MATTHEWS INTERNATIONAL FUNDS
(d/b/a MATTHEWS ASIAN FUNDS)
WWW.MATTHEWSFUNDS.COM
PACIFIC TIGER FUND
ASIAN GROWTH AND INCOME FUND
KOREA FUND
CHINA FUND
JAPAN FUND
ASIAN TECHNOLOGY FUND
STATEMENT OF ADDITIONAL INFORMATION
December 31, 2002
as revised
April 7, 2003
This Statement of Additional Information ("SAI") is not a
Prospectus and should be read in conjunction with the current
Prospectus of Matthews Asian Funds dated December 31, 2002 as
revised January 15, 2003. The financial statements contained in
the Funds' Annual Report for the fiscal year ended August 31, 2002
are incorporated herein by reference. You can obtain a free copy
of the current Prospectus and Annual Report on our web site at
WW.MATTHEWSFUNDS.COM or by contacting the following companies at
the addresses and telephone numbers listed below.
Underwriter:
PFPC Distributors, Inc.
760 Moore Road
King of Prussia, PA 19406
(800) 892-0382
Investment Advisor:
Matthews International Capital Management, LLC
456 Montgomery Street, Suite 1200
San Francisco, CA 94104
(800) 789-2742
No person has been authorized to give any information or to make
any representations not contained in this SAI or in the Prospectus
in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be
relied upon as having been authorized by the Funds or their
Underwriter. The Prospectus does not constitute an offering by
the Funds or by the Underwriter in any jurisdiction in which such
offering may not lawfully be made.
TABLE OF CONTENTS PAGE
Fund History 3
Description of the Funds and Their Investments and Risks 3
Classification 3
Investment Strategies and Risks 4
Matthews' Investment Process 4
Foreign Currency Transactions 5
Investment Strategies and Risks Common to All Funds 5
Investment Strategies and Risks Specific to Each Fund 7
Risks Related to Lower Rated Debt Securities 12
Non-Principal Investment Strategies 13
Funds' Policies 24
Temporary Defensive Position 25
Portfolio Turnover 25
Management of the Funds 25
Trustees and Officers 25
Approval of Investment Advisory Agreements 29
Compensation 29
Code of Ethics 30
Control Persons and Principal Holders of Securities 30
Investment Advisory & Other Service Providers 33
The Investment Advisor 33
Principal Underwriter 35
Service Agreements 35
Rule 12b-1 Plan (Distribution Plan) 36
Shareholder Services Agreement 36
Transfer Agent 37
Custodian 37
Counsel to the Trust 37
Independent Auditors 37
Brokerage Allocation and Other Practices 37
Shares of Beneficial Interest 39
Purchase, Redemption and Pricing of Shares 39
Purchase of Shares 39
Determination of Net Asset Value 39
Redemption in Kind 40
Equalization 41
Taxation of the Trust 41
In General 41
Taxes Regarding Options, Futures and Foreign Currency
Transactions 42
Unique Foreign Tax Issues 43
Calculation of Performance Data 43
In General 43
Average Total Return Quotations 43
Yield Quotation 46
Performance and Advertisements 47
Other Information 48
Reports to Shareholders 48
Financial Statements 48
Appendix 49
Bond Ratings 49
FUND HISTORY
Matthews International Funds (d/b/a Matthews Asian Funds) (the
"Trust"), 456 Montgomery Street, Suite 1200, San Francisco,
California 94104, is a family of mutual funds currently offering
six separate series of shares named:
Matthews Pacific Tiger Fund, Matthews Asian Growth and Income
Fund, Matthews Korea Fund, Matthews China Fund, Matthews Japan
Fund and Matthews Asian Technology Fund (collectively referred to
as the "Funds" or individually as a "Fund"). All six Funds are
offered in a single prospectus, referred to herein as the
"Prospectus."
The Trust was organized as a Delaware business trust on April 13,
1994 and commenced operations on September 12, 1994. It has never
been engaged in any other business.
DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS
Please read the following information together with the
information contained in the Prospectus concerning the investment
strategies, risks and policies of the Funds. The information here
supplements the information in the Prospectus.
Classification
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940
Act"). Each Fund is "diversified" except for the Korea Fund,
which is non-diversified. Diversified means that as to 75% of the
assets of a Fund, one holding cannot represent more than 5% of the
assets of the Fund, nor can any holding represent more than 10% of
a company's outstanding voting securities. The remaining 25% of
the Fund could be invested in one holding, or in multiple holdings
not subject to the above limitations.
Each Fund has elected and intends to continue to qualify to be
treated as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986 (the "Code"). Such
qualification relieves the Funds of liability for federal income
taxes to the extent the Funds' earnings are distributed in
accordance with the Code. To so qualify, among other
requirements, each Fund will limit its investments so that, at the
close of each quarter of its taxable year, (i) not more than 25%
of the market value of the Fund's total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50% of
the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the
securities of a single issuer, and it will not own more than 10%
of the outstanding voting securities of a single issuer.
Investment Strategies and Risks
As a general matter, the investment advisor believes that the
discipline of company evaluation and choosing good stocks (and in
the case of the Asian Growth and Income Fund, convertible
securities as well) is the best way to manage the assets of the
Funds, and to be fully invested as appropriate with cash needs.
