---------- 4,133,072 ---------- Internet & Catalog Retail: 2.04% LG Home Shopping, Inc. 42,234 2,611,066 ---------- Textiles, Apparel & Luxury Goods: 0.36% Handsome Co., Ltd. 56,699 458,434 ---------- Auto Components: 0.35% Korea Electric Terminal Co., Ltd. 25,980 444,210 ---------- Total Consumer Discretionary 23,393,477 =========================================================================== SHARES VALUE =========================================================================== CONSUMER STAPLES: 12.54% Food Products: 5.92% Nong Shim Co., Ltd. 15,420 $3,716,470 Pulmuone Co., Ltd. 43,510 2,185,587 ORION Corp. 15,760 1,659,428 ---------- 7,561,485 ---------- Personal Products: 3.70% AmorePacific Corp. 18,890 4,735,273 ---------- Beverages: 2.92% Hite Brewery Co., Ltd. 45,191 3,732,448 ---------- Total Consumer Staples 16,029,206 =========================================================================== TELECOMMUNICATION SERVICES: 8.45% Wireless Telecommunication Services: 5.34% SK Telecom Co., Ltd. 19,845 3,776,531 SK Telecom Co., Ltd. ADR 86,900 1,933,525 KT Freetel Co., Ltd. 46,671 1,113,576 ---------- 6,823,632 ---------- Diversified Telecommunication Services: 3.11% KT Corp. 59,720 2,394,107 KT Corp. ADR 72,300 1,576,863 ---------- 3,970,970 ---------- Total Telecommunication Services 10,794,602 ===========================================================================See footnotes on page 23.
800.789.ASIA [2742] www.matthewsfunds.com 21
M A T T H E W S K O R E A F U N D
SCHEDULE OF INVESTMENTS (continued)
EQUITIES: SOUTH KOREA (continued)SHARES VALUE =========================================================================== INDUSTRIALS: 8.15% Commercial Services & Supplies: 6.28% S1 Corp. 120,455 $4,247,109 Sindo Ricoh Co., Ltd. 39,766 2,535,313 Shinsegae Food Systems Co., Ltd. 43,509 1,235,669 ---------- 8,018,091 ---------- Construction & Engineering: 1.87% Tae Young Corp. 66,010 2,391,205 ---------- Total Industrials 10,409,296 =========================================================================== HEALTH CARE: 7.85% Pharmaceuticals: 7.85% Hanmi Pharm Co., Ltd. 61,931 3,164,781 Yuhan Corp. 37,133 3,120,743 LG Life Sciences, Ltd. ** 66,370 2,263,197 Daewoong Pharmaceutical Co., Ltd. 68,210 1,479,245 ---------- Total Health Care 10,027,966 =========================================================================== SHARES VALUE =========================================================================== UTILITIES: 1.91% Electric Utilities: 1.39% Korea Electric Power Corp. 68,510 $1,776,945 ---------- Gas Utilities: 0.52% Samchully Co., Ltd. 10,570 662,667 ---------- Total Utilities 2,439,612 =========================================================================== MATERIALS: 0.76% Chemicals: 0.76% LG Chem, Ltd. 24,420 973,073 ---------- Total Materials 973,073 ===========================================================================22 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
VALUE =========================================================================== TOTAL INVESTMENTS: 99.66% $127,355,443 (Cost $79,182,812***) CASH AND OTHER ASSETS, LESS LIABILITIES: 0.34% 439,008 ---------- NET ASSETS: 100.00% $127,794,451 ===========================================================================* As a percentage of net assets as of December 31, 2004
** Nonincome producing security
*** Cost for Federal tax purposes is $80,477,217 and net unrealized appreciation consists of:Gross unrealized appreciation..................$49,489,630 Gross unrealized depreciation.................. (2,611,404) ----------- Net unrealized appreciation....................$46,878,226 ===========ADR American Depositary Receipt
GDS Global Depositary Shares
Pfd. PreferredSee accompanying notes to financial statements.
800.789.ASIA [2742] www.matthewsfunds.com 23
M A T T H E W S C H I N A F U N D
CO-PORTFOLIO MANAGERS SYMBOL: MCHFX
Richard H. Gao, Mark W. Headley and G. Paul Matthews
The Matthews China Fund invests at least 80% of its assets in the common and preferred stocks of companies located in China. China includes Taiwan and Hong Kong.
PORTFOLIO MANAGER COMMENTARY
During the year ended December 31, 2004, Chinese equities experienced some volatile trading periods in a market driven by a combination of Chinas efforts to slow its economy, rising energy and commodity prices, and investor expectations of a currency revaluation. Over the year, the Matthews China Fund gained 3.88%, outperforming its benchmark index but underperforming the Lipper China Region Funds category average. The Funds outperformance of the index came mainly from its overweight position in the consumer sector and its stronger relative performance in the financial and materials sectors.
After benefiting from strong economic growth in the first two months of the year, Chinese stocks began a sharp correction due to signs of overheating in the economy. In response, the central bank initiated various tightening measures. The markets rebounded strongly in the second half of
(continued on page 26)
GROWTH OF A $10,000 INVESTMENT
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.24 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 2/19/98------------------------------------------------------------------------------------ AVERAGE ANNUAL RETURNS AS OF DECEMBER 31, 2004 ------------------------------------------------------------------------------------ SINCE 1 YR 3 YRS 5 YRS INCEPTION ------------------------------------------------------------------------------------ Matthews China Fund 3.88% 16.60% 12.33% 7.58% MSCI China Free Index(1) 1.89% 17.97% -2.77% -8.23%* Lipper China Region Funds Category Average(2) 9.27% 14.60% 3.40% 6.11%* ------------------------------------------------------------------------------------ Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Funds NAV, is not adjusted to reflect fair value at 4PM Eastern Time. *Calculated from 2/28/98 ------------------------------------------------------------ OPERATING EXPENSES(3) ------------------------------------------------------------ For the four months ended 12/31/04+ (annualized) 1.43% For Fiscal Year 2004 (ended 8/31/04) 1.50% ------------------------------------------------------------ ------------------------------------------------------------ PORTFOLIO TURNOVER(4) ------------------------------------------------------------ For the four months ended 12/31/04+ (not annualized) 4.99% For Fiscal Year 2004 (ended 8/31/04) 28.99% ------------------------------------------------------------ +For the four months ended 12/31/04 due to Funds change of fiscal year from 8/31 to 12/31. ------------------------------------------------------------ CHINA EXPOSURE(5)** ------------------------------------------------------------ China Play 40.6% H Share 27.6% Red Chip 25.1% B Share 5.9% Cash and other 0.8% ------------------------------------------------------------ ------------------------------------------------------------ SECTOR ALLOCATION** ------------------------------------------------------------ Consumer Discretionary 23.9% Industrials 15.7% Financials 14.1% Utilities 9.3% Information Technology 9.2% Energy 7.4% Telecommunications Services 6.9% Consumer Staples 5.0% Health Care 4.1% Materials 3.6% Cash and other 0.8% ------------------------------------------------------------ ------------------------------------------------------------ MARKET CAP EXPOSURE** ------------------------------------------------------------ Large cap (over $5 billion) 28.9% Mid cap ($1-$5 billion) 50.4% Small cap (under $1 billion) 19.9% Cash and other 0.8% ------------------------------------------------------------ **Percentage figures have been rounded to total 100.0% ------------------------------------------------------------------------ NAV NET ASSETS REDEMPTION FEE 12b-1 FEES ------------------------------------------------------------------------ $14.01 $380.1 million 2.00% within 90 days None ------------------------------------------------------------------------All data is as of December 31, 2004, unless otherwise noted.
1 The MSCI China Free Index is a free floatadjusted market capitalizationweighted index of Chinese equities that includes Red Chips and H shares listed on the Hong Kong exchange, and B shares listed on the Shanghai and Shenzhen exchanges. Source: Bloomberg. 2 As of 12/31/04, the Lipper China Region Funds Category Average consisted of 26 funds for the one-year period, 22 funds for the three-year period, 20 funds for the five-year period, and 16 funds since 2/28/98. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods. 3 Includes management fee, shareholder services fees, waivers, reimbursements, recoupments and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 4 The lesser of fiscal year-to-date purchase costs or sales, proceeds divided by the average monthly market value of long-term securities. 5 China Plays are Hong Kong companies that conduct the majority of their business in mainland China. Red Chips are Mainland Chinese companies listed on the Hong Kong stock exchange and incorporated in Hong Kong. H shares are Mainland Chinese companies listed on the Hong Kong stock exchange; companies are incorporated in Mainland China and approved by the China Securities Regulatory Commission for a listing in Hong Kong. B Shares are Mainland Chinese stocks listed on the Shanghai and Shenzhen stock exchanges, available to Chinese and foreign investors.800.789.ASIA [2742] www.matthewsfunds.com 25
M A T T H E W S C H I N A F U N D
Portfolio manager commentary,
continued from page 24the year as the tightening measures seemed to be taking effect and liquidity returned to stocks amid investor expectations that the Chinese currency would be revalued.
For the year, we continued to maintain diversification within the Fund, with overweight positions in the industrials, financials and consumer-discretionary sectors. These three sectors also contributed most to Fund performance. We believe that companies in these sectors will continue to benefit from the continuing development of Chinas economy and its improving living standards. The Funds holdings in the information technology, utilities and health care sectors produced mostly negative returns as a result of rising competition and/or increasing operating costs.
The Fund continues to keep a long-term investment perspective and invests the majority of its holdings in pure Chinese companies and companies with significant amounts of business coming from China. During the period, the Fund underperformed the overall Hong Kong market, as measured by the Hang Seng Index, which benefited from a strong recovery in the territorys property and retail sectors.
In late January 2005, Richard H. Gao was named Lead Manager of the Fund. Mr. Gao served as Co-Manager of the Fund since 1999. No other changes to the Funds management occurred.
SCHEDULE OF INVESTMENTS
EQUITIES: CHINA/HONG KONG: 99.20%*SHARES VALUE =========================================================================== CONSUMER DISCRETIONARY: 23.89% Hotels, Restaurants & Leisure: 7.30% Shangri-La Asia, Ltd. 8,953,600 $12,843,845 China Travel International Investment Hong Kong, Ltd. 24,034,000 7,730,162 Cafe de Coral Holdings, Ltd. 5,880,100 6,808,473 China Travel International Investment Hong Kong, Ltd. Warrants, Expires 5/31/06 ** 2,942,400 370,980 ---------- 27,753,460 ---------- Media: 4.50% Television Broadcasts, Ltd. 2,542,000 11,806,067 Clear Media, Ltd. ** 5,534,000 5,304,176 ---------- 17,110,243 ---------- Textiles, Apparel & Luxury Goods: 3.16% Weiqiao Textile Co., Ltd. H Shares 4,445,500 7,006,146 Texwinca Holdings, Ltd. 5,284,000 4,996,578 ---------- 12,002,724 ---------- Household Durables: 2.65% TCL International Holdings, Ltd. 24,764,000 6,371,964 Lerado Group Holding Co., Ltd. 24,089,000 3,687,977 ---------- 10,059,941 ---------- Automobiles: 2.42% Denway Motors, Ltd. 25,805,200 9,212,823 ---------- Distributors: 2.18% Li & Fung, Ltd. 4,914,000 8,281,880 ---------- Specialty Retail: 1.68% Giordano International, Ltd. 10,188,000 6,389,782 ---------- Total Consumer Discretionary 90,810,853 ===========================================================================26 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
SHARES VALUE =========================================================================== INDUSTRIALS: 15.69% Transportation Infrastructure: 10.06% Cosco Pacific, Ltd. 5,948,000 $12,320,245 China Merchants Holdings International Co., Ltd. 5,205,000 9,810,268 Zhejiang Expressway Co., Ltd. H Shares 9,656,000 6,646,202 Beijing Capital International Airport Co., Ltd. H Shares 13,616,000 5,780,774 GZI Transport, Ltd. 12,384,000 3,664,471 ---------- 38,221,960 ---------- Electrical Equipment: 2.51% BYD Co., Ltd. H Shares 3,599,000 9,538,313 ---------- Machinery: 1.78% Shanghai Zhenhua Port Machinery Co., Ltd. B Shares 8,729,682 6,782,963 ---------- Air Freight & Logistics: 0.81% Sinotrans, Ltd. H Shares 10,566,000 3,092,534 ---------- Airlines: 0.53% Air China, Ltd.** 5,230,000 2,018,578 ---------- Total Industrials 59,654,348 =========================================================================== SHARES VALUE =========================================================================== FINANCIALS: 14.06% Real Estate: 7.69% Swire Pacific, Ltd. A Shares 2,103,500 $17,590,508 China Vanke Co., Ltd. B Shares 20,396,858 11,598,666 ---------- 29,189,174 ---------- Commercial Banks: 3.59% BOC Hong Kong Holdings, Ltd. 7,131,500 13,624,791 ---------- Insurance: 2.78% PICC Property and Casualty Co., Ltd. H Shares ** 20,856,000 7,244,648 China Insurance International Holdings Co., Ltd. 8,104,000 3,336,352 ---------- 10,581,000 ---------- Total Financials 53,394,965 =========================================================================== UTILITIES: 9.33% Electric Utilities: 5.54% Datang International Power Generation, Co., Ltd. H Shares 11,232,000 8,453,479 Huaneng Power International, Inc. H Shares 8,604,000 6,420,235 Guangdong Electric Power Development Co., Ltd. B Shares 8,471,726 3,803,819 Huaneng Power International, Inc. ADR 78,800 2,365,576 ---------- 21,043,109 ---------- Gas Utilities: 3.79% Hong Kong and China Gas Co., Ltd. 6,973,400 14,399,325 ---------- Total Utilities 35,442,434 ===========================================================================See footnotes on page 29.