MATTHEWS' INVESTMENT PROCESS
Matthews International Capital Management, LLC, serves as the
investment advisor to the Trust. In this SAI, it is referred to
as "Matthews" or the "Advisor." Although the Advisor uses a
multi-factor research approach when selecting investments for the
Funds, primary emphasis is placed on individual stock selection
("bottom up") using a "Growth at a Reasonable Price" process
("GARP"). Other factors include evaluation of each country's
political stability, prospects for economic growth (inflation,
interest direction, trade balance and currency strength),
identification of long term trends that might create investment
opportunities, the status of the purchasing power of the people
and population and composition of the work force. In reviewing
potential companies in which to invest, the Advisor considers the
company's quality of management, plans for long-term growth,
competitive position in the industry, future expansion plans and
growth prospects, valuations compared with industry average,
earnings track record, technology, research and development,
productivity, labor costs, raw material costs and sources, profit
margins, capital resources, governmental regulation, a debt/equity
ratio less than the market average, and other factors. In
addition, the Advisor will visit countries and companies in person
to derive firsthand information for further evaluation. After
evaluation of all factors, the Advisor attempts to identify those
companies in such countries and industries that are best
positioned and managed to take advantage of the varying economic
and political factors.
The Funds may invest in securities of issuers of various sizes,
large or small. Smaller companies often have limited product
lines, markets or financial resources, and they may be dependent
upon one or a few key people for management. The securities of
such companies generally are subject to more abrupt or erratic
market movements and may be less liquid than securities of larger,
more established companies or the market averages in general.
Many of the debt and convertible securities in which the Funds
invest are unrated by any rating agency and, therefore, there is
no objective standard against which the Advisor may evaluate such
securities. The Advisor seeks to minimize the risks of investing
in lower-rated securities through investment analysis and
attention to current developments in interest rates and economic
conditions. In selecting debt and convertible securities for the
Funds, the Advisor will assess the following factors:
1) potential for capital appreciation; 2) price of security
relative to price of underlying stock, if a convertible security;
3) yield of security relative to yield of other fixed-income
securities; 4) interest or dividend income; 5) call and/or put
features; 6) creditworthiness; 7) price of security relative to
price of other comparable securities 8) size of issue; 9) currency
of issue; and 10) impact of security on diversification of the
portfolios.
The Funds may also invest in securities of foreign issuers in the
form of American Depository Receipts ("ADRs") and European
Depository Receipts ("EDRs"). Generally, ADRs in registered form
are dollar denominated securities designed for use in the U.S.
securities markets, which represent and may
be converted into an underlying foreign security. EDRs, in bearer
form, are designed for use in the European securities markets.
The Funds may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis
in order to hedge against anticipated changes in interest rates
and prices.
Foreign Currency Transactions
The Funds will engage in foreign currency transactions in
connection with their investment in foreign securities but will
not speculate in foreign currency exchange. The Funds will
conduct their foreign currency exchange transactions either on a
spot (i.e. cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase
or sell foreign currencies. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specified
currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded
directly between currency traders and their customers.
When a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may want to
establish the U.S. dollar cost or proceeds, as the case may be.
By entering into a forward contract in U.S. dollars for the
purchase or sale of the amount of foreign currency involved in an
underlying security transaction, a Fund is able to protect itself
against a possible loss between trade and settlement dates
resulting from an adverse change in the relationship between the
U.S. dollar and such foreign currency. This tends to limit
potential gains however, that might result from a positive change
in such currency relationships. The Funds may also hedge their
foreign currency exchange rate risk by engaging in currency
financial futures and options transactions.
When the Advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell an amount of
foreign currency approximating the value of some or all of the
Funds' securities denominated in such foreign currency. In this
situation the Funds may, in the alternative, enter into a forward
contract to sell a different foreign currency for a fixed U.S.
dollar amount where the Advisor believes that the U.S. dollar
value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of
the currency in which portfolio securities of the Funds are
denominated ("cross-hedge"). The forecasting of short-term
currency market movement is extremely difficult and whether such a
short-term hedging strategy will be successful is highly
uncertain.
The Funds may enter into forward contracts to sell foreign
currency with respect to portfolio positions denominated or quoted
in that currency.
Investment Strategies and Risks Common to All Funds
Below are explanations and the associated risks of certain unique
securities and investment techniques. Shareholders should
understand that all investments involve risk and there can be no
guarantee against loss resulting from an investment in the Funds,
nor can there be any assurance that the Funds' investment
objectives will be attained. Again, we remind you that generally
speaking, the Trust's investment strategy is to invest the
shareholders' money in equity securities (and convertible
securities in the case of Asian Growth and Income Fund) consistent
with each Fund's investment goal.
ADRs and EDRs
For many foreign securities, there are U.S. dollar denominated
ADRs, which are bought and sold in the United States and are
issued by domestic banks. ADRs represent the right to receive
securities of foreign issuers deposited in the domestic bank or a
correspondent bank. ADRs do not eliminate all the risks inherent
in investing in the securities of foreign issuers. By investing
in ADRs rather than directly in foreign issuer's stock however,
the Funds will avoid currency risks during the settlement period
for either purchases or sales. The Funds may also invest in EDRs
which are receipts evidencing an arrangement with a European bank
similar to that for ADRs and are designed for use in the European
securities markets.
EDRs are not necessarily denominated in the currency of the
underlying security. The Funds have no current intention to invest
in unsponsored ADRs and EDRs.
IDRs
IDRs (International Depository Receipts, also known as GDRs or
Global Depository Receipts) are similar to ADRs except that they
are bearer securities for investors or traders outside the U.S.,
and for companies wishing to raise equity capital in securities
markets outside the U.S. Most IDRs have been used to represent
shares although it is possible to use them for bonds, commercial
paper and certificates of deposit. IDRs can be convertible to
ADRs in New York making them particularly useful for arbitrage
between the markets. The Funds have no current intention to
invest in unsponsored IDRs.
Risks Associated with Euroconvertible Securities
Most of the convertible securities in which the Funds will invest
are unrated by any rating agency and, therefore, there is no
objective standard against which the Advisor may evaluate such
securities. Investing in a convertible security denominated in a
currency different from that of the security into which it is
convertible exposes the Fund to currency risk.
The theoretical value of convertible securities varies with a
number of factors including the value and volatility of the
underlying stock, the level and volatility of the interest rates,
the passage of time, dividend policy, and other variables.
Euroconvertible securities, specifically, are also influenced by
the level and volatility of the foreign exchange rate between the
security's currency and the underlying stock's currency. While
the volatility of convertible fixed income securities will
typically be less than that of the underlying securities, the
volatility of warrants will typically be greater than that of the
underlying securities.
Risks Associated with Emerging Markets
Investing in securities of issuers in Asia and the Pacific Basin
involves special risks. First, the Funds' investment focus on
that region makes the Funds particularly subject to political,
social, or economic conditions experienced in that region.
Second, many of the countries in Asia and the Pacific Basin
constitute so-called "developing" or "emerging" economies and
markets. The risks of investing in foreign markets generally are
greater for investments in developing markets. Additional risks
of investment
in such markets include (i) less social, political,
and economic stability; (ii) the smaller size of the securities
markets in such countries and the lower volume of trading, which
may result in a lack of liquidity and in greater price volatility;
(iii) certain national policies which may restrict the Funds'
investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests, or
expropriation or confiscation of assets or property, which could
result in the Funds' loss of their entire investment in that
market; and (iv) less developed legal structures governing private
or foreign investment or allowing for judicial redress for injury
to private property.
Risks Associated with Foreign Currency
The U.S. dollar market value of the Funds' investments and of
dividends and interest earned by the Funds may be significantly
affected by changes in currency exchange rates. The value of Fund
assets denominated in foreign currencies will increase or decrease
in response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Although the Funds may
attempt to manage currency exchange rate risks, there is no
assurance that the Funds will do so at an appropriate time or that
they will be able to predict exchange rates accurately. For
example, if the Funds increase their exposure to a currency and
that currency's price subsequently falls, such currency management
may result in increased losses to the Funds. Similarly, if the
Funds decrease their exposure to a currency and the currency's
price rises, the Funds will lose the opportunity to participate in
the currency's appreciation. Some currency prices may be
volatile, and there is the possibility of government controls on
currency exchange or government intervention in currency markets,
which could adversely affect the Funds. Foreign investments which
are not U.S. dollar denominated may require the Funds to convert
assets into foreign currencies or to convert assets and income
from foreign currencies to U.S. dollars. Normally, exchange
transactions will be conducted on a spot, cash or forward basis at
the prevailing rate in the foreign exchange market.
Dividends and interest received by the Funds with respect to
foreign securities may give rise to withholding and other taxes
imposed by foreign countries. Tax consequences between certain
countries and the United States may reduce or eliminate such
taxes. In addition, foreign countries generally do not impose
taxes on capital gains with respect to investments by non-resident
investors. Matthews Korea Fund does not intend to engage in
activities that will create a permanent establishment in Korea
within the meaning of the Korea-U.S. Tax Treaty. Therefore,
Matthews Korea Fund generally will not be subject to any Korean
income taxes other than Korean withholding taxes. Exemptions or
reductions in these taxes apply if the Korea-U.S. Tax Treaty
applies to the Fund. If the treaty provisions are not, or cease
to be, applicable to Matthews Korea Fund, significant additional
withholding taxes would apply.
Investment Strategies Specific to Each Fund
Investment Strategies and Risks Specific to Matthews Pacific Tiger
Fund
Equity securities in which the Fund may invest include common
stocks, preferred stocks, warrants, and securities convertible
into common stocks, such as convertible bonds and debentures.
The Fund may invest up to 20% of its total assets in equity and
other securities of issuers located outside of the Pacific Tiger
economies, including, without limitation, the United States, and
in non-convertible bonds and other debt securities issued by
foreign issuers and foreign government entities.
The Fund may invest up to 15% of its total assets in securities
rated below investment grade (securities rated Baa or below by
Moody's Investors Service, Inc. ("Moody's") or BBB or below by
Standard & Poor's Corporation ("S&P") or, if unrated, are
comparable in quality). Debt securities rated below investment
grade, commonly referred to as junk bonds, have speculative
characteristics that result in a greater risk of loss of principal
and interest.
The Advisor may invest where the Advisor believes the potential
for capital growth exists and in companies which have demonstrated
the ability to anticipate and adapt to changing markets. The Fund
may invest in the securities of all types of issuers, large or
small, whose earnings are believed by the Advisor to be in a
relatively strong growth trend or whose assets are substantially
undervalued.
Under normal circumstances, the Advisor expects that the portfolio
of the Fund will be comprised of forty to eighty individual stocks
in various countries in the Pacific Tiger economies. When
purchasing portfolio securities for the Fund, the Advisor's
philosophy is a buy and hold strategy versus buying for short-term
trading.
Investment Strategies and Risks Specific to Matthews Asian Growth
and Income Fund
You should refer to the section of this SAI entitled Investment
Strategies and Risks Common to All Funds for the investment
strategies and risks specific to the Matthews Asian Growth and
Income Fund.
Investment Strategies Specific to Matthews Korea Fund
Equity securities in which the Fund may invest include South
Korean common stocks, preferred stocks (including convertible
preferred stock), bonds, notes and debentures convertible into
common or preferred stocks, warrants and rights, equity interests
in trusts, partnerships, joint ventures or similar enterprises and
depositary receipts. At present, not all of these types of
securities are available for investment in South Korea.
The Fund may invest up to 35% of its total assets in non-
convertible debt securities provided that such securities are
rated, at the time of investment, BBB or higher by S&P or Baa or
higher by Moody's or rated of equivalent credit quality by an
internationally recognized statistical rating organization or, if
not rated, are of equivalent credit quality as determined by the
Advisor. Securities rated BBB by S&P or Baa by Moody's are
considered to have speculative characteristics. Non-convertible
debt securities in which the Fund may invest include U.S. dollar
or won-denominated debt securities issued by the South Korean
government or South Korean companies and obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities. Korean law does not currently permit foreign
investors such as the Fund to acquire debt securities denominated
in won or equity securities of companies organized under the laws
of Korea that are not listed on the Korea Stock Exchange ("KSE").