800.789.ASIA [2742] www.matthewsfunds.com 27
M A T T H E W S C H I N A F U N D
SCHEDULE OF INVESTMENTS (continued)
EQUITIES: CHINA/HONG KONG (continued)SHARES VALUE =========================================================================== INFORMATION TECHNOLOGY: 9.19% Computers & Peripherals: 4.15% Lenovo Group, Ltd. 30,500,000 $9,123,160 TPV Technology, Ltd. 11,122,000 6,653,625 ---------- 15,776,785 ---------- Communications Equipment: 1.64% Comba Telecom Systems Holdings, Ltd. 11,214,000 4,977,396 ZTE Corp. H Shares ** 390,600 1,263,842 ---------- 6,241,238 ---------- Internet Software & Services: 1.63% Sina Corp. ** 192,900 6,184,374 ---------- IT Services: 1.38% Travelsky Technology, Ltd. H Shares 6,487,000 5,257,835 ---------- Semiconductors & Semiconductor Equipment: 0.39% Semiconductor Manufacturing International, Corp. ADR ** 138,000 1,486,260 ---------- Total Information Technology 34,946,492 =========================================================================== ENERGY: 7.44% Oil & Gas: 5.99% CNOOC, Ltd. 17,072,000 9,169,874 Sinopec Zhenhai Refining and Chemical Co., Ltd. 7,352,000 7,614,193 PetroChina Co., Ltd. H Shares 11,226,000 5,993,709 ---------- 22,777,776 ---------- Energy Equipment & Services: 1.45% China Oilfield Services, Ltd. H Shares 18,018,000 5,505,448 ---------- Total Energy 28,283,224 =========================================================================== SHARES VALUE =========================================================================== TELECOMMUNICATION SERVICES: 6.89% Wireless Telecommunication Services: 4.87% China Mobile HK, Ltd. 5,199,583 $17,626,726 China Mobile HK, Ltd. ADR 50,500 866,580 ---------- 18,493,306 ---------- Diversified Telecommunication Services: 2.02% China Telecom Corp., Ltd. H Shares 20,988,000 7,695,528 ---------- Total Telecommunication Services 26,188,834 =========================================================================== CONSUMER STAPLES: 5.00% Food & Staples Retailing: 1.77% Lianhua Supermarket Holdings, Ltd. H Shares 5,512,000 6,736,826 ---------- Beverages: 1.69% Tsingtao Brewery Co., Ltd. H Shares 6,351,000 6,414,079 ---------- Food Products: 1.54% China Mengniu Dairy Co., Ltd. ** 7,444,000 5,841,962 ---------- Total Consumer Staples 18,992,867 ===========================================================================28 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
SHARES VALUE =========================================================================== HEALTH CARE: 4.07% Pharmaceuticals: 1.52% China Pharmaceutical Group, Ltd. 21,974,000 $5,795,428 ---------- Health Care Equipment & Supplies: 1.29% Moulin International Holdings, Ltd. 7,192,000 4,903,973 ---------- Biotechnology: 1.26% Global Bio-chem Technology Group Co., Ltd. 7,204,000 4,726,791 Global Bio-chem Technology Group Co., Ltd. Warrants Expires 5/31/07 ** 1,089,000 51,838 ---------- 4,778,629 ---------- Total Health Care 15,478,030 =========================================================================== MATERIALS: 3.64% Construction Materials: 3.64% Cheung Kong Infrastructure Holdings, Ltd. 4,805,500 13,879,615 ---------- Total Materials 13,879,615 =========================================================================== VALUE =========================================================================== TOTAL INVESTMENTS: 99.20% $377,071,662 (Cost $345,741,936***) CASH AND OTHER ASSETS, LESS LIABILITIES: 0.80% 3,049,808 ---------- NET ASSETS: 100.00% $380,121,470 ===========================================================================* As a percentage of net assets as of December 31, 2004 ** Nonincome producing security. *** Cost for Federal tax purposes is $346,280,460 and net unrealized appreciation consists of:Gross unrealized appreciation.....................$ 50,817,457 Gross unrealized depreciation..................... (20,026,255) ------------ Net unrealized depreciation.......................$ 30,791,202 ============ADR American Depositary ReceiptSee accompanying notes to financial statements.
800.789.ASIA [2742] www.matthewsfunds.com 29
M A T T H E W S J A P A N F U N D
PORTFOLIO MANAGER SYMBOL: MJFOX
Mark W. Headley
The Matthews Japan Fund invests at least 80% of its assets in the common and preferred stocks of companies located in Japan.
PORTFOLIO MANAGER COMMENTARY
For the year ended December 31, 2004, the Japanese equity market was volatile. This was primarily due to a lack of consistent and positive economic data released in Japan and the markets factoring in possible negative repercussions from slower growth in China and the U.S. Despite these uncertainties, the Japanese equity markets were able to end the year with gains.
For the year ended December 31, 2004, the Matthews Japan Fund gained 22.03%, outperforming its benchmark indices as well as the Lipper Japanese Funds category average. The largest contributing sectors to the Funds performance were financial, consumer discretionary and information technology. During the year, the Fund was overweight in these sectors relative to its benchmarks. Positions in the telecommunication and industrial sectors underperformed, detracting from the Funds
(continued on page 32)
GROWTH OF A $10,000 INVESTMENT
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gain distributions or redemption of fund shares.30 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
FUND HIGHLIGHTS Fund Inception: 12/31/98--------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF DECEMBER 31, 2004 --------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION --------------------------------------------------------------------------------------------------------- Matthews Japan Fund 22.03% 19.02% -2.18% 10.87% MSCI Developed Markets Japan Index(1) 15.95% 12.36% -6.31% 2.62% TOPIX Index(2) 15.54% 13.47% -7.03% 3.68% Lipper Japanese Funds Category Average(3) 13.83% 10.46% -8.83% 4.16% --------------------------------------------------------------------------------------------------------- Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund's NAV, is not adjusted to reflect fair value at 4PM Eastern Time. ------------------------------------------------------------------- OPERATING EXPENSES(4) ------------------------------------------------------------------- For the four months ended 12/31/04+ (annualized) 1.38% For Fiscal Year 2004 (ended 8/31/04) 1.45% ------------------------------------------------------------------- ------------------------------------------------------------------- PORTFOLIO TURNOVER(5) ------------------------------------------------------------------- For the four months ended 12/31/04+ (not annualized) 5.30% For Fiscal Year 2004 (ended 8/31/04) 14.57% ------------------------------------------------------------------- + For the four months ended 12/31/04 due to Fund's change of fiscal year from 8/31 to 12/31. ---------------------------------------------------- COUNTRY ALLOCATION** ---------------------------------------------------- Japan 99.5% Cash and other 0.5% ---------------------------------------------------- ---------------------------------------------------- SECTOR ALLOCATION** ---------------------------------------------------- Consumer Discretionary 31.6% Financials 23.9% Information Technology 13.4% Industrials 11.7% Consumer Staples 10.4% Telecommunications Services 6.7% Health Care 1.8% Cash and other 0.5% ---------------------------------------------------- ---------------------------------------------------- MARKET CAP EXPOSURE** ---------------------------------------------------- Large cap (over $5 billion) 52.9% Mid cap ($1-$5 billion) 35.6% Small cap (under $1 billion) 11.0% Cash and other 0.5% ---------------------------------------------------- ** Percentage figures have been rounded to total 100.0% --------------------------------------------------------------------------- NAV NET ASSETS REDEMPTION FEE 12b-1 FEES --------------------------------------------------------------------------- $16.12 $200.5 million 2.00% within 90 days None ---------------------------------------------------------------------------All data is as of December 31, 2004, unless otherwise noted.
1 The MSCI Developed Markets Japan Index is a free floatadjusted market capitalizationweighted index of Japanese equities listed in Japan. Source: Bloomberg. 2 The Tokyo Price Index (TOPIX) is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. Source: Bloomberg. 3 As of 12/31/04, the Lipper Japanese Funds Category Average consisted of 40 funds for the one-year period, 35 funds for the three-year period, 28 funds for the five-year period, and 28 funds since 12/31/98. Lipper, Inc. fund performance does not reflect sales charges and is based on total return, including reinvestment of dividends and capital gains, for the stated periods. 4 Includes management fee, shareholder services fees, waivers, reimbursements, recoupments and other expenses. Matthews Asian Funds do not charge 12b-1 fees. 5 The lesser of fiscal year-to-date purchase costs or sales, proceeds divided by the average monthly market value of long-term securities.800.789.ASIA [2742] www.matthewsfunds.com 31
M A T T H E W S J A P A N F U N D
Portfolio manager commentary, continued from page 30
performance. The Matthews Japan Funds exposure to small- and mid-capitalization stocks enabled it to participate in some of the small-cap indexs outperformance relative to the large- to mid-cap indices.
The Matthews Japan Fund continues to concentrate its exposure in three main sectors: financials, consumer discretionary and information technology. This focus is based on the view that, over the long term, these sectors represent the best growth opportunitiesdriven by the revitalization of the consumer in Japan as well as the growth in absolute consumption in Asia ex-Japan. The Fund also maintains exposure to a combination of stocks of larger-capitalization companies as well as medium- and smaller-cap companies, as we believe such exposure allows for both greater diversification and broader participation in the Japanese economy. The Japanese equity markets continue to present short-term uncertainties. However, we are observing many Japanese companies improving their operations and service toward investors, which we believe over the long term will result in a more positive environment in which to invest in Japanese equities.
In late January 2005, Mark W. Headley was named Lead Manager of the Fund and Patricia Higase, CFA, was named Co-Manager. Mr. Headley served as a Manager since the Funds inception in December 1998. No other changes to the Funds management occurred.
SCHEDULE OF INVESTMENTS
EQUITIES: Japan: 99.46%*SHARES VALUE =================================================================== CONSUMER DISCRETIONARY: 31.64% Household Durables: 9.46% Sharp Corp. 461,000 $7,529,562 Matsushita Electric Industrial Co., Ltd 377,000 5,984,594 Makita Corp. 312,000 5,458,401 ---------- 18,972,557 ---------- Leisure, Equipment & Products: 6.71% Shimano, Inc. 209,000 5,968,222 Studio Alice Co., Ltd. 214,500 4,607,049 Fuji Photo Film Co., Ltd. 79,000 2,884,506 ---------- 13,459,777 ---------- Specialty Retail: 3.43% Nitori Co., Ltd. 61,250 4,000,415 Gulliver International Co., Ltd. 21,570 2,884,985 ---------- 6,885,400 ---------- Multiline Retail: 2.79% Mitsukoshi, Ltd. 1,149,000 5,586,273 ---------- Media: 2.55% Fuji Television Network, Inc. 2,357 5,108,406 ---------- Automobiles: 2.37% Honda Motor Co., Ltd. ADR 182,200 4,748,132 ---------- Hotels Restaurants & Leisure: 2.35% Nissin Healthcare Food Service Co., Ltd. 260,800 4,707,793 ---------- Internet & Catalog Retail: 1.98% Rakuten, Inc. W / I **, *** 3,258 3,535,358 Rakuten, Inc. ** 362 413,492 Belluna Co., Ltd. 710 26,479 ---------- 3,975,329 ---------- Total Consumer Discretionary 63,443,667 ===================================================================32 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
SHARES VALUE =================================================================== FINANCIALS: 23.90% Commercial Banks: 10.95% The Sumitomo Trust and Banking Co., Ltd. 1,210,000 $8,753,392 Mizuho Financial Group, Inc. 1,491 7,511,042 The Joyo Bank, Ltd. 1,165,000 5,686,810 ---------- 21,951,244 ---------- Capital Markets: 6.67% Nomura Holdings, Inc. 460,000 6,709,362 Monex Beans Holdings, Inc. ** 5,328 6,658,049 ---------- 13,367,411 ---------- Real Estate: 3.26% Japan Retail Fund Investment Corp. REIT 416 3,513,033 Japan Real Estate Investment Corp. REIT 359 3,028,175 ---------- 6,541,208 ---------- Insurance: 3.02% T&D Holdings, Inc. ** 126,445 6,048,819 ---------- Total Financials 47,908,682 =================================================================== SHARES VALUE =================================================================== INFORMATION TECHNOLOGY: 13.37% Software: 6.04% Nintendo Co., Ltd. 52,215 $6,560,647 Square Enix Co., Ltd. 187,600 5,549,429 ---------- 12,110,076 ---------- IT Services: 3.25% NIWS Co., Ltd. 2,245 6,509,470 ---------- Office Electronics: 2.93% Canon, Inc. ADR 108,300 5,876,358 ---------- Electronic Equipment & Instruments: 1.15% Murata Manufacturing Co., Ltd. 41,300 2,310,348 ---------- Total Information Technology 26,806,252 =================================================================== INDUSTRIALS: 11.68% Commercial Services & Supplies: 5.46% Secom Co., Ltd. 158,500 6,344,333 Toppan Forms Co., Ltd. 377,600 4,608,025 ---------- 10,952,358 ---------- Air Freight & Logistics: 2.46% Yamato Transport Co., Ltd. 333,000 4,941,521 ---------- Building Products: 2.11% Toto, Ltd. 444,000 4,239,305 ---------- Machinery: 1.65% Yushin Precision Equipment Co., Ltd. 127,145 2,136,254 Disco Corp. 25,000 1,144,684 ---------- 3,280,938 ---------- Total Industrials 23,414,122 ===================================================================See footnotes on page 35.
800.789.ASIA [2742] www.matthewsfunds.com 33
M A T T H E W S J A P A N F U N D
SCHEDULE OF INVESTMENTS (continued)
EQUITIES (continued)SHARES VALUE =================================================================== CONSUMER STAPLES: 10.38% Food Staples & Retailing: 3.29% Seven-Eleven Japan Co., Ltd. 209,000 $6,590,550 ---------- Beverages: 2.89% Ito En, Ltd. 111,600 5,796,271 ---------- Food Products: 2.53% Hokuto Corp. 278,680 5,071,361 ---------- Personal Products: 1.67% Shiseido Co., Ltd. 232,000 3,361,203 ---------- Total Consumer Staples 20,819,385 =================================================================== SHARES VALUE =================================================================== TELECOMMUNICATION SERVICES: 6.68% Diversified Telecommunication Services: 3.73% Nippon Telegraph & Telephone Corp. ADR 222,325 $5,013,429 Usen Corp. ** 104,400 2,466,543 ---------- 7,479,972 ---------- Wireless Telecommunication Services: 2.95% NTT DoCoMo, Inc. 3,204 5,911,901 ---------- Total Telecommunication Services 13,391,873 =================================================================== HEALTH CARE: 1.81% Health Care Equipment & Supplies: 1.81% Nakanishi, Inc. 53,000 3,621,986 ---------- Total Health Care 3,621,986 ===================================================================34 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 , 2 0 0 4
VALUE =================================================================== TOTAL INVESTMENTS: 99.46% $199,405,967 (Cost $177,076,344****) CASH AND OTHER ASSETS, LESS LIABILITIES: 0.54% 1,075,918 ---------- NET ASSETS: 100.00% $200,481,885 ===================================================================
Gross unrealized appreciation.....................$27,605,043 Gross unrealized depreciation..................... (7,144,869) ----------- Net unrealized depreciation.......................$20,460,174 ===========ADR American Depositary Receipt REIT Real Estate Investment Trust W/I When Issued
See accompanying notes to financial statements.