At the present time, however, foreign investors are permitted to
invest in debt securities issued by Korean companies outside of
Korea and denominated in currencies other than won.
The Fund may invest up to 35% of its total assets in securities
rated below investment grade (securities rated below Baa by
Moody's or below BBB by S&P or, if unrated, are comparable in
quality) commonly referred to as "junk bonds." Debt securities
rated below investment grade may have speculative characteristics
that result in a greater risk of loss of principal or interest.
See "Risks Associated with Lower Rated Securities."
The Fund may invest its assets in a broad spectrum of securities
of Korean industries which are believed to have attractive long-
term growth potential.
Because the Fund intends to invest primarily in equity securities
of South Korean companies, an investor in the Fund should be aware
of certain risks relating to South Korea, the Korean securities
markets and international investments generally which are not
typically associated with U.S. domestic investments. In addition,
the Fund may be more volatile than a geographically diverse fund.
Security Valuation Considerations
The Korean government has historically imposed significant
restrictions and controls for foreign investors. As a result, the
Fund may be limited in its investments or precluded from investing
in certain Korean companies, which may adversely affect the
performance of the Fund. Under the current regulations, foreign
investors are allowed to invest in almost all shares listed on the
KSE. From time to time, many of the securities trade among non-
Korean residents at a premium over the market price. Foreign
investors may effect transactions with other foreign investors off
the KSE in the shares of companies that have reached the maximum
aggregate foreign ownership limit through a securities company in
Korea. These transactions typically occur at a premium over
prices on the KSE. There can be no assurance that the Fund, if it
purchases such shares at a premium, will be able to realize such
premium, on the sale of such shares or that such premium will not
be adversely affected by changes in regulations or otherwise.
Such securities will be valued at fair value as determined in good
faith by the Board of Trustees.
Risks Associated with Investing in Korean Securities
Investments by the Fund in the securities of Korean issuers may
involve investment risks different from those of U.S. issuers,
including possible political, economic or social instability in
Korea, and by changes in Korean law or regulations. In addition,
there is the possibility of the imposition of currency exchange
controls, foreign withholding tax on the interest income payable
on such instruments, foreign controls, seizure or nationalization
of foreign deposits or assets, or the adoption of other foreign
government restrictions that might adversely affect the Korean
securities held by the Fund. Political instability and/or military
conflict involving North Korea may adversely affect the value of
the Fund's assets. Foreign securities may also be subject to
greater fluctuations in price than securities of domestic
corporations or the U.S. Government. There may be less publicly
available information about a Korean company than about a domestic
company. Brokers in Korea may not be as well capitalized as those
in the U.S., so that they are more susceptible to financial
failure in times of market, political, or economic stress.
Additionally, Korean accounting, auditing and financial reporting
standards and requirements differ, in some cases, significantly,
from those applicable to U.S. issuers. In particular the assets
and profits appearing on the financial statements of a Korean
issuer may not reflect its financial position or results of
operations in accordance with U.S. generally accepted accounting
principles. There is a possibility of expropriation,
nationalization, confiscatory taxation, or diplomatic developments
that could affect investments in Korea.
In addition, brokerage commissions, custodian services,
withholding taxes, and other costs relating to investment in
foreign markets generally are more expensive than in the United
States. Therefore, the
operating expense ratio of the Fund can be
expected to be higher than that of a fund investing primarily in
the securities of U.S. issuers.
Risks Associated with the Korean Securities Markets
In addition to the risks of investing in Korea discussed in the
Prospectus, investors should know that the Korean securities
markets are smaller than the securities markets of the U.S. or
Japan. Certain restrictions on foreign investment in the Korean
securities markets may preclude investments in certain securities
by the Fund and limit investment opportunities for the Fund.
Investing in securities of South Korean companies and of the
government of the Republic of Korea involves certain
considerations not typically associated with investing in
securities of United States companies or the United States
government. Among these are the risks of political, economic and
social uncertainty and instability, including the potential for
increasing militarization in North Korea. Relations between North
and South Korea, while improving, remain tense and the possibility
of military action still exists. In the event that military
action were to take place, the value of the Fund's Korean assets
are likely to be adversely affected. The Fund may also be
affected by foreign currency fluctuations or exchange controls,
differences in accounting procedures and other risks. The Fund is
also subject to typical stock and bond market risk. In addition,
limitations of foreign ownership currently exist which may impact
the price of a Korean security paid by the Fund.
In the latter part of 1997, Korea experienced a national financial
crisis requiring intervention by the International Monetary Fund
("IMF") and a large infusion of foreign capital. The financial
crisis led to a recessionary environment, which had serious
consequences for unemployment and domestic business activity. The
government has initiated, in conjunction with the IMF, wide-
ranging reform activities. The full impact on corporate Korea
cannot be predicted but widespread restructuring and consolidation
as well as a continued high rate of bankruptcies can be expected.
Investment Strategies and Risks Specific to Matthews China Fund
The Fund may hold a significant weighting in securities listed on
either the Shanghai and/or Shenzhen stock exchanges. Securities
listed on these exchanges are divided into two classes, A shares,
which are limited to domestic investors, and B shares, which are
allocated for both international and domestic investors. The
Fund's exposure to securities listed on either the Shanghai and
Shenzhen exchanges will initially be through B shares, until the
regulatory environment eliminates the share class distinction. In
addition to B shares, the Fund may also invest in Hong Kong listed
H shares, Hong Kong listed Red chips (which are companies owned by
mainland China enterprises, but are listed in Hong Kong), and
companies with the majority of their revenues derived from
business conducted in China (regardless of the exchange on which
the security is listed or the country in which the company is
based).