800.789.ASIA [2742] www.matthewsfunds.com 35
M A T T H E W S A S I A N T E C H N O L O G Y F U N D
Mark W. Headley and G. Paul Matthews
The Matthews Asian Technology Fund invests at least 80% of its assets in the common and preferred stocks
of companies located in Asia which derive a substantial portion of their revenues from the sale of
products or services in technology-related industries and services. Asia includes China, Hong Kong,
India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.
PORTFOLIO MANAGER COMMENTARY
For the year ended December 31, 2004, the Matthews Asian Technology Fund gained 12.84%, outperforming its benchmark index and the Lipper Science and Technology Funds category average. The Funds outperformance was primarily due to strong returns from its positions in the wireless telecommunications and software and services sectors. Among the best performers were Internet companies, which primarily generated earnings in their home markets, as opposed to earnings from overseas exports.
While the performance of the Fund and its underlying markets were positive, it was a very volatile year. For the first three months, the Fund and its underlying markets performed very strongly. By the second quarter, however, as concerns over margin erosion and over-capacity in some industries grew, the market turned negative. This trend continued until expectations of strong holiday sales in the U.S. and attractive valuations lifted the markets.
(continued on page 38)
GROWTH OF A $10,000 INVESTMENT
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on
dividends, capital gain distributions or redemption of fund shares.
36 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 ,
2 0 0 4
-------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS AS OF DECEMBER 31, 2004 -------------------------------------------------------------------------------------------------------------------- SINCE 1 YR 3 YRS 5 YRS INCEPTION -------------------------------------------------------------------------------------------------------------------- Matthews Asian Technology Fund 12.84% 11.82% -10.71% -10.43% MSCI/Matthews Asian Technology Index(1) 6.86% 6.82% -16.15% -16.15%* Lipper Science and Technology Funds Category Average(2) 3.97% -2.71% -16.49% -16.49%* -------------------------------------------------------------------------------------------------------------------- Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund's NAV, is not adjusted to reflect fair value at 4PM Eastern Time. *Calculated from 12/31/99 -------------------------------------------------------------------- OPERATING EXPENSES(3) -------------------------------------------------------------------- For the four months ended 12/31/04+ (annualized) 1.60% For Fiscal Year 2004 (ended 8/31/04) 1.91% -------------------------------------------------------------------- -------------------------------------------------------------------- PORTFOLIO TURNOVER(4) -------------------------------------------------------------------- For the four months ended 12/31/04+ (not annualized) 7.36% For Fiscal Year 2004 (ended 8/31/04) 41.25% -------------------------------------------------------------------- + For the four months ended 12/31/04 due to Fund's change of fiscal year from 8/31 to 12/31. ---------------------------------------------------- COUNTRY ALLOCATION** ---------------------------------------------------- Japan 31.4% China/Hong Kong 20.1% South Korea 17.7% Taiwan 12.2% India 5.4% Thailand 5.2% Indonesia 3.1% Singapore 3.0% Australia 0.7% Cash and other 1.2% ---------------------------------------------------- ---------------------------------------------------- SECTOR ALLOCATION** ---------------------------------------------------- Information Technology 60.0% Telecommunication Services 21.2% Consumer Discretionary 11.2% Industrials 3.4% Health Care 3.0% Cash and other 1.2% ---------------------------------------------------- MARKET CAP EXPOSURE** ---------------------------------------------------- Large cap (over $5 billion) 53.6% Mid cap ($1-$5 billion) 25.5% Small cap (under $1 billion) 19.7% Cash and other 1.2% ---------------------------------------------------- ** Percentage figures have been rounded to total 100.0% ---------------------------------------------------------------------- NAV NET ASSETS REDEMPTION FEE 12b-1 FEES ---------------------------------------------------------------------- $5.45 $38.9 million 2.00% within 90 days None ----------------------------------------------------------------------All data is as of December 31, 2004, unless otherwise noted.
800.789.ASIA [2742] www.matthewsfunds.com 37
M A T T H E W S A S I A N T E C H N O L O G Y F U N D
Portfolio manager commentary,
continued from page 36
Relative to their global peers, Asian tech companies continued to perform well in the digital products segment. The intense competition among Asian manufacturers continued to reduce prices of many digital products. We believe that the cost competitiveness and R&D focus of Asian technology companies relative to their global peers should enable them to continue to maintain their position in the global market.
The Fund continues to seek new investment opportunities in software and services, Internet and high-tech component areas while maintaining its exposure to telecommunications. We believe that rising incomes among consumers in the Asia Pacific region should translate to higher consumption of Asian technology products. Furthermore, we believe that this trend may result in less reliance on U.S. consumers in the future, which may allow Asian technology companies to achieve a degree of independence from global technology cycles.
In late January 2005, Patricia Higase, CFA, and Andrew T. Foster were named Co-Managers of the Fund and G. Paul Matthews relinquished his role as Co-Manager of the Fund. No other changes to the Funds management occurred.
SCHEDULE OF INVESTMENTS
EQUITIES: 98.85%*
SHARES VALUE =================================================================== JAPAN: 31.35% Niws Co., Ltd. 503 $1,458,469 Nintendo Co., Ltd. 11,385 1,430,489 Matsushita Electric Industrial Co., Ltd. 85,000 1,349,312 NTT DoCoMo, Inc. 676 1,247,330 Sharp Corp. 74,000 1,208,650 Rakuten, Inc. W/I **,*** 981 1,064,514 Access Co., Ltd. ** 35 984,087 Canon, Inc. ADR 17,500 949,550 Usen Corp. ** 29,600 699,326 Nidec Corp. 5,300 646,266 Yushin Precision Equipment Co., Ltd. 25,245 424,159 Strawberry Corp. 58 417,885 Kakaku.com, Inc. 25 181,343 Rakuten, Inc.** 109 124,505 ---------- Total Japan 12,185,885 =================================================================== CHINA/HONG KONG: 20.11% China Mobile HK, Ltd. ADR 83,000 1,424,280 ASM Pacific Technology, Ltd. 298,000 1,073,487 SINA Corp. ** 26,600 852,796 Lenovo Group, Ltd. 2,667,000 797,753 Asia Satellite Telecommunications Holdings, Ltd. 416,900 793,809 TPV Technology, Ltd. 1,152,000 689,172 TCL International Holdings, Ltd. 2,352,000 605,187 Comba Telecom Systems Holdings, Ltd. 1,156,000 513,097 BYD Co., Ltd. H Shares 185,000 490,300 Tencent Holdings, Ltd. ** 803,000 480,387 ZTE Corp. H Shares ** 29,600 95,775 ---------- Total China/Hong Kong 7,816,043 ===================================================================
38 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 ,
2 0 0 4
SHARES VALUE =================================================================== SOUTH KOREA: 17.69% Samsung Electronics Co., Ltd. 4,048 $1,761,615 NCSoft Corp. ** 13,463 1,089,837 NHN Corp. 12,939 1,043,669 LG Life Sciences, Ltd. ** 26,212 893,821 SK Telecom Co., Ltd. 4,359 829,524 Mtekvision Co., Ltd. ** 13,434 423,057 LG.Philips LCD Co., Ltd. ADR ** 22,900 411,971 Amotech Co., Ltd. 36,853 377,359 Sanghwa Micro Technology, Inc. 5,350 42,740 ---------- Total South Korea 6,873,593 =================================================================== TAIWAN: 12.18% Hon Hai Precision Industry Co., Ltd. 345,492 1,597,587 Taiwan Semiconductor Manufacturing Co., Ltd. 743,466 1,181,033 Quanta Computer, Inc. 452,386 811,136 LITE-ON IT Corp. 309,300 632,416 Sunplus Technology Co., Ltd. 364,595 511,511 ---------- Total Taiwan 4,733,683 =================================================================== INDIA: 5.46% Infosys Technologies, Ltd. 29,118 1,406,416 Wipro, Ltd. 41,400 716,005 ---------- Total India 2,122,421 =================================================================== THAILAND: 5.26% Advanced Info Service Public Co., Ltd. 535,100 1,472,853 Shin Satellite Public Co., Ltd. 1,241,800 571,802 ---------- Total Thailand 2,044,655 =================================================================== SHARES VALUE =================================================================== INDONESIA: 3.09% PT Telekomunikasi Indonesia ADR 57,200 $1,202,344 ---------- Total Indonesia 1,202,344 =================================================================== SINGAPORE: 3.00% Venture Corp., Ltd. 119,600 1,165,149 ---------- Total Singapore 1,165,149 =================================================================== AUSTRALIA: 0.71% Novogen, Ltd. ** 60,532 272,795 ---------- Total Australia 272,795 =================================================================== TOTAL INVESTMENTS: 98.85% 38,416,568 (Cost $33,382,894****) CASH AND OTHER ASSETS, LESS LIABILITIES: 1.15% 448,855 ---------- NET ASSETS: 100.00% $38,865,423 ===================================================================* As a percentage of net assets as of December 31, 2004 ** Nonincome producing security. *** Valued at fair value under direction of the Board of Trustees (Note 1A) **** Cost for Federal tax purposes is $33,661,739 and net unrealized appreciation consists of:
Gross unrealized appreciation.....................$7,219,942 Gross unrealized depreciation.....................(2,465,113) ---------- Net unrealized depreciation.......................$4,754,829 ==========ADR American Depositary Receipt W/I When Issued
See accompanying notes to financial statements.
800.789.ASIA [2742] www.matthewsfunds.com 39
M A T T H E W S A S I A P A C I F I C F U N D
The Matthews Asia Pacific Fund invests at least 80% of its assets in the common and preferred stocks of companies located in the Asia Pacific region. The Fund may also invest in the convertible securities of companies located in Asia.
Asia includes China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand. The Asia Pacific region includes the markets of Asia, as well as Australia, New Zealand, and Pakistan.
PORTFOLIO MANAGER COMMENTARY
In its first full calendar year of operation, the Matthews Asia Pacific Fund benefited from a positive environment in the Asia Pacific region. The year was not without significant ups and downs, as concerns over economic conditions in China and the cost of energy caused significant uncertainty over regional growth. Overall, the region continues to exhibit trends toward more rational and integrated economic activity. The sheer scale of the region was exhibited in a particularly tragic manner by December 26ths massive earthquake and tsunami, which caused extensive death and destruction yet had no significant impact on the economic foundations of the countries in which we invest.
The Matthews Asia Pacific Fund gained 22.35% for the year, outperforming both its benchmark index and the Lipper Pacific Region Funds category average. The Fund saw its most significant returns in the Korean and Japanese markets.
(continued on page 42)
GROWTH OF A $10,000 INVESTMENT
The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on
dividends, capital gain distributions or redemption of fund shares.
40
MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 ,
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------------------------------------------------------------------------------------- TOTAL RETURN AS OF DECEMBER 31, 2004 ------------------------------------------------------------------------------------- SINCE 1 YR INCEPTION ------------------------------------------------------------------------------------- Matthews Asia Pacific Fund 22.35% 22.06% MSCI All Country Asia Pacific Free Index(1) 18.59% 20.23% Lipper Pacific Region Funds Category Average(2) 16.04% 17.87% ------------------------------------------------------------------------------------- Assumes reinvestment of all dividends. Past performance is not indicative of future results. Unusually high returns may not be sustainable. The performance of foreign indices may be based on different exchange rates than those used by the Fund and, unlike the Fund's NAV, is not adjusted to reflect fair value at 4PM Eastern Time. ------------------------------------------------------------------- OPERATING EXPENSES(3) ------------------------------------------------------------------- For the four months ended 12/31/04+ (annualized) 1.51% Since inception to 8/31/04 (annualized) 1.66% ------------------------------------------------------------------- ------------------------------------------------------------------- PORTFOLIO TURNOVER(4) ------------------------------------------------------------------- For the four months ended 12/31/04+ (not annualized) 1.28% Since inception to 8/31/04 (not annualized) 10.75% ------------------------------------------------------------------- + For the four months ended 12/31/04 due to Fund's change of fiscal year from 8/31 to 12/31. ---------------------------------------------------- COUNTRY ALLOCATION** ---------------------------------------------------- Japan 37.7% China/Hong Kong 22.0% South Korea 13.8% Singapore 6.6% Australia 4.5% India 4.1% Thailand 3.9% Indonesia 2.4% Taiwan 2.2% United Kingdom(1) 1.1% Cash and other 1.7% ---------------------------------------------------- ---------------------------------------------------- SECTOR ALLOCATION** ---------------------------------------------------- Financials 27.3% Consumer Discretionary 26.1% Information Technology 15.6% Industrials 8.8% Consumer Staples 8.6% Telecommunication Services 7.1% Health Care 2.5% Materials 1.4% Utilities 0.9% Cash and other 1.7% ---------------------------------------------------- ---------------------------------------------------- MARKET CAP EXPOSURE** ---------------------------------------------------- Large cap (over $5 billion) 49.1% Mid cap ($1-$5 billion) 39.4% Small cap (under $1 billion) 9.8% Cash and other 1.7% ---------------------------------------------------- ** Percentage figures have been rounded to total 100.0% ---------------------------------------------------------------------------- NAV NET ASSETS REDEMPTION FEE 12b-1 FEES ---------------------------------------------------------------------------- $12.58 $112.0 million 2.00% within 90 days None ----------------------------------------------------------------------------All data is as of December 31, 2004, unless otherwise noted.
800.789.ASIA [2742] www.matthewsfunds.com 41
M A T T H E W S A S I A P A C I F I C F U N D
Portfolio manager commentary, continued from page 40
Hong Kongbased companies were also a source of strong returns. India was the only market in which the Fund saw negative returns on a country-specific basis, and those returns were minor. On a sector basis, the Fund saw very strong returns in both consumer retailrelated companies and the broad financial sector. The single largest contributor to performance was a Japanese bank. We continue to focus on these domestically driven sectors, as we continue to believe that this is where many of the most exciting opportunities in the region can be found. The technology sector was mixed for the year, but its relative underperformance was not significant.
The Fund continues to seek long-term growth opportunities across the Asia Pacific region through our bottom-up analysis of companies ranging from very large to quite small. We believe that this universe offers a wide range of diversity. The ongoing changes in the region continue to excite us, but the many challenges for both countries and companies remain real and should never be taken lightly.
In late January 2005, Mark W. Headley was named Lead Manager of the Fund and Patricia Higase, CFA, and Andrew T. Foster were named Co-Managers. Mr. Headley served as Co-Manager since the Funds inception in October 2003. No other changes to the Funds management occurred.
SCHEDULE OF INVESTMENTS
EQUITIES: 98.32%*
SHARES VALUE =================================================================== JAPAN: 37.70% Ito En, Ltd. 50,600 $2,628,058 Mizuho Financial Group, Inc. 491 2,473,455 The Sumitomo Trust and Banking Co., Ltd. 330,000 2,387,289 Seven-Eleven Japan Co., Ltd. 75,000 2,365,030 Secom Co., Ltd. 58,500 2,341,599 Matsushita Electric Industrial Co., Ltd. 146,000 2,317,641 Sharp Corp. 136,000 2,221,302 Monex Beans Holdings, Inc.** 1,754 2,191,858 Shimano, Inc. 66,600 1,901,835 Nintendo Co., Ltd. 14,700 1,847,008 Nomura Holdings, Inc. 126,000 1,837,782 Niws Co., Ltd. 617 1,789,017 T&D Holdings, Inc. ** 36,430 1,742,722 Makita Corp. 97,000 1,697,003 Gulliver International Co., Ltd. 12,470 1,667,861 Canon, Inc. ADR 29,400 1,595,244 Fuji Television Network, Inc. 691 1,497,628 Toppan Forms Co., Ltd. 114,500 1,397,296 Nissin Healthcare Food Service Co., Ltd. 76,150 1,374,610 Yamaha Corp. 76,200 1,163,495 NTT DoCoMo, Inc. 591 1,090,491 Honda Motor Co., Ltd. 13,200 684,292 Honda Motor Co., Ltd. ADR 24,100 628,046 Nippon Telegraph and Telephone Corp. ADR 24,400 550,220 Nippon Telegraph and Telephone Corp. 102 458,069 NTT DoCoMo, Inc. ADR 21,400 398,468 ---------- Total Japan 42,247,319 ===================================================================
42 MATTHEWS ASIAN FUNDS
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SHARES VALUE =================================================================== CHINA/HONG KONG: 22.02% Swire Pacific, Ltd. A Shares 264,000 $2,207,699 Lenovo Group, Ltd. 7,148,000 2,138,110 Dah Sing Financial Group 256,400 1,987,456 Giordano International, Ltd. 3,164,000 1,984,420 Television Broadcasts, Ltd. 381,000 1,769,517 ASM Pacific Technology, Ltd. 425,000 1,530,980 Shangri-La Asia, Ltd. 930,000 1,334,075 China Mobile HK, Ltd. ADR 75,500 1,295,580 China Travel International Investment HK, Ltd. 3,922,000 1,261,450 PICC Property and Casualty Co., Ltd. H Shares ** 3,554,000 1,234,536 Sa Sa International Holdings, Ltd. 1,936,000 1,039,883 Sun Hung Kai Properties, Ltd. 102,000 1,020,289 BYD Co., Ltd. H Shares 384,000 1,017,703 SINA Corp. ** 31,600 1,013,096 Hong Kong and China Gas Co., Ltd. 470,000 970,500 Cosco Pacific, Ltd. 360,000 745,677 Denway Motors, Ltd. 1,928,000 688,323 China Telecom Corp., Ltd. H Shares 1,742,000 638,727 China Pharmaceutical Group, Ltd. 1,962,000 517,458 China Mobile HK, Ltd. 80,500 272,897 ---------- Total China/Hong Kong 24,668,376 =================================================================== SHARES VALUE =================================================================== SOUTH KOREA: 13.83% S1 Corp. 65,640 $2,314,393 Samsung Electronics Co., Ltd. 5,140 2,236,833 AmorePacific Corp. 7,540 1,890,099 Kookmin Bank ADR ** 35,540 1,388,903 LG Home Shopping, Inc. 21,289 1,316,167 Hyundai Motor Co. 20,180 1,081,907 Nong Shim Co., Ltd. 4,470 1,077,343 Shinhan Financial Group Co., Ltd. 46,400 1,048,841 SK Telecom Co., Ltd. ADR 46,200 1,027,950 NCsoft Corp. ** 12,380 1,002,168 Samsung Fire & Marine Insurance Co., Ltd. 9,130 718,793 Kookmin Bank ** 9,920 388,099 ---------- Total South Korea 15,491,496 =================================================================== SINGAPORE: 6.60% Hyflux, Ltd. 1,111,875 2,023,324 DBS Group Holdings, Ltd. 189,700 1,871,313 Venture Corp., Ltd. 186,600 1,817,867 Fraser and Neave, Ltd. 166,800 1,665,854 ---------- Total Singapore 7,378,358 =================================================================== AUSTRALIA: 4.47% AXA Asia Pacific Holdings, Ltd. 556,307 1,784,544 Australia and New Zealand Banking Group, Ltd. 102,823 1,656,439 BHP Billiton, Ltd. 130,401 1,565,075 ---------- Total Australia 5,006,058 ===================================================================
See footnotes on page 45.
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M A T T H E W S A S I A P A C I F I C F U N D
SCHEDULE OF INVESTMENTS (continued)
EQUITIES (continued)
SHARES VALUE =================================================================== INDIA: 4.05% HDFC Bank, Ltd. 114,104 $1,368,852 Dr. Reddy's Laboratories, Ltd. 60,293 1,206,278 Dabur India, Ltd. 485,177 1,042,710 Hero Honda Motors, Ltd. 70,000 924,324 ---------- Total India 4,542,164 =================================================================== THAILAND: 3.90% Advanced Info Service Public Co., Ltd. 809,000 2,226,758 Bangkok Bank Public Co., Ltd. 731,200 2,144,282 ---------- Total Thailand 4,371,040 =================================================================== SHARES VALUE =================================================================== INDONESIA: 2.37% PT Astra International 1,367,500 $1,414,274 PT Ramayana Lestari Sentosa 14,909,000 1,244,759 ---------- Total Indonesia 2,659,033 =================================================================== TAIWAN: 2.25% Hon Hai Precision Industry Co., Ltd. 545,549 2,522,670 ---------- Total Taiwan 2,522,670 =================================================================== UNITED KINGDOM: 1.13% HSBC Holdings PLC ADR 14,900 1,268,586 ---------- Total United Kingdom 1,268,586 ===================================================================
44 MATTHEWS ASIAN FUNDS
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VALUE =================================================================== TOTAL INVESTMENTS: 98.32% $110,155,100 (Cost $96,021,314***) CASH AND OTHER ASSETS, LESS LIABILITIES: 1.68% 1,887,432 ------------ NET ASSETS: 100.00% $112,042,532 ===================================================================* As a percentage of net assets as of December 31, 2004 ** Nonincome producing security. *** Cost for Federal tax purposes is $96,085,558 and net unrealized appreciation consists of:
Gross unrealized appreciation.....................$16,818,554 Gross unrealized depreciation..................... (2,749,012) ----------- Net unrealized depreciation.......................$14,069,542 ===========ADR American Depositary Receipt
See accompanying notes to financial statements.
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D I S C L O S U R E O F F U N D E X P E N S E S  
( U n a u d i t e d )
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 funds gross income, directly reduce the investment return of the fund. A funds 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.
The table on page 47 illustrates your
funds costs in two ways:
Actual Fund Return: This section
helps you to estimate the actual expenses, after any applicable fee waivers, that you paid
over the period. The Ending Account Value shown is derived from the
funds actual return for the past six month period, the Expense Ratio
column shows the periods annualized expense ratio, and the 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 Expenses Paid During Period.
Hypothetical 5% Return: This section is intended to help you compare your funds costs with those of other mutual funds. It assumes that the fund had an annual return of 5% before expenses, but that the expense ratio is unchanged. In this case, because the return used is not the funds 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 funds costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Please note that the 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. The Funds assess a redemption fee of 2.00% of the total redemption proceeds if you sell or exchange your shares within 90 days after purchasing them. The redemption fee is paid directly to the Funds and is designed to offset transaction costs associated with short-term trading of Fund shares. The redemption fee does not apply to redemptions of shares held in certain omnibus accounts and retirement plans that cannot currently implement the redemption fee. While these exceptions exist, the Funds are not accepting any new accounts which cannot implement the redemp-
46 MATTHEWS ASIAN FUNDS
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tion fee. In addition, the Funds are actively discussing a schedule for implementation of the fee with these providers. For more information on this policy, please see the Funds prospectus. The Matthews Asian Funds do 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.
Expenses Paid Beginning Account Ending Account Expense During Period Value 7/1/04 Value 12/31/04 Ratio(1) 7/1/04-12/31/04(2) Matthews Pacific Tiger Fund =================================================================================================================== Actual Fund Return $1,000.00 $1,239.99 1.38% $7.79 Hypothetical 5% Return $1,000.00 $1,018.25 1.38% $7.02 Matthews Asian Growth and Income Fund =================================================================================================================== Actual Fund Return $1,000.00 $1,169.10 1.33% $7.27 Hypothetical 5% Return $1,000.00 $1,018.50 1.33% $6.77 Matthews Korea Fund =================================================================================================================== Actual Fund Return $1,000.00 $1,203.00 1.34% $7.44 Hypothetical 5% Return $1,000.00 $1,018.45 1.34% $6.82 Matthews China Fund =================================================================================================================== Actual Fund Return $1,000.00 $1,093.80 1.44% $7.60 Hypothetical 5% Return $1,000.00 $1,017.95 1.44% $7.32 Matthews Japan Fund =================================================================================================================== Actual Fund Return $1,000.00 $1,022.90 1.39% $7.09 Hypothetical 5% Return $1,000.00 $1,018.20 1.39% $7.07 Matthews Asian Technology Fund =================================================================================================================== Actual Fund Return $1,000.00 $1,068.60 1.61% $8.39 Hypothetical 5% Return $1,000.00 $1,017.09 1.61% $8.19 Matthews Asia Pacific Fund =================================================================================================================== Actual Fund Return $1,000.00 $1,147.80 1.53% $8.28 Hypothetical 5% Return $1,000.00 $1,017.49 1.53% $7.781 Annualized, based on the Funds expenses for the most recently completed six months. 2 Expenses are equal to the Funds annualized expense ratio multiplied by the average acount value over the period, multiplied by the number of days in the most recently completed six months, then divided by 365.
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S T A T E M E N T O F A S S E T S A N D L I A B I L I T I E S
Matthews Matthews Pacific Tiger Asian Growth and Fund Income Fund Assets: Investments at value (A) (Note 1-A) $840,409,223 $1,185,956,898 Cash 23,010,215 21,694,907 Foreign currency at value (B) 80,034 68 Dividends and interest receivable 228,702 2,751,678 Receivable for securities sold -- 28,165,000 Receivable for capital shares sold 7,121,180 3,637,339 Prepaid expenses and other assets 20,679 28,883 ------------------------------------------------------------------------------------------------------------ Total assets 870,870,033 1,242,234,773 ------------------------------------------------------------------------------------------------------------ Liabilities: Payable for securities purchased 13,587,208 3,139,939 Payable for capital shares redeemed 953,748 963,665 Administration and accounting fees payable 50,681 76,783 Transfer agent fees payable 39,630 60,084 Custodian fees payable 185,473 184,377 Due to Advisor (Note 2) 496,257 745,228 Administration and shareholder servicing fees payable 158,864 238,566 Accrued expenses payable 245,459 334,843 ------------------------------------------------------------------------------------------------------------ Total Liabilities 15,717,320 5,743,485 ------------------------------------------------------------------------------------------------------------ Net Assets $855,152,713 $1,236,491,288 ============================================================================================================ Shares Outstanding: (shares of beneficial interest issued and outstanding, respectively, unlimited number of shares authorized with a $0.001 par value) 53,783,576 78,175,399 ------------------------------------------------------------------------------------------------------------ Net asset value, offering price and redemption price $15.90 $15.82 ============================================================================================================ Net Assets Consist of: Capital paid-in $651,355,933 $956,470,056 Accumulated undistributed net investment income (loss) (95,607) (10,307,622) Accumulated net realized gain (loss) on investments (28,248) 2,449,541 Net unrealized appreciation on investments and foreign currency related transactions 203,920,635 287,879,313 ------------------------------------------------------------------------------------------------------------ Net Assets $855,152,713 $1,236,491,288 ============================================================================================================ (A) Investments at cost $636,464,735 $898,084,629 ============================================================================================================ (B) Foreign currency at cost $79,708 $67 ============================================================================================================
See accompanying notes to financial statements.