The Fund may invest up to 20% of its total assets in equity and
other securities of issuers located outside of the China region,
including, without limitation, the United States, and in non-
convertible bonds and other debt securities issued by foreign
issuers and foreign government entities.
The Advisor may invest where the Advisor believes the potential
for capital growth exists and in companies which have demonstrated
the ability to anticipate and adapt to changing markets. The
Fund may invest in the securities of all types of issuers, large or
small, whose earnings are believed by the Advisor to be in a
relatively strong growth trend or whose assets are substantially
undervalued.
Under normal circumstances, the Advisor expects that the portfolio
of the Fund will be comprised of 20 to 60 individual stocks in
various countries in the China region. When purchasing portfolio
securities for the Fund, the Advisor's philosophy is a buy and
hold strategy versus buying for short-term trading.
In addition to the risks of investing in China and Hong Kong
discussed in the Prospectus, investors should know that China's
securities markets have less regulation, are substantially
smaller, less liquid and more volatile than the securities markets
of more developed countries. Financial information on companies
listed on these markets is limited and may be inaccurate.
Companies listed on these markets may trade at prices not
consistent with traditional valuation measures. Management of
these companies could have conflicting financial interests or
little experience managing a business.
Investment Strategies and Risks Specific to Matthews Japan Fund
The Fund may invest in equity and other securities of issuers
located outside of Japan, including the United States, and in non-
convertible bonds and other debt securities issued by foreign
issuers and foreign government entities. The Fund may invest in
non-convertible debt securities provided that such securities are
rated, at the time of investment, BBB or higher by S&P or Baa or
higher by Moody's or rated of equivalent credit quality by an
internationally recognized statistical rating organization or, if
not rated, are of equivalent credit quality as determined by the
Advisor. Securities rated BBB by S&P or Baa by Moody's are
considered to have speculative characteristics. Non-convertible
debt securities in which the Fund may invest include U.S. dollar
or yen-denominated debt securities issued by the Japanese
government or Japanese companies and obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities.
The Fund may invest up to 5% of its total assets in securities
rated below investment grade (securities rated Baa or below by
Moody's or BBB or below by S&P or, if unrated, are comparable in
quality). Debt securities rated below investment grade, commonly
referred to as junk bonds, have speculative characteristics that
result in a greater risk of loss of principal and interest.
The Fund may invest its assets in a broad spectrum of securities
of Japanese industries which are believed to have attractive long-
term growth potential. The Fund has the flexibility to invest in
both large and small companies, as deemed appropriate by the
Advisor. Smaller companies often have limited product lines,
markets or financial resources, and they may be dependent upon one
or a few key people for management. The securities of such
companies generally are subject to more abrupt or erratic market
movements and may be less liquid than securities of larger, more
established companies or the market averages in general. In
selecting industries and companies for investment, the Advisor
considers overall growth prospects, competitive position in export
markets, technology, research and development, productivity, labor
costs, raw material costs and sources, profit margins, capital
resources, government regulation, quality of management and other
factors. After evaluation of all factors, the Advisor attempts to
identify those companies and industries that are best positioned
and managed to take advantage of the varying economic and
political factors.
Under normal circumstances, the Advisor expects that the portfolio
of the Fund will be comprised of 25 to 75 individual stocks in the
Japanese economy. When purchasing portfolio securities for the
Fund, the Advisor's philosophy is generally a buy and hold
strategy versus buying for short-term trading.
Concentration in Japanese Securities
The Fund concentrates its investments in equity securities of
Japanese companies. Consequently, the Fund's share price may be
more volatile than that of mutual funds not sharing this
geographic concentration. The value of the Fund's shares may vary
in response to political and economic factors affecting companies
in Japan. The Fund should not be considered a complete investment
program, rather it may be used as a vehicle for diversification.
Securities in Japan are denominated and quoted in yen. Yen are
fully convertible and transferable based on floating exchange
rates into all readily convertible currencies, without
administrative or legal restrictions for both non-residents and
residents of Japan. In determining the net asset value of shares
of the Fund, assets or liabilities initially expressed in terms of
Japanese yen will be translated into U.S. dollars at the current
selling rate of Japanese yen against U.S. dollars. As a result,
in the absence of a successful currency hedge, the value of the
Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by fluctuations in the value of Japanese
yen relative to the U.S. dollar.
The decline in the Japanese securities markets since 1989 has
contributed to a weakness in the Japanese economy, and the impact
of a further decline cannot be ascertained. The common stocks of
many Japanese companies continue to trade at high price-earnings
ratios in comparison with those in the United States, even after
the recent market decline. Differences in accounting methods make
it difficult to compare the earning of Japanese companies with
those of companies in other countries, especially the United
States.
Japan is largely dependent on foreign economies for raw materials.
International trade is important to Japan's economy, as exports
provide the means to pay for many of the raw materials it must
import. Because of the concentration of the Japanese exports in
highly visible products such as automobiles, machine tools and
semiconductors, and the large trade surpluses ensuing therefrom,
Japan has entered a difficult phase in its relations with its
trading partners, particularly with respect to the United States,
with whom the trade imbalance is the greatest.
Investment Strategies and Risks Specific to Matthews Asian
Technology Fund
Since the Fund's investments are concentrated in the technology
sector, the movements in its net asset value ("NAV") will follow
that sector, as opposed to the general movement of the economies
of the countries where the companies are located. This
concentration will have a tendency to make the NAV more volatile
than a non-concentrated portfolio.