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Matthews Matthews Matthews Matthews Matthews Asian Technology Asia Pacific Korea Fund China Fund Japan Fund Fund Fund $127,355,443 $377,071,662 $199,405,967 $38,416,568 $110,155,100 281,208 2,990,310 875,190 425,792 2,890,673 -- -- -- -- -- 221,592 57,300 126,184 9,339 77,904 -- 585,211 -- -- -- 428,715 1,250,109 668,697 160,062 1,148,049 4,265 11,847 7,093 1,085 4,593 ------------------------------------------------------------------------------------- 128,291,223 381,966,439 201,083,131 39,012,846 114,276,319 ------------------------------------------------------------------------------------- -- -- -- -- 2,011,934 292,407 1,200,422 338,965 73,608 59,491 10,344 27,235 14,727 5,063 10,588 6,245 21,882 11,312 2,392 5,375 39,940 119,087 15,801 8,898 19,810 76,119 239,644 118,574 23,391 63,767 24,368 76,716 37,958 7,488 20,413 47,349 159,983 63,909 26,583 42,409 ------------------------------------------------------------------------------------- 496,772 1,844,969 601,246 147,423 2,233,787 ------------------------------------------------------------------------------------- $127,794,451 $380,121,470 $200,481,885 $38,865,423 $112,042,532 ===================================================================================== 31,329,187 27,133,312 12,436,710 7,132,080 8,904,954 ------------------------------------------------------------------------------------- $4.08 $14.01 $16.12 $5.45 $12.58 ===================================================================================== $76,686,618 $351,314,601 $182,662,204 $48,972,860 $97,933,805 (79,695) -- (853,336) -- (9,385) 3,014,220 (2,522,912) (3,658,044) (15,140,953) (15,880) 48,173,308 31,329,781 22,331,061 5,033,516 14,133,992 ------------------------------------------------------------------------------------- $127,794,451 $380,121,470 $200,481,885 $38,865,423 $112,042,532 ===================================================================================== $79,182,812 $345,741,936 $177,076,344 $33,382,894 $96,021,314 ===================================================================================== $0 $0 $0 $0 $0 =====================================================================================
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S T A T E M E N T S O F O P E R A T I O N S
Matthews Pacific Tiger Fund Four-Month Period Year Ended Ended 12/31/04 8/31/04 Investment Income: Dividends $2,886,900 $13,297,235 Interest 15,865 -- Foreign withholding tax (115,408) (786,709) ------------------------------------------------------------------------------------------------------------ Total investment income 2,787,357 12,510,526 ------------------------------------------------------------------------------------------------------------ Expenses: Investment advisory fees (Note 2) 1,719,850 5,143,536 Transfer agent fees 397,261 805,644 Administration and accounting fees 94,870 391,263 Professional fees 24,444 41,543 Custodian fees 121,300 455,392 Trustees fees 4,060 14,669 Administration and shareholder servicing fees (Note 2) 721,833 599,977 Insurance fees 4,615 13,457 Printing fees 76,762 119,282 Registration fees 55,069 99,319 Other expenses 26,135 6,551 ------------------------------------------------------------------------------------------------------------ Total expenses 3,246,199 7,690,633 ------------------------------------------------------------------------------------------------------------ Advisory fee waivers, shareholder servicing fees reimbursed and expenses waived, reimbursed or recaptured (Note 2) (84,923) (67,924) ------------------------------------------------------------------------------------------------------------ Net expenses 3,161,276 7,622,709 ------------------------------------------------------------------------------------------------------------ Net Investment Income (Loss) (373,919) 4,887,817 ============================================================================================================ Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions: Net realized gain (loss) on investments 12,432,245 10,038,789 Net realized gain (loss) on foreign currency related transactions (136,918) (158,728) Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 131,675,214 28,678,000 ------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments and foreign currency related transactions 143,970,541 38,558,061 ------------------------------------------------------------------------------------------------------------ Net Increase in Net Assets from Operations $143,596,622 $43,445,878 ============================================================================================================
See accompanying notes to financial statements.
50 MATTHEWS ASIAN FUNDS
Matthews Asian Growth and Income Fund Matthews Korea Fund Matthew China Fund Four-Month Period Year Ended Four-Month Period Year Ended Four-Month Period Year Ended Ended 12/31/04 8/31/04 Ended 12/31/04 8/31/04 Ended 12/31/04 8/31/04 $11,194,293 $32,726,002 $293,155 $4,309,161 $2,849,752 $8,123,294 2,140,774 2,633,023 238 -- 5,241 -- (358,313) (1,616,779) (51,376) (718,667) -- -- -------------------------------------------------------------------------------------------------------------------------- 12,976,754 33,742,246 242,017 3,590,494 2,854,993 8,123,294 -------------------------------------------------------------------------------------------------------------------------- 2,742,251 9,079,372 292,383 2,001,270 924,168 3,208,027 628,715 1,417,984 69,621 322,165 217,062 503,067 149,042 699,677 20,170 171,944 53,923 247,674 34,361 62,355 12,875 32,182 17,810 30,831 103,841 497,140 35,522 187,733 98,967 284,357 6,572 26,184 681 7,127 2,246 9,212 1,148,008 1,053,319 123,857 238,490 389,276 373,687 9,258 27,413 2,452 11,371 2,541 6,839 103,077 204,797 17,935 32,086 67,409 99,740 52,496 83,666 8,209 18,654 50,030 92,786 41,873 11,763 4,402 5,668 14,312 4,229 -------------------------------------------------------------------------------------------------------------------------- 5,019,494 13,163,670 588,107 3,028,690 1,837,744 4,860,449 -------------------------------------------------------------------------------------------------------------------------- (160,992) (111,382) (71,157) (22,659) (46,134) (44,176) -------------------------------------------------------------------------------------------------------------------------- 4,858,502 13,052,288 516,950 3,006,031 1,791,610 4,816,273 -------------------------------------------------------------------------------------------------------------------------- 8,118,252 20,689,958 (274,933) 584,463 1,063,383 3,307,021 ========================================================================================================================== 9,745,226 36,487,000 4,680,971 40,209,106 (1,737,542) 18,919,038 (41,907) (113,242) (64,604) (82,257) 261 985 121,813,965 112,274,452 17,858,180 (20,703,622) 37,381,655 (22,011,668) -------------------------------------------------------------------------------------------------------------------------- 131,517,284 148,648,210 22,474,547 19,423,227 35,644,374 (3,091,645) -------------------------------------------------------------------------------------------------------------------------- $139,635,536 $169,338,168 $22,199,614 $20,007,690 $36,707,757 $215,376 ==========================================================================================================================
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S T A T E M E N T S O F O P E R A T I O N S
Matthews Japan Fund Four-Month Period Year Ended Ended 12/31/04 8/31/04 Investment Income: Dividends $739,416 $824,028 Interest -- -- Foreign withholding tax (52,036) (60,298) --------------------------------------------------------------------------------------------------------- Total investment income 687,380 763,730 --------------------------------------------------------------------------------------------------------- Expenses: Investment advisory fees (Note 2) 475,443 1,020,695 Transfer agent fees 111,674 156,797 Administration and accounting fees 29,544 72,446 Professional fees 13,395 18,515 Custodian fees 8,359 39,690 Trustees fees 1,136 2,860 Administration and shareholder servicing fees (Note 2) 200,439 118,063 Insurance fees 773 1,818 Amortization of organization costs (Note 1-F) -- -- Printing fees 25,074 22,094 Registration fees 26,003 39,606 Other expenses 6,845 1,274 --------------------------------------------------------------------------------------------------------- Total expenses 898,685 1,493,858 --------------------------------------------------------------------------------------------------------- Advisory fee waivers, shareholder servicing fees reimbursed and (13,135) (10,801) expenses waived, reimbursed or recaptured (Note 2) --------------------------------------------------------------------------------------------------------- Net expenses 885,550 1,483,057 --------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) (198,170) (719,327) ========================================================================================================= Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions: Net realized gain (loss) on investments 3,430,117 1,707,220 Net realized gain (loss) on foreign currency related transactions 34,448 (12,061) Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 13,716,288 5,815,943 --------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments and foreign currency related transactions 17,180,853 7,511,102 --------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets from Operations $16,982,683 $6,791,775 =========================================================================================================
See accompanying notes to financial statements.
52 MATTHEWS ASIAN FUNDS
Matthews Asian Matthews Asia Technology Fund Pacific Fund Four-Month Period Year Ended Four-Month Period Year Ended Ended 12/31/04 8/31/04 Ended 12/31/04 8/31/04(1) $94,168 $619,847 $381,274 $847,333 494 -- 2,262 532 (4,040) (73,892) (23,392) (40,407) ------------------------------------------------------------------------- 90,622 545,955 360,144 807,458 ------------------------------------------------------------------------- 88,661 340,330 220,204 393,709 20,273 53,559 50,320 59,853 9,580 31,210 19,422 33,506 10,390 14,269 11,259 10,545 4,532 41,122 13,757 51,814 216 991 523 1,059 37,061 39,795 92,121 45,607 340 1,047 177 152 -- -- 7,566 35,831 9,126 12,224 11,178 9,269 15,864 20,050 24,485 17,152 1,392 454 3,411 493 ------------------------------------------------------------------------- 197,435 555,051 454,423 658,990 ------------------------------------------------------------------------- (5,372) 95,490 (4,198) (6,346) ------------------------------------------------------------------------- 192,063 650,541 450,225 652,644 ------------------------------------------------------------------------- (101,441) (104,586) (90,081) 154,814 ========================================================================= 187,900 3,507,455 508,578 (250,500) (37) (20,524) (9,438) (14,257) 4,295,150 (2,095,574) 15,010,643 (876,651) ------------------------------------------------------------------------- 4,483,013 1,391,357 15,509,783 (1,141,408) ------------------------------------------------------------------------- $4,381,572 $1,286,771 $15,419,702 ($986,594) =========================================================================1 The Matthews Asia Pacific Fund commenced operations on October 31, 2003, so the data presented covers 10 months.
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S T A T E M E N T S O F C H A N G E S I N N E T A S S E T S
Matthews Pacific Tiger Fund Four-Month Period Ended Year Ended Year Ended December 31, 2004 August 31, 2004 August 31, 2003 Operations: Net investment income (loss) ($373,919) $4,887,817 $1,274,408 Net realized gain (loss) on investments and foreign currency related transactions 12,295,327 9,880,061 (5,218,374) Net change in unrealized appreciation on investments and foreign currency related transactions 131,675,214 28,678,000 47,655,905 ----------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 143,596,622 43,445,878 43,711,939 ----------------------------------------------------------------------------------------------------------------------------- Dividends and Distributions to Shareholders from: Net investment income (4,820,318) (1,397,658) -- Realized gains on investments (10,645,798) -- -- ----------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from distributions (15,466,116) (1,397,658) -- ----------------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (net) (Note 1-L): 139,889,530 315,617,520 70,956,917 ----------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 268,020,036 357,665,740 114,668,856 ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of period 587,132,677 229,466,937 114,798,081 ----------------------------------------------------------------------------------------------------------------------------- End of period [including undistributed net investment income (loss) of ($95,607), $4,646,983, and $1,315,552, respectively] $855,152,713 $587,132,677 $229,466,937 =============================================================================================================================
See accompanying notes to financial statements.
Matthews Asian Growth and Income Fund Four-Month Period Ended Year Ended Year Ended December 31, 2004 August 31, 2004 August 31, 2003 Operations: Net investment income $8,118,252 $20,689,958 $7,056,030 Net realized gain on investments and foreign currency related transactions 9,703,319 36,373,758 5,819,944 Net change in unrealized appreciation on investments and foreign currency related transactions 121,813,965 112,274,452 53,657,051 ----------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 139,635,536 169,338,168 66,533,025 ----------------------------------------------------------------------------------------------------------------------------- Dividends and Distributions to Shareholders from: Net investment income (27,982,588) (16,238,863) (5,777,923) Realized gains on investments (28,099,442) (12,255,109) (2,386,434) ----------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from distributions (56,082,030) (28,493,972) (8,164,357) ----------------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (net) (Note 1-L): 145,751,266 333,039,912 322,252,539 ----------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 229,304,772 473,884,108 380,621,207 ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of period 1,007,186,516 533,302,408 152,681,201 ----------------------------------------------------------------------------------------------------------------------------- End of period [including undistributed net investment income (loss) of ($10,307,622), $9,691,236 and $41,181, respectively] $1,236,491,288 $1,007,186,516 $533,302,408 =============================================================================================================================
See accompanying notes to financial statements.
54 MATTHEWS ASIAN FUNDS
Matthews Korea Fund Four-Month Period Ended Year Ended Year Ended December 31, 2004 August 31, 2004 August 31, 2003 Operations: Net investment income (loss) ($274,933) $584,463 $322,453 Net realized gain on investments and foreign currency related transactions 4,616,367 40,126,849 29,202,117 Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 17,858,180 (20,703,622) (17,725,381) ----------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 22,199,614 20,007,690 11,799,189 ----------------------------------------------------------------------------------------------------------------------------- Dividends and Distributions to Shareholders from: Net investment income (246,627) (111,729) -- Realized gains on investments (17,328,002) (41,348,079) (19,371,082) ----------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from distributions (17,574,629) (41,459,808) (19,371,082) ----------------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (net) (Note 1-L): 12,970,291 (85,615,445) (28,164,832) ----------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 17,595,276 (107,067,563) (35,736,725) ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of period 110,199,175 217,266,738 253,003,463 ----------------------------------------------------------------------------------------------------------------------------- End of period [including undistributed net investment income (loss) of ($79,695) and $140,937, and $1,453,786, respectively] $127,794,451 $110,199,175 $217,266,738 =============================================================================================================================
See accompanying notes to financial statements.
Matthews China Fund Four-Month Period Ended Year Ended Year Ended December 31, 2004 August 31, 2004 August 31, 2003 Operations: Net investment income $1,063,383 $3,307,021 $993,917 Net realized gain (loss) on investments and foreign currency related transactions (1,737,281) 18,920,023 (1,736,843) Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 37,381,655 (22,011,668) 19,677,070 ----------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 36,707,757 215,376 18,934,144 ----------------------------------------------------------------------------------------------------------------------------- Dividends and Distributions to Shareholders from: Net investment income (3,755,290) (1,173,461) (542,079) Realized gains on investments (13,885,616) -- -- ----------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from distributions (17,640,906) (1,173,461) (542,079) ----------------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (net) (Note 1-L): 20,803,219 229,259,390 59,882,757 ----------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 39,870,070 228,301,305 78,274,822 ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of period 340,251,400 111,950,095 33,675,273 ----------------------------------------------------------------------------------------------------------------------------- End of period [including undistributed net investment income of $0, $2,696,162 and $1,039,670, respectively] $380,121,470 $340,251,400 $111,950,095 =============================================================================================================================
See accompanying notes to financial statements.
800.789.ASIA [2742] www.matthewsfunds.com 55
S T A T E M E N T S O F C H A N G E S I N N E T A S S E T S
Matthews Japan Fund Four-Month Period Ended Year Ended Year Ended December 31, 2004 August 31, 2004 August 31, 2003 Operations: Net investment loss ($198,170) ($719,327) ($94,755) Net realized gain (loss) on investments and foreign currency related transactions 3,464,565 1,695,159 (347,238) Net change in unrealized appreciation on investments and foreign currency related transactions 13,716,288 5,815,943 2,825,816 ----------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 16,982,683 6,791,775 2,383,823 ----------------------------------------------------------------------------------------------------------------------------- Dividends and Distributions to Shareholders from: Net investment income -- -- -- Realized gains on investments -- -- -- ----------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from distributions -- -- -- ----------------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (net) (Note 1-L): (11,756,303) 164,810,307 11,871,005 ----------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 5,226,380 171,602,082 14,254,828 ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of period 195,255,505 23,653,423 9,398,595 ----------------------------------------------------------------------------------------------------------------------------- End of period [including undistributed net investment loss of ($853,336), ($689,614) and ($68), respectively] $200,481,885 $195,255,505 $23,653,423 =============================================================================================================================
See accompanying notes to financial statements.