Risks Related to Lower Rated Debt Securities
Debt securities rated lower than Baa by Moody's or BBB by S&P
(commonly referred to as "junk bonds") are considered to be of
poor standing and predominantly speculative. Such securities are
subject to a substantial degree of credit risk. There can be no
assurance that the Funds would be protected from widespread bond
defaults brought about by a sustained economic downturn or other
market and interest rate changes.
The value of lower-rated debt securities will be influenced not
only by changing interest rates, but also by the bond market's
perception of credit quality and the outlook for economic growth.
When economic conditions appear to be deteriorating, low and
medium-rated bonds may decline in market value due to investors'
heightened concern over credit quality, regardless of prevailing
interest rates. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the
value and liquidity (liquidity refers to the ease or difficulty
which the Fund could sell a security at its perceived value) of
lower-rated securities held by a Fund, especially in a thinly
traded foreign market.
To the extent that an established secondary market does not exist
and a particular lower-rated debt security is thinly traded, that
security's fair value may be difficult to determine because of the
absence of reliable objective data. As a result, a Fund's
valuation of the security and the price it could obtain upon its
disposition could differ. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of lower-rated securities held
by the Funds, especially in a thinly traded market.
The credit ratings of S&P and Moody's are evaluations of the
safety of principal and interest payments, not market value risk,
of lower-rated securities. These ratings are provided as an
Appendix to this SAI. Also, credit rating agencies may fail to
change timely the credit ratings to reflect subsequent events.
Therefore, in addition to using recognized rating agencies and
other sources, the Advisor may perform its own analysis of issuers
in selecting investments for the Funds. The Advisor's analysis of
issuers may include, among other things, historic and current
financial condition and current and anticipated cash flows.
Non-Principal Investment Strategies
The following strategies and specific type of investments are not
the principal investment strategies of the Funds, but are reserved
by the Advisor for its use in the event that the Advisor deems it
appropriate to do so to achieve the Funds' fundamental goals.
1. Loans of Portfolio Securities
The Funds may lend portfolio securities to broker-dealers and
financial institutions. In return, the broker-dealers and
financial institutions pay the Funds money to borrow these
securities. The Funds may lend portfolio securities provided:
(1) the loan is secured continuously by collateral marked-to-
market daily and maintained in an amount at least equal to the
current market value of the securities loaned; (2) the Funds may
call the loan at any time and receive the securities loaned; (3)
the Funds will receive any interest or dividends paid on the
loaned securities; and (4) the aggregate market value of
securities loaned by a Fund will not at any time exceed 33% of the
total assets of such Fund.
Collateral will consist of U.S. Government securities, cash
equivalents or irrevocable letters of credit. Loans of securities
involve a risk that the borrower may fail to return the securities
or may fail to maintain the proper amount of collateral.
Therefore, the Funds will only enter into portfolio loans after a
review by the Advisor, under the supervision of the Board of
Trustees, including a review of the creditworthiness of the
borrower. Such reviews will be monitored on an ongoing basis.
Lending
portfolio securities by Matthews Korea Fund is not
currently permitted under Korean laws and regulations. In the
event that these laws change, the Fund will take advantage of this
strategy as it deems appropriate.
2. Repurchase Agreements
The Funds may purchase repurchase agreements to earn income. The
Funds may also enter into repurchase agreements with financial
institutions that are deemed to be creditworthy by the Advisor,
pursuant to guidelines established by the Board of Trustees. The
repurchase price under the repurchase agreements equals the price
paid by each Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the
securities underlying the repurchase agreement). Repurchase
agreements may be considered to be collateralized loans by the
Funds under the 1940 Act.
Any collateral will be marked-to-market daily. If the seller of
the underlying security under the repurchase agreement should
default on its obligation to repurchase the underlying security, a
Fund may experience delay or difficulty in exercising its right to
realize upon the security and, in addition, may incur a loss if
the value of the security should decline, as well as disposition
costs in liquidating the security. A Fund will not invest more
than 15% of its net assets in repurchase agreements maturing in
more than seven days. The Funds must treat each repurchase
agreement as a security for tax diversification purposes and not
as cash, a cash equivalent or receivable. Matthews Korea Fund is
not currently permitted to engage in repurchase agreement
transactions in Korea under Korean laws and regulations.
The financial institutions with whom the Funds may enter into
repurchase agreements are banks and non-bank dealers of U.S.
Government securities that are listed on the Federal Reserve Bank
of New York's list of reporting dealers and banks, if such banks
and non-bank dealers are deemed creditworthy by the Advisor. The
Advisor will continue to monitor the creditworthiness of the
seller under a repurchase agreement, and will require the seller
to maintain during the term of the agreement the value of the
securities subject to the agreement at not less than the
repurchase price. The Funds will only enter into a repurchase
agreement where the market value of the underlying security,
including interest accrued, will be at all times equal to or
exceed the value of the repurchase agreement.
The Funds may invest in repurchase agreements with foreign
parties, or in a repurchase agreement based on securities
denominated in foreign currencies. Legal structures in foreign
countries, including bankruptcy laws, may offer less protection to
investors such as the Funds, and foreign repurchase agreements
generally involve greater risks than a repurchase agreement in the
United States.
3. Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements to raise
cash on a short-term basis. Reverse repurchase agreements involve
the sale of securities held by the Funds pursuant to the Funds'
agreement to repurchase the securities at an agreed upon price,
date and rate of interest. Such agreements are considered to be
borrowings under the 1940 Act, and may be entered into only for
temporary or emergency purposes. While reverse repurchase
transactions are outstanding, the Funds will maintain in a
segregated account of cash, U.S. Government securities or other
liquid, high-grade debt securities in an amount at least equal to
the market value of the securities, plus accrued interest,
subject to the agreement. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Funds may
decline below the price of the securities the Funds are obligated
to repurchase.