Matthews Asian Technology Fund Four-Month Period Ended Year Ended Year Ended December 31, 2004 August 31, 2004 August 31, 2003 Operations: Net investment loss ($101,441) ($104,586) ($43,306) Net realized gain (loss) on investments and foreign currency related transactions 187,863 3,486,931 (1,019,882) Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 4,295,150 (2,095,574) 4,209,341 ----------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 4,381,572 1,286,771 3,146,153 ----------------------------------------------------------------------------------------------------------------------------- Dividends and Distributions to Shareholders from: Net investment income -- (18,196) -- Realized gains on investments -- -- -- ----------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from distributions -- (18,196) -- ----------------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (net) (Note 1-L): 187,191 14,259,517 8,743,248 ----------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 4,568,763 15,528,092 11,889,401 ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of period 34,296,660 18,768,568 6,879,167 ----------------------------------------------------------------------------------------------------------------------------- End of period [including undistributed net investment income (loss) of $0, ($22,563) and $8,943, respectively] $38,865,423 $34,296,660 $18,768,568 =============================================================================================================================
See accompanying notes to financial statements.
56 MATTHEWS ASIAN FUNDS
Matthews Asia Pacific Fund Four-Month Period Ended Period Ended December 31, 2004 August 31, 20041 Operations: Net investment income (loss) ($90,081) $154,814 Net realized gain (loss) on investments and foreign currency related transactions 499,140 (264,757) Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions 15,010,643 (876,651) ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from operations 15,419,702 (986,594) ----------------------------------------------------------------------------------------------------------------------------- Dividends and Distributions to Shareholders from: Net investment income (190,985) -- Realized gains on investments (176,807) -- ----------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets resulting from distributions (367,792) -- ----------------------------------------------------------------------------------------------------------------------------- Capital Share Transactions (net) (Note 1-L): 20,768,393 77,208,823 ----------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 35,820,303 76,222,229 ----------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of period 76,222,229 -- ----------------------------------------------------------------------------------------------------------------------------- End of period [including undistributed net investment income (loss) of ($9,385) and $176,402, respectively] $112,042,532 $76,222,229 =============================================================================================================================1 The Matthews Asia Pacific Fund commenced operations on October 31, 2003.
See accompanying notes to financial statements.
800.789.ASIA [2742] www.matthewsfunds.com 57
F I N A N C I A L H I G H L I G H T S
MATTHEWS PACIFIC TIGER FUND
The table below sets forth financial data for a share of beneficial interest outstanding throughout each year presented.
Four-Month Period Ended Years Ended August 31, December 31, 2004(1) 2004 2003 2002 2001 2000 Net Asset Value, beginning of period $13.22 $11.20 $8.54 $7.91 $12.35 $10.41 ------------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income (loss) (0.01) 0.09 0.07 (0.01) 0.02 0.18 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency 3.00 1.95 2.58 0.66 (3.37) 2.01 ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 2.99 2.04 2.65 0.65 (3.35) 2.19 ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income (0.10) (0.04) -- (0.01) (0.31) (0.27) Net realized gains on investments (0.21) -- -- (0.03) (0.84) -- ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (0.31) (0.04) -- (0.04) (1.15) (0.27) ------------------------------------------------------------------------------------------------------------------------------------ Paid-in capital from redemption fees (Note 1-L) -- 0.02 0.01 0.02 0.06 0.02 ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of period $15.90 $13.22 $11.20 $8.54 $7.91 $12.35 TOTAL RETURN 22.69%(3) 18.45% 31.15% 8.44% (27.46%) 21.28% ==================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) $855,153 $587,133 $229,467 $114,798 $76,503 $111,502 ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor (Note 2) 1.39%(2) 1.50% 1.75% 1.79% 1.90% 1.88% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor 1.36%(2) 1.48% 1.75% 1.87% 1.90% 1.81% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor (0.19%)(2) 0.93% 1.04% (0.17%) 0.67% 1.49% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor (0.16%)(2) 0.95% 1.04% (0.09%) 0.67% 1.56% ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover 3.82%(3) 15.16% 28.24% 57.00% 63.59% 52.11% ------------------------------------------------------------------------------------------------------------------------------------1 The Funds fiscal year-end changed from August 31 to December 31, effective December 31, 2004. 2 Annualized. 3 Not annualized.
See accompanying notes to financial statements.
58 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 ,
2 0 0 4
MATTHEWS ASIAN GROWTH AND INCOME FUND
The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
Four-Month Period Ended Years Ended August 31, December 31, 2004(1) 2004 2003 2002 2001 2000 Net Asset Value, beginning of period $14.65 $12.21 $10.71 $9.08 $10.50 $9.37 ----------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income 0.11 0.32 0.23 0.18 0.54 0.61 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency 1.83 2.56 1.61 1.70 (0.49) 1.09 ----------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.94 2.88 1.84 1.88 0.05 1.70 ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income (0.38) (0.25) (0.20) (0.27) (0.60) (0.59) Net realized gains on investments (0.39) (0.20) (0.15) -- (0.88) -- ----------------------------------------------------------------------------------------------------------------------------------- Total distributions (0.77) (0.45) (0.35) (0.27) (1.48) (0.59) ----------------------------------------------------------------------------------------------------------------------------------- Paid-in capital from redemption fees (Note 1-L) -- 0.01 0.01 0.02 0.01 0.02 ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, end of period $15.82 $14.65 $12.21 $10.71 $9.08 $10.50 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL RETURN 13.32%(3) 23.99% 17.81% 21.11% 1.15% 18.68% =================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) $1,236,491 $1,007,187 $533,302 $152,681 $24,447 $11,469 ----------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor (Note 2) 1.35%(2) 1.45% 1.69% 1.77% 1.90% 1.97% ----------------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor 1.31%(2) 1.44% 1.69% 1.79% 1.90% 1.90% ----------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets before reimbursement, waiver or recapture of expenses by Advisor 2.15%(2) 2.27% 2.69% 2.13% 7.71% 6.17% ----------------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets after reimbursement, waiver or recapture of expenses by Advisor 2.19%(2) 2.28% 2.69% 2.11% 7.71% 6.24% ----------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover 7.32%(3) 17.46% 13.33% 32.37% 33.94% 62.23% -----------------------------------------------------------------------------------------------------------------------------------1 The Funds fiscal year-end changed from August 31 to December 31, effective December 31, 2004. 2 Annualized. 3 Not annualized.
See accompanying notes to financial statements.
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F I N A N C I A L H I G H L I G H T S
MATTHEWS KOREA FUND
The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
Four-Month Period Ended Years Ended August 31, December 31, 2004(1) 2004 2003 2002 2001 2000 Net Asset Value, beginning of period $3.94 $4.37 $4.42 $2.68 $5.19 $7.49 ------------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income (loss) -- 0.04 0.01 (0.02) (0.01) (0.01) Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency 0.78 0.34 0.32 1.81 (0.90) (1.45) ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 0.78 0.38 0.33 1.79 (0.91) (1.46) ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income (0.01) -- -- (0.01) -- -- Net realized gains on investments (0.63) (0.82) (0.39) (0.07) (1.63) (0.88) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (0.64) (0.82) (0.39) (0.08) (1.63) (0.88) ------------------------------------------------------------------------------------------------------------------------------------ Paid-in capital from redemption fees (Note 1-L) -- 0.01 0.01 0.03 0.03 0.04 ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of period $4.08 $3.94 $4.37 $4.42 $2.68 $5.19 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 20.60%(3) 9.91% 8.80% 68.49% (13.09%) (22.92%) ==================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) $127,794 $110,199 $217,267 $253,003 $117,138 $115,158 ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor (Note 2) 1.49%(2) 1.51% 1.72% 1.75% 1.78% 1.75% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor 1.31%(2) 1.50% 1.72% 1.75% 1.78% 1.75% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor (0.87%)(2) 0.28% 0.17% (0.64%) 0.75% 0.42% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor (0.69%)(2) 0.29% 0.17% (0.64%) 0.75% 0.42% ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover 6.53%(3) 18.40% 29.90% 46.52% 81.96% 47.80% ------------------------------------------------------------------------------------------------------------------------------------1 The Funds fiscal year-end changed from August 31 to December 31, effective December 31, 2004. 2 Annualized. 3 Not annualized.
See accompanying notes to financial statements.
60 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 ,
2 0 0 4
MATTHEWS CHINA FUND
The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
Four-Month Period Ended Years Ended August 31, December 31, 2004(1) 2004 2003 2002 2001 2000 Net Asset Value, beginning of period $13.26 $11.54 $8.96 $9.21 $9.93 $8.48 ------------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income 0.03 0.08 0.11 0.05 0.24 0.09 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency 1.38 1.67 2.59 (0.20) (0.61) 1.44 ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.41 1.75 2.70 (0.15) (0.37) 1.53 ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income (0.14) (0.07) (0.14) (0.15) (0.15) (0.11) Net realized gains on investments (0.53) -- -- -- (0.28) -- ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (0.67) (0.07) (0.14) (0.15) (0.43) (0.11) ------------------------------------------------------------------------------------------------------------------------------------ Paid-in capital from redemption fees (Note 1-L) 0.01 0.04 0.02 0.05 0.08 0.03 ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of period $14.01 $13.26 $11.54 $8.96 $9.21 $9.93 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 10.61%(3) 15.48% 30.88% (1.16%) (2.23%) 18.54% ==================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) $380,121 $340,251 $111,950 $33,675 $19,843 $9,232 ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor (Note 2) 1.47%(2) 1.52% 1.78% 1.97% 2.00% 2.15% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor 1.43%(2) 1.50% 1.79% 2.00% 2.00% 2.00% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets before reimbursement, waiver or recapture of expenses by Advisor 0.81%(2) 1.02% 1.94% 0.99% 2.62% 1.54% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets after reimbursement, waiver or recapture of expenses by Advisor 0.85%(2) 1.04% 1.93% 0.96% 2.62% 1.69% ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover 4.99%(3) 28.99% 19.34% 43.84% 61.07% 80.90% ------------------------------------------------------------------------------------------------------------------------------------1 The Funds fiscal year-end changed from August 31 to December 31, effective December 31, 2004. 2 Annualized. 3 Not annualized.
See accompanying notes to financial statements.
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F I N A N C I A L H I G H L I G H T S
MATTHEWS JAPAN FUND
The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
Four-Month Period Ended Years Ended August 31, December 31, 2004(1) 2004 2003 2002 2001 2000 Net Asset Value, beginning of period $14.73 $10.90 $9.60 $11.22 $20.76 $21.70 ------------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment loss (0.02) (0.05) (0.03) (0.07) (0.26) (0.24) Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency 1.40 3.82 1.30 (1.39) (7.99) (0.29) ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.38 3.77 1.27 (1.46) (8.25) (0.53) ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income -- -- -- (0.27) (0.37) -- Net realized gains on investments -- -- -- -- (1.03) (0.54) ------------------------------------------------------------------------------------------------------------------------------------ Total distributions -- -- -- (0.27) (1.40) (0.54) ------------------------------------------------------------------------------------------------------------------------------------ Paid-in capital from redemption fees (Note 1-L) 0.01 0.06 0.03 0.11 0.11 0.13 ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of period $16.12 $14.73 $10.90 $9.60 $11.22 $20.76 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 9.44%(3) 35.14% 13.54% (12.20%) (40.92%) (1.75%) ==================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) $200,482 $195,256 $23,653 $9,399 $7,758 $23,869 ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor (Note 2) 1.40%(2) 1.46% 1.92% 1.91% 2.08% 1.88% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor 1.38%(2) 1.45% 2.00% 2.00% 2.00% 2.00% ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment loss to average net assets before reimbursement, waiver or recapture of expenses by Advisor (0.33%)(2) (0.72%) (0.97%) (1.25%) (0.90%) (0.36%) ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment loss to average net assets after reimbursement, waiver or recapture of expenses by Advisor (0.31%)(2) (0.71%) (1.05%) (1.34%) (0.82%) (0.48%) ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover 5.30%(3) 14.57% 77.30% 113.23% 71.09% 23.00% ------------------------------------------------------------------------------------------------------------------------------------1 The Fund's fiscal year-end changed from August 31 to December 31, effective December 31, 2004. 2 Annualized. 3 Not annualized.
See accompanying notes to financial statements.
62 MATTHEWS ASIAN FUNDS
D E C E M B E R 3 1 ,
2 0 0 4
MATTHEWS ASIAN TECHNOLOGY FUND
The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
Four-Month Period Period Ended Years Ended August 31, Ended December 31, 2004(1) 2004 2003 2002 2001 2000(2) Net Asset Value, beginning of period $4.83 $4.30 $3.13 $3.53 $7.61 $10.00 ------------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income (loss) (0.02) (0.02) (0.01) (0.10) (0.05) 0.22 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency 0.64 0.53 1.16 (0.31) (3.97) (2.65) ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 0.62 0.51 1.15 (0.41) (4.02) (2.43) ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS FROM: Net investment income -- -- -- (0.04) (0.22) -- Net realized gains on investments -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Total distributions -- -- -- (0.04) (0.22) -- ------------------------------------------------------------------------------------------------------------------------------------ Paid-in capital from redemption fees (Note 1-L) -- 0.02 0.02 0.05 0.16 0.04 ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of period $5.45 $4.83 $4.30 $3.13 $3.53 $7.61 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 12.84%(4) 12.40% 37.38% (10.40%) (51.54%) (23.90%)(4) ==================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) $38,865 $34,297 $18,769 $6,879 $9,607 $24,570 ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor (Note 2) 1.64%(3) 1.63% 2.10% 2.01% 2.69% 2.66%(3) ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor 1.60%(3) 1.91% 2.00% 2.00% 2.00% 2.00%(3) ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor (0.89%)(3) (0.03%) (0.71%) (1.56%) 1.14% 3.75%(3) ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor (0.85%)(3) (0.31%) (0.61%) (1.55%) 1.83% 4.41%(3) ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover 7.36%(4) 41.25% 72.03% 103.60% 181.24% 50.35%(4) ------------------------------------------------------------------------------------------------------------------------------------1 The Funds fiscal year-end changed from August 31 to December 31, effective December 31, 2004. 2 The Matthews Asian Technology Fund commenced operations on December 27, 1999. 3 Annualized. 4 Not annualized.
See accompanying notes to financial statements.