4. Securities of Other Investment Companies
The Funds may invest in the securities of other investment
companies and currently intend to limit their investments in
securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is
made: (i) not more than 5% of the value of any of the individual
Fund's total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of a Fund's total
assets will be invested in the aggregate in securities of
investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be
owned by the respective Fund.
As a shareholder of another investment company, a Fund would bear
along with other shareholders, its pro rata portion of the
investment company's expenses, including advisory fees. These
expenses would be in addition to the advisory and other expenses
that the Funds bear directly in connection with their own
operations.
5. Illiquid Securities
Illiquid securities are securities that cannot be disposed of at
the market price within seven days of wanting to do so. The Board
of Trustees has delegated the function of making day to day
determinations of whether a security is liquid or not to the
Advisor, pursuant to guidelines established by the Board of
Trustees and subject to its quarterly review. The Advisor will
monitor the liquidity of securities held by each Fund and report
periodically on such decisions to the Board of Trustees.
A Fund may invest up to 15% of its net assets in equity or debt
securities for which there is no ready market. A Fund may
therefore not be able to readily sell such securities. Such
securities are unlike securities that are traded in the open
market and which can be expected to be sold immediately. The sale
price of securities that are not readily marketable may be lower
or higher than a Fund's most recent estimate of their fair value.
Generally, less public information is available with respect to
the issuers of these securities than with respect to companies
whose securities are traded on an exchange. Securities which are
not readily marketable are more likely to be issued by start-up,
small or family business and therefore subject to greater
economic, business and market risks than the listed securities of
more well-established companies.
6. Rule 144A Securities (Restricted Securities)
Securities which are not registered with the U.S. Securities and
Exchange Commission ("SEC") pursuant to Rule 144A of the
Securities Act of 1933, as amended (the "1933 Act"), are only
traded among institutional investors. These securities are
sometimes called "Restricted Securities" because they are
restricted from being sold to the general public because they are
not registered with the SEC.
Some of these securities are also illiquid because they cannot be
sold at market price within 7 days of wanting to do so. The Funds
will limit their investments in securities of issuers which are
restricted
from selling to the public without registration under
the 1933 Act to 15%. This 15% does not include any restricted
securities that have been determined to be liquid by the Funds'
Board of Trustees.
7. Convertible Securities
Each Fund may purchase convertible securities. While common stock
occupies the most junior position in a company's capital
structure, convertible securities entitle the holder to exchange
the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain
period of time. In addition, the owner of convertible securities
receives interest or dividends until the security is converted.
The provisions of any convertible security determine its ranking
in a company's capital structure. In the case of subordinated
convertible debentures, the holder's claims on assets and earnings
are subordinated to the claims of other creditors, and are senior
to the claims of preferred and common shareholders. In the case
of preferred stock and convertible preferred stock, the holder's
claims on assets and earnings are subordinated to the claims of
all creditors but are senior to the claims of common shareholders.
To the extent that a convertible security's investment value is
greater than its conversion value, its price will be primarily a
reflection of such investment value and its price will be likely
to increase when interest rates fall and decrease when interest
rates rise, as with a fixed-income security. If the conversion
value exceeds the investment value, the price of the convertible
security will rise above its investment value and, in addition,
may sell at some premium over its conversion value. At such times
the price of the convertible security will tend to fluctuate
directly with the price of the underlying equity security.
8. Forward Commitments, When-Issued Securities and Delayed-
Delivery Transactions
The Funds may purchase securities on a when-issued basis, or
purchase or sell securities on a forward commitment basis or
purchase securities on a delayed-delivery basis. The Funds will
normally realize a capital gain or loss in connection with these
transactions. For purposes of determining the Funds' average
dollar-weighted maturity, the maturity of when-issued or forward
commitment securities will be calculated from the commitment date.
When the Funds purchase securities on a when-issued, delayed-
delivery or forward commitment basis, the Funds' custodian will
maintain in a segregated account: cash, U.S. Government
securities or other high grade liquid debt obligations having a
value (determined daily) at least equal to the amount of the
Funds' purchase commitments. In the case of a forward commitment
to sell portfolio securities, the custodian will hold the
portfolio securities themselves in a segregated account while the
commitment is outstanding. These procedures are designed to
ensure that the Funds will maintain sufficient assets at all times
to cover their obligations under when-issued purchases, forward
commitments and delayed-delivery transactions.
Securities purchased or sold on a when-issued, delayed-delivery or
forward commitment basis involve a risk of loss if the value of
the security to be purchased declines prior to the settlement
date. Although the Funds would generally purchase securities on a
when-issued, delayed-delivery or a forward commitment basis with
the intention of acquiring the securities, the Funds may dispose
of such securities prior to settlement if the Advisor deems it
appropriate to do so.
9. Fixed-Income Securities (Bonds etc.)
All fixed-income securities are subject to two types of risks:
credit risk (will the borrower be able to pay back the money) and
interest rate risk. The credit risk relates to the ability of the
issuer to meet interest or principal payments or both as they come
due. The interest rate risk refers to the fluctuations in the net
asset value of any portfolio of fixed-income securities resulting
from the inverse relationship between price and yield of fixed-
income securities; that is, when the general level of interest
rates rises, the prices of outstanding fixed-income securities
decline, and when interest rates fall, prices rise.
In addition, if the currency in which a security is denominated
appreciates against the U.S. dollar, the dollar value of the
security will increase. Conversely, a rise in interest rates or a
decline in the exchange rate of the currency would adversely
affect the value of the security expressed in dollars. Fixed-
income securities denominated in currencies other than the U.S.
dollar or in multinational currency units are evaluated on the
strength of the particular currency against the U.S. dollar as
well as on the current and expected levels of interest rates in
the country or countries.
10. Short-Selling
The Funds may make short sales. A short sale occurs when a Fund
borrows stock (usually from a broker) and promises to give it back
at some date in the future. If the market price of that stock goes
down, the Fund buys the stock at a lower price so that it can pay
back the broker for the stock borrowed. The difference between
the price of the stock when borrowed, and when later purchased, is
a profit. The profit is reduced by a fee paid to the broker for
borrowing the stock.
A Fund may incur a loss as a result of a short sale if the price
of the security increases between the date of the short sale and
the date on which the Fund replaced the borrowed security. The
amount of any loss will be increased, by the amount of any
premium, dividends or interest the Fund may be required to pay in
connection with a short sale. No securities will be sold short
if, after effect is given to any such short sale, the total market
value of all securities sold short would exceed 10% of the value
of the Fund's net assets. The Fund will place in a segregated
account with its custodian bank an amount of cash or U.S.
Government securities equal to the difference between the market
value of the securities sold short at the time they were sold
short and any cash or U.S. Government securities required to be
deposited as collateral with the broker in connection with the
short sale.
This segregated account will be marked to market daily, provided
that at no time will the amount deposited in it plus the amount
deposited with the broker as collateral be less than the market
value of the securities at the time they were sold short.
11. Interest Rate Futures Contracts
The Funds may enter into contracts for the future delivery of
fixed-income securities commonly referred to as "interest rate
futures contracts." These futures contracts will be used only as
a hedge against anticipated interest rate changes. The Funds will
not enter into an interest rate futures contract if immediately
thereafter more than 5% of the value of the respective Fund's
total assets will be committed to margin. The principal risks
related to the use of such instruments are (1) the offsetting
correlation between movements in the market price of the portfolio
investments being hedged and in
the price of the futures contract or option may be imperfect
(the Advisor guessed wrong about how interest rates would
change); (2) possible lack of a liquid secondary market for
closing out futures or option positions; (3) the need for
additional portfolio management skills and techniques; and
(4) losses due to unanticipated market price movements.
12. Futures Transactions
The Funds may engage in futures transactions for the purchase or
sale for future delivery of securities. While futures contracts
provide for the delivery of securities, deliveries usually do not
occur. Contracts are generally terminated by entering into
offsetting transactions. The Funds may invest in futures
transactions for hedging purposes or to maintain liquidity. A
Fund may not purchase or sell a futures contract, however, unless
immediately after any such transaction the sum of the aggregate
amount of margin deposits on its existing futures positions and
the amount of premiums paid for related options is 10% or less of
its total assets.
At maturity, a futures contract obligates the Funds to take or
make delivery of certain securities or the cash value of a
securities index. A Fund may sell a futures contract in order to
offset a decrease in the market value of its portfolio securities
that might otherwise result from a market decline. A Fund may do
so either to hedge the value of its portfolio of securities as a
whole, or to protect against declines, occurring prior to sales of
securities, in the value of the securities to be sold.
Conversely, a Fund may purchase a futures contract in anticipation
of purchases of securities. In addition, a Fund may utilize
futures contracts in anticipation of changes in the composition of
its portfolio holdings.
The Funds may engage in futures transactions on U.S. or foreign
exchanges or boards of trade. In the U.S., futures exchanges and
trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission (CFTC), a U.S. Government
agency.
The Funds may enter into such futures transactions to protect
against the adverse effects of fluctuations in security prices, or
interest rates, without actually buying or selling the securities
underlying the contract. A stock index futures contract obligates
the seller to deliver (and the purchaser to take) an amount of
cash equal to a specific dollar amount multiplied by the
difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at
which the agreement was made.
With respect to options on futures contracts, when the Funds are
temporarily not fully invested, they may purchase a call option on
a futures contract to hedge against a market advance due to
declining interest rates. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing
of the option compared to either the price of the futures contract
upon which it is based, or the price of the underlying debt
securities, it may or may not be less risky than ownership of the
futures contract or underlying debt securities.
The writing of a call option on a futures contract constitutes a
partial hedge against the declining price of the security or
foreign currency which is deliverable upon exercise of the futures
contract. The writing of a put option on a futures contract
constitutes a partial hedge against the increasing price of the
security or foreign currency which is deliverable upon exercise of
the futures contract.
To the extent that market prices move in an unexpected direction,
the Funds may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize a loss.
Further, with respect to options on futures contracts, the Funds
may seek to close out an option position by writing or buying an
offsetting position covering the same securities or contracts and
that have the same exercise price and expiration date. The
ability to establish and close out positions on options will be
subject to the maintenance of a liquid secondary market, which
cannot be assured.
The Funds may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Fund
purchases an option on a futures contract, it has the right to
assume a position as a purchaser or seller of a futures contract
at a specified exercise price at any time during the option
period. When a Fund sells an option on a futures contract, it
becomes obligated to purchase or sell a futures contract if the
option is exercised. In anticipation of a market advance, the
Funds may purchase call options on futures contracts as a
substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which the Funds
intend to purchase. Similarly, if the market is expected to
decline, the Funds might purchase put options or sell call options
on futures contracts rather than sell futures contracts. In
connection with the Funds' position in a futures contract or
option thereon, the Funds will create a segregated account of
liquid assets, such as cash, U.S. Government securities or other
liquid high grade debt obligations, or will otherwise cover its
position in accordance with applicable requirements of the SEC.
a. Restrictions on the Use of Futures Contracts
Each Fund may enter into futures contracts provided that such
obligations represent no more than 20% of the Fund's net assets.
Under the Commodity Exchange Act, each Fund may enter into futures
transactions for hedging purposes without regard to the percentage
of assets committed to initial margin and for other than hedging
purposes provided that assets committed to initial margin do not
exceed 5% of the Fund's net assets. To the extent required by
law, the Fund will set aside cash and appropriate liquid assets in
a segregated account to cover its obligations related to futures
contracts.
b. Risk Factors of Futures Transactions