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F I N A N C I A L H I G H L I G H T S
MATTHEWS ASIA PACIFIC FUND
The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
Four-Month Period Ended Period Ended December 31, 2004(1) August 31, 2004(2) Net Asset Value, beginning of period $10.70 $10.00 --------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income (loss) (0.01) 0.02 Net realized gain and unrealized appreciation on investments and foreign currency 1.93 0.66 --------------------------------------------------------------------------------------------------------------- Total from investment operations 1.92 0.68 --------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS FROM: Net investment income (0.02) -- Net realized gains on investments (0.02) -- --------------------------------------------------------------------------------------------------------------- Total distributions (0.04) -- --------------------------------------------------------------------------------------------------------------- Paid-in capital from redemption fees (Note 1-L) -- 0.02 --------------------------------------------------------------------------------------------------------------- Net Asset Value, end of period $12.58 $10.70 --------------------------------------------------------------------------------------------------------------- TOTAL RETURN 18.00%(4) 7.00%(4) =============================================================================================================== RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) $112,043 $76,222 --------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets before reimbursement, waiver or recapture of expenses by Advisor (Note 2) 1.52%(3) 1.67%(3) --------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets after reimbursement, waiver or recapture of expenses by Advisor 1.51%(3) 1.66%(3) --------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets before reimbursement, waiver or recapture of expenses by Advisor (0.31%)(3) 0.38%(3) --------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets after reimbursement, waiver or recapture of expenses by Advisor (0.30%)(3) 0.39%(3) --------------------------------------------------------------------------------------------------------------- Portfolio turnover 1.28%(4) 10.75%(4) ---------------------------------------------------------------------------------------------------------------1 The Fund's fiscal year-end changed from August 31 to December 31, effective December 31, 2004. 2 The Matthews Asia Pacific Fund commenced operations on October 31, 2003. 3 Annualized. 4 Not annualized.
See accompanying notes to financial statements.
64 MATTHEWS ASIAN FUNDS
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66 MATTHEWS ASIAN FUNDS
The tax character of distributions paid for the four-month period ended December 31, 2004 and the fiscal years ended August 31, 2004 and August 31, 2003, were as follows:
FOUR-MONTH PERIOD ENDED ORDINARY LONG TERM TOTAL TAXABLE DECEMBER 31, 2004 INCOME CAPITAL GAINS DISTRIBUTIONS Matthews Pacific Tiger Fund $12,808,269 $2,657,847 $15,466,116 Matthews Asian Growth and Income Fund 34,804,545 21,277,485 56,082,030 Matthews Korea Fund 246,627 17,328,002 17,574,629 Matthews China Fund 3,755,290 13,885,616 17,640,906 Matthews Asia Pacific Fund 367,792 -- 367,792 YEAR ENDED AUGUST 31, 2004 ORDINARY LONG TERM TOTAL TAXABLE INCOME CAPITAL GAINS DISTRIBUTIONS Matthews Pacific Tiger Fund $1,397,658 $ -- $1,397,658 Matthews Asian Growth and Income Fund 23,978,932 4,515,040 28,493,972 Matthews Korea Fund 1,785,809 39,673,999 41,459,808 Matthews China Fund 1,173,461 -- 1,173,461 Matthews Asian Technology Fund 18,196 -- 18,196 YEAR ENDED AUGUST 31, 2003 ORDINARY LONG TERM TOTAL TAXABLE INCOME CAPITAL GAINS DISTRIBUTIONS Matthews Pacific Tiger Fund $ -- $ -- $ -- Matthews Asian Growth and Income Fund 7,795,759 368,598 8,164,357 Matthews Korea Fund -- 19,371,082 19,371,082 Matthews China Fund 542,079 -- 542,079
As of December 31, 2004, the components of distributable earnings/(deficit) on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED CAPITAL POST OCT. ORDINARY LONG TERM LOSS CARRY CAPITAL INCOME CAPITAL GAINS FORWARDS LOSSES* Matthews Pacific Tiger Fund $499,197 $ -- $ -- $ -- Matthews Asian Growth and Income Fund 6,337,053 7,926,832 -- -- Matthews Korea Fund -- 4,281,573 -- -- Matthews China Fund -- -- (78,979) (1,905,409) Matthews Japan Fund 574,162 -- (3,216,093) -- Matthews Asian Technology Fund -- -- (14,826,201) (35,907) Matthews Asia Pacific Fund 48,364 -- -- -- TOTAL POST OCT. UNREALIZED ACCUMULATED CURRENCY LOSSES* APPRECIATION** EARNINGS/(DEFICIT) Matthews Pacific Tiger Fund ($97,522) $203,395,105 $203,796,780 Matthews Asian Growth and Income Fund (68,447) 265,825,794 280,021,232 Matthews Korea Fund (52,643) 46,878,903 51,107,833 Matthews China Fund -- 30,791,257 28,806,869 Matthews Japan Fund -- 20,461,612 17,819,681 Matthews Asian Technology Fund -- 4,754,671 (10,107,437) Matthews Asia Pacific Fund (9,385) 14,069,748 14,108,727
* Under the current tax law, capital and currency losses realized after October 31 and prior to the Fund's fiscal
year end may be deferred as occuring on the first day of the following fiscal year.
** The differences between book-basis and tax-basis unrealized appreciation is attributable primarily to the tax
deferral of losses on wash sales and passive foreign investment company (PFIC) mark to market adjustments.
800.789.ASIA (2742) www.matthewsfunds.com 67
For Federal income tax purposes, the Funds indicated below have capital loss carryforwards, which expire in the year indicated, as of December 31, 2004, which are available to offset future capital gains, if any:
LOSSES DEFERRED EXPIRING IN: 2007 2008 2009 2010 2011 2012 TOTAL Matthews China Fund $ -- $ -- $ -- $ -- $ -- $78,979 $78,979 Matthews Japan Fund -- -- -- 3,216,093 -- -- 3,216,093 Matthews Asian Technology Fund 22,583 5,375,361 5,967,059 3,461,198 -- -- 14,826,201
H. RECLASSIFICATIONS: Accounting principles generally accepted in the United States of America require that certain components of net assets be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. For the four-month period ended December 31, 2004, 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) INCREASE/ INCREASE/ UNDISTRIBUTED NET (DECREASE) (DECREASE) INVESTMENT ACCUMULATED PAID-IN CAPITAL INCOME/(LOSS) REALIZED GAIN/(LOSS) Matthews Pacific Tiger Fund $ -- $451,647 ($451,647) Matthews Asian Growth and Income Fund 148,554 (134,522) (14,032) Matthews Korea Fund (74,527) 301,882 (227,355) Matthews China Fund 4,671 (4,255) (416) Matthews Japan Fund -- 34,448 (34,448) Matthews Asian Technology Fund (124,041) 124,004 37 Matthews Asia Pacific Fund (7,566) 95,279 (87,713)
I. FUND EXPENSE ALLOCATIONS: The Funds account separately for the assets, liabilities and operations of each Fund. Direct expenses of each Fund are charged to the Fund while general expenses are allocated pro-rata among the Funds based on net assets.
J. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
K. OTHER: Securities transactions are accounted for on the date the securities are purchased or sold. Interest income is recorded on the accrual basis. Dividend income and distributions to shaeholders are recorded on the ex-dividend date.
L. 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.
68 MATTHEWS ASIAN FUNDS
MATTHEWS PACIFIC TIGER FUND FOUR-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2004 AUGUST 31, 2004 AUGUST 31, 2003 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Shares sold 10,861,164 $161,170,011 42,210,845 $553,297,425 15,023,339 $137,306,760 Shares issued through reinvestment of dividends 939,003 14,319,805 102,761 1,284,573 -- -- Shares redeemed (2,425,788) (35,600,286) (18,399,797) (238,964,478) (7,972,026) (66,349,843) =============================================================================================================================== Net increase 9,374,379 $139,889,530 23,913,809 $315,617,520 7,051,313 $70,956,917 =============================================================================================================================== MATTHEWS ASIAN GROWTH AND INCOME FUND FOUR-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2004 AUGUST 31, 2004 AUGUST 31, 2003 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Shares sold 8,932,041 $138,085,292 40,882,235 $555,066,165 39,973,007 $435,370,172 Shares issued through reinvestment of dividends 3,293,024 51,173,594 1,880,015 25,405,726 669,460 7,282,120 Shares redeemed (2,816,789) (43,507,620) (17,654,943) (247,431,979) (11,240,758) (120,399,753) =============================================================================================================================== Net increase 9,408,276 $145,751,266 25,107,307 $333,039,912 29,401,709 $322,252,539 =============================================================================================================================== MATTHEWS KOREA FUND FOUR-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2004 AUGUST 31, 2004 AUGUST 31, 2003 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Shares sold 3,469,304 $14,582,599 16,683,706 $70,846,837 26,969,605 $101,436,079 Shares issued through reinvestment of dividends 4,210,605 16,337,147 5,710,659 22,455,641 3,512,115 13,486,520 Shares redeemed (4,341,030) (17,949,455) (44,086,992) (178,917,923) (38,085,006) (143,087,431) =============================================================================================================================== Net increase (decrease) 3,338,879 $12,970,291 (21,692,627) ($85,615,445) (7,603,286) ($28,164,832) =============================================================================================================================== MATTHEWS CHINA FUND FOUR-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2004 AUGUST 31, 2004 AUGUST 31, 2003 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Shares sold 4,375,395 $61,741,286 32,717,708 $458,457,166 9,399,794 $91,503,345 Shares issued through reinvestment of dividends 1,142,315 16,232,294 81,100 1,089,212 57,638 506,057 Shares redeemed (4,047,391) (57,170,361) (16,834,124) (230,286,988) (3,517,599) (32,126,645) =============================================================================================================================== Net increase 1,470,319 $20,803,219 15,964,684 $229,259,390 5,939,833 $59,882,757 =============================================================================================================================== MATTHEWS JAPAN FUND FOUR-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2004 AUGUST 31, 2004 AUGUST 31, 2003 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Shares sold 3,632,824 $53,123,634 17,265,451 $250,032,677 2,461,873 $23,056,012 Shares issued through reinvestment of dividends -- -- -- -- -- -- Shares redeemed (4,450,277) (64,879,937) (6,181,657) (85,222,370) (1,270,520) (11,185,007) =============================================================================================================================== Net increase (decrease) (817,453) ($11,756,303) 11,083,794 $164,810,307 1,191,353 $11,871,005 ===============================================================================================================================
800.789.ASIA (2742) www.matthewsfunds.com 69
MATTHEWS ASIAN TECHNOLOGY FUND FOUR-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2004 AUGUST 31, 2004 AUGUST 31, 2003 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Shares sold 1,152,449 $5,878,233 9,485,777 $46,781,267 5,319,636 $18,618,111 Shares issued through reinvestment of dividends -- -- 3,666 16,797 -- -- Shares redeemed (1,125,047) (5,691,042) (6,753,759) (32,538,547) (3,148,718) (9,874,863) =============================================================================================================================== Net increase 27,402 $187,191 2,735,684 $14,259,517 2,170,918 $8,743,248 =============================================================================================================================== MATTHEWS ASIA PACIFIC FUND* FOUR-MONTH PERIOD ENDED PERIOD ENDED DECEMBER 31, 2004 AUGUST 31, 2004 SHARES AMOUNT SHARES AMOUNT Shares sold 2,315,867 $26,850,048 8,608,738 $92,928,911 Shares issued through reinvestment of dividends 26,617 319,672 -- -- Shares redeemed (561,366) (6,401,327) (1,484,902) (15,720,088) =============================================================================================================================== Net increase 1,781,118 $20,768,393 7,123,836 $77,208,823 ===============================================================================================================================
* Matthews Asia Pacific Fund commenced operations on October 31, 2003
The Funds assess a redemption fee of 2.00% of the total redemption proceeds if you sell or exchange your shares within 90 days after purchasing them. The redemption fee is paid directly to the Funds and is designed to offset transaction costs associated with short-term trading of Fund shares. The redemption fee does not apply to redemptions of shares held in certain omnibus accounts and retirement plans that cannot currently implement the redemption fee. While these exceptions exist, the Funds are not accepting any new accounts which cannot implement the redemption fee. In addition, the Funds are actively discussing a schedule for implementation of the fee with these providers. For more information on this policy, please see the Funds prospectus. The redemption fees returned to the assets of the Funds were as follows:FOUR-MONTH PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 2004 AUGUST 31, 2004 AUGUST 31, 2003 Matthews Pacific Tiger Fund $46,003 $764,625 $200,852 Matthews Asian Growth and Income Fund 17,286 270,983 344,510 Matthews Korea Fund 36,999 179,713 737,918 Matthews China Fund 151,718 919,439 148,090 Matthews Japan Fund 96,091 813,418 76,633 Matthews Asian Technology Fund 6,384 171,537 70,837 Matthews Asia Pacific Fund 4,628 105,818 --2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
70 MATTHEWS ASIAN FUNDS
FOUR-MONTH PERIOD ENDED DECEMBER 31, 2004 VOLUNTARY EXPENSE LIMITATION ADVISORY FEES Matthews Pacific Tiger Fund 1.90% $1,719,850 Matthews Asian Growth and Income Fund 1.90% 2,742,251 Matthews Korea Fund 2.00% 292,383 Matthews China Fund 2.00% 924,168 Matthews Japan Fund 2.00% 457,443 Matthews Asian Technology Fund 2.00% 88,661 Matthews Asia Pacific Fund 1.90% 220,204 YEAR ENDED AUGUST 31, 2004 INVESTMENT VOLUNTARY EXPENSE GROSS ADVISORY LIMITATION ADVISORY FEES FEE RATE* Matthews Pacific Tiger Fund 1.00% 1.90% $5,143,536 Matthews Asian Growth and Income Fund 1.00% 1.90% 9,079,372 Matthews Korea Fund 1.00% 2.00% 2,001,270 Matthews China Fund 1.00% 2.00% 3,208,027 Matthews Japan Fund 1.00% 2.00% 1,020,695 Matthews Asian Technology Fund 1.00% 2.00% 340,330 Matthews Asia Pacific Fund 1.00% 1.90% 393,709 ADVISORY FEES EXPENSES TOTAL FEES WAIVED WAIVED BY THE RECOUPED BY THE OR (RECOUPED) BY ADVISOR ADVISOR ADVISOR Matthews Pacific Tiger Fund $67,924 $ -- $67,924 Matthews Asian Growth and Income Fund 111,382 -- 111,382 Matthews Korea Fund 22,659 -- 22,659 Matthews China Fund 44,176 -- 44,176 Matthews Japan Fund 13,941 3,140 10,801 Matthews Asian Technology Fund 4,232 99,722 (95,490) Matthews Asia Pacific Fund 6,346 -- 6,346
* Effective January 1, 2004 the Investment Advisory Fee Rate is reduced to 0.90% for average daily total net assets in the Matthews Asian Funds complex in excess of $2 billion.
The investment advisory agreements provide that any reductions made by the Advisor in its fees, in the event a funds expenses exceed the voluntary expense limitation, are subject to reimbursements by the Funds within the following three years provided that the Funds are able to effect such reimbursements and remain in compliance with applicable expense limitations. The Funds had no expenses available for recoupment by the Advisor at fiscal year end December 31, 2004. There were no fees waived by the Advisor for the four-month period ended December 31, 2004.800.789.ASIA (2742) www.matthewsfunds.com 71
FOUR-MONTH PERIOD ENDED ADMINISTRATION DECEMBER 31, 2004 ADMINISTRATION & SHAREHOLDER NET FEES & SHAREHOLDER SERVICING FEES IN BASIS SERVICING FEES REIMBURSED TOTAL POINTS Matthews Pacific Tiger Fund $554,787 ($84,923) $469,864 0.20% Matthews Asian Growth and Income Fund 884,810 (160,992) 723,818 0.19% Matthews Korea Fund 94,358 (71,157) 23,201 0.06% Matthews China Fund 298,248 (46,134) 252,114 0.20% Matthews Japan Fund 153,463 (13,135) 140,328 0.22% Matthews Asian Technology Fund 28,612 (5,372) 23,240 0.19% Matthews Asia Pacific Fund 71,031 (4,198) 66,833 0.22% YEAR ENDED AUGUST 31, 2004 SHAREHOLDER FEE IN SERVICING FEES BASIS POINTS Matthews Pacific Tiger Fund $297,638 0.06% Matthews Asian Growth and Income Fund 520,383 0.06% Matthews Korea Fund 114,766 0.06% Matthews China Fund 184,606 0.06% Matthews Japan Fund 61,055 0.06% Matthews Asian Technology Fund 19,715 0.06% Matthews Asia Pacific Fund 23,822 0.06%The Funds bear a portion of the fees paid to certain services providers (exclusive of the Funds transfer agent) which provide transfer agency and shareholder servicing to certain shareholders. Fees accrued to pay to such service providers for the four-month period ended December 31, 2004, and fiscal year ended August 31, 2004, are reflected in the Statement of Operations as follows:
FOUR-MONTH PERIOD ENDED ADMINISTRATION & DECEMBER 31, 2004 TRANSFER SHAREHOLDER AGENT FEES SERVICING FEES TOTAL Matthews Pacific Tiger Fund $334,091 $167,046 $501,137 Matthews Asian Growth and Income Fund 526,397 263,198 789,595 Matthews Korea Fund 58,998 29,499 88,497 Matthews China Fund 182,056 91,028 273,084 Matthews Japan Fund 93,950 46,975 140,925 Matthews Asian Technology Fund 16,899 8,449 25,348 Matthews Asia Pacific Fund 42,181 21,090 63,271 YEAR ENDED AUGUST 31, 2004 TRANSFER SHAREHOLDER AGENT SERVICING TOTAL Matthews Pacific Tiger Fund $604,678 $302,339 $907,017 Matthews Asian Growth and Income Fund 1,065,871 532,936 1,598,807 Matthews Korea Fund 247,447 123,724 371,171 Matthews China Fund 378,162 189,081 567,243 Matthews Japan Fund 114,015 57,008 171,023 Matthews Asian Technology Fund 40,160 20,080 60,240 Matthews Asia Pacific Fund 43,569 21,785 65,354
72 MATTHEWS ASIAN FUNDS
PROCEEDS PURCHASES FROM SALES Matthews Pacific Tiger Fund $139,201,538 $26,416,849 Matthews Asian Growth and Income Fund 141,108,121 79,177,606 Matthews Korea Fund 7,710,529 12,219,007 Matthews China Fund 22,824,690 18,237,277 Matthews Japan Fund 10,234,756 19,779,507 Matthews Asian Technology Fund 2,621,324 2,942,040 Matthews Asia Pacific Fund 20,654,902 1,141,361
T A X I N F O R M A T I O N ( U n a u d i t e d)
1. QUALIFIED DIVIDEND INCOMEQDI PORTION Matthews Pacific Tiger Fund 14.22% Matthews Asian Growth and Income Fund 15.53% Matthews China Fund 26.18% Matthews Asia Pacific Fund 100.00%2. LONG-TERM CAPITAL GAIN DIVIDENDS
LONG-TERM CAPITAL GAINS Matthews Pacific Tiger Fund $2,657,847 Matthews Asian Growth and Income Fund 21,324,762 Matthews Korea Fund 17,619,961 Matthews China Fund 13,885,771
800.789.ASIA (2742) www.matthewsfunds.com 73
R E P O R T O F I N D E P E N D E N T
R E G I S T E R E D
P U B L I C A C C O U N T I N G F I R M
To the Shareholders and Board of Trustees of Matthews Asian Funds,
We have audited the accompanying statements of assets and liabilities of Matthews Asian Funds (comprising the Matthews Pacific Tiger Fund, Matthews Asian Growth and Income Fund, Matthews Korea Fund, Matthews China Fund, Matthews Japan Fund, Matthews Asian Technology Fund, and Matthews Asia Pacific Fund, collectively referred to as the Funds) including the schedules of investments as of December 31, 2004, and the related statements of operations, statements of changes in net assets and financial highlights for the periods indicated thereon. These financial statements and financial highlights are the responsibility of the Funds management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Matthews Asian Funds as of December 31, 2004, the results of their operations, changes in their net assets and the financial highlights for the periods indicated thereon, in conformity with accounting principles generally accepted in the United States of America.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
January 18, 2005
74 MATTHEWS ASIAN FUNDS
The operations of each Fund are under the direction of the Board of Trustees. The Board of Trustees establishes each Funds 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-ASIA [2742] or by visiting the funds website, www.matthewsfunds.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:
------------------------------------------------------------------------------------------------------------------------------------- Number of Term of Portfolios Office and in Fund Other Trusteeships/ Name, Year of Birth, Length Complex Directorships Address and Position(s) of Time Principal Occupation(s) Overseen by (number of portfolios) Held with Trust Served(1) During Past 5 Years Trustee Held by Trustee I N D E P E N D E N T T R U S T E E S Richard K. Lyons Since 1994 Acting Dean (since 2004) 7 Director, iShares Fund Born 1961 and Coleman Professor of Finance Complex, consisting of Four Embarcadero Center, Suite 550 (since 1993), Haas School of iShares, Inc. and iShares San Francisco, CA 94111 Business University of California. Trust managed by Barclays Chairman of the Board of Global Investors (90 Trustees and Trustee portfolios); Trustee, Barclays Global Investor Fund Complex, consisting of Barclays Global Investor Funds and Barclays Master Investment Portfolios (15 portfolios). Robert K. Connolly Since 1994 Retired since 8/90. Prior 7 None Born 1932 thereto: Institutional Four Embarcadero Center, Suite 550 Sales Manager and Securities San Francisco, CA 94111 Analyst for Barrington Trustee Research Associates. Toshi Shibano Since President, Toshi Shibano 7 None Born 1950 December 31, Consulting, since 1995; Adjunct Four Embarcadero Center, Suite 550 2003 Associate Professor, Columbia San Francisco, CA 94111 Graduate School of Business Trustee since 2001; Adjunct Professor, Thunderbird American Graduate School of International Management since 2000; Faculty, General Electric Corporate Leadership Development Center since 2000; Executive Education Lecturer, Haas School of Business, University of California at Berkeley since 1995. I N T E R E S T E D T R U S T E E(2) David FitzWilliam-Lay Since 1994 Retired in 1993. 7 None Born 1931 Prior thereto Chairman Four Embarcadero Center, Suite 550 of GT Management, PLC, San Francisco, CA 94111 United Kingdom Trustee O F F I C E R ( S ) W H O A R E N O T T R U S T E E S(2) G. Paul Matthews Since 1994 Chairman, Co-Chief N/A N/A Born 1956 Executive Officer Four Embarcadero Center, Suite 550 and Chief Investment San Francisco, CA 94111 Officer, Matthews Trustee International Capital Management, LLC since 1991. Mark W. Headley Since 1999 Co-Chief Executive Officer, N/A N/A Born 1959 President and Portfolio Four Embarcadero Center, Manager, Matthews International Suite 550 Capital Management, LLC since San Francisco, CA 94111 2001; President and Portfolio Vice President Manager, 1999-2001; Portfolio Manager and Managing Director 1996-1999. Rodney D. Yee Since 2004 Chief Financial Officer, N/A N/A Born 1960 Matthews International Capital Four Embarcadero Center, Management, LLC since 2004; Chief Suite 550 Financial Officer, Corporate San Francisco, CA 94111 Secretary and Compliance Officer, Treasurer Sand Hill Advisors, Inc. 2002-2004; Controller, Firsthand Capital Management, Inc., 1998-2002 Downey H. Blount(3) Secretary Senior Vice President Born 1970 since 2001; and Chief Compliance Officer, Four Embarcadero Center, Chief Matthews International Capital Suite 550 Compliance Management, LLC since 2004; San Francisco, CA 94111 Officer Senior Vice President and Secretary, Chief Compliance since 2004 Compliance Officer, 2001-2004; Officer Vice President, 1999-2001; Manager, Mutual Fund Administration, Montgomery Asset Management LLC, 1997-1999. ----------------------------------------------------------------------------------------------------------------------------------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 These Trustees and officers are considered interested persons of the Trust as defined under the 1940 Act either because of an ownership interest in the Advisor or an office held with the Trust. Mr. FitzWilliam-Lay is an interested person because of an ownership interest in the Advisor. 3 Ms. Blount resigned as Secretary and Shai Malka of the Advisor was elected as her replacement on February 25, 2005.
800.789.ASIA [2742] www.matthewsfunds.com 75
B O A R D O F T R U S T E E S
I n d e p e n d e n t T r u s t e e s :
Richard K. Lyons, Chairman
Robert K. Connolly
Toshi Shibano
I n t e r e s t e d T r u s t e e :
David FitzWilliam-Lay
O F F I C E R S
G. Paul Matthews
Mark W. Headley
Rodney D. Yee
Downey H. Blount
I N V E S T M E N T A D V I S O R
Matthews International Capital Management, LLC
Four Embarcadero Center, Suite 550
San Francisco, CA 94111
800-789-ASIA [2742]
A C C O U N T S E R V I C E S
PFPC Inc.
P.O. Box 9791
Providence, RI 02940
800-789-ASIA [2742]
C U S T O D I A N
The Bank of New York
One Wall Street
New York, NY 10286
L E G A L C O U N S E L
Paul, Hastings, Janofsky
& Walker, LLP
55 Second Street
San Francisco, CA 94105
76 MATTHEWS ASIAN FUNDS
©2005 Matthews International Capital Management, LLC
MATAR-0205-130M-FST
The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrants 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.
There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrants 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.
The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrants 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 items instructions.
As of the end of the period covered by the report, the registrants board of directors has determined that the registrant has at least one audit committee financial expert serving on its audit committee and that person is independent.
Professor Richard K. Lyons has been a professor of International Finance at the Haas School of Business at UC Berkeley for 10 years. 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 instruction of International Finance at the graduate level. As a student, he completed courses at UC Berkeley in financial and managerial accounting and later received a PhD from M.I.T. in Economics. Mr. Lyons has gained additional accounting expertise as the Audit Committee Chair of Matthews Asian Funds.
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 registrants 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 were $62,000 for the fiscal year ended 08/31/2003, $75,000 for the fiscal year ended 08/31/2004, and $58,600 for the four-month fiscal stub-year ended 12/31/2004.
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 registrants financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended 08/31/2003, $0 for the fiscal year ended 08/31/2004, and $0 for the four-month fiscal stub-year ended 12/31/2004.
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 with IRS Subchapter M, tax advice, and tax planning with regard to federal and state income tax returns were $6,000 for the fiscal year ended 08/31/2003, $7,000 for the fiscal year ended 08/31/2004, and $7,000 for the four-month fiscal stub-year ended 12/31/2004.
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 were $0 for the fiscal year ended 08/31/2003, $0 for the fiscal year ended 08/31/2004, and $0 for the four-month fiscal stub-year ended 12/31/2004.
(1) Disclose the audit committees 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
Auditors engagement. Any such policies and procedures must (1) be
detailed as to the particular service and (2) not involve any delegation of
the Audit Committees 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 5
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
(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:
n/a
100%
n/a
The percentage of hours expended on the principal accountants engagement
to audit the registrants financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the principal
accountants full-time, permanent employees was 0%.
The aggregate non-audit fees billed by the registrants accountant for
services rendered to the registrant, and rendered to the registrants
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 were $0 for the fiscal year ended
08/31/2003, $0 for the fiscal year ended 08/31/2004, and $0 for the four-month fiscal stub-year
ended 12/31/2004.
The registrants audit committee of the board of directors has considered
whether the provision of non-audit services that were rendered to the
registrants 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
accountants independence. Not applicable. 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. Item 7. Disclosure of Proxy Voting
Policies and Procedures for Closed-End Management Investment Companies. Not applicable. 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
registrants board of directors, where those changes were implemented after the
registrant last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G)
of Schedule 14A (17 CFR 240.14a-101), or this Item.
The registrants principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrants
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)).
There were no changes in the registrants 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 registrants second fiscal quarter of the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial
reporting.
The Registrants Code of Ethics that is the subject of disclosure required by Item 2
is incorporated by reference to Exhibit (a)(1) to the Registrants Form N-CSR filed on October 29, 2003
(Accession No. 0001068800-03-000617).
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of
the Sarbanes-Oxley Act of 2002 are attached hereto.
Not applicable.
Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of
the Sarbanes-Oxley Act of 2002 are attached hereto. 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/ G. Paul Matthews
Date
March 7, 2005
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/ G. Paul Matthews
Date
March 7, 2005
By (Signature and Title)*
/s/ Rodney D. Yee
Date
March 7, 2005
* Print the name and title
of each signing officer under his or her signature.
(c)
(d)
(f)
(g)
(h)
Item 5. Audit Committee
of Listed Registrants.
Item 6. Schedule of
Investments
Item 8. Portfolio
Managers of Closed-End Management Investment Companies.
Item 11. Controls and
Procedures.
(a)
(b)
Item 12. Exhibits.
(a)(1)
(a)(2)
(a)(3)
(b)
SIGNATURES
G. Paul Matthews, President
(principal executive officer)
G. Paul Matthews, President
(principal executive officer)
Rodney D. Yee, Treasurer
(principal financial officer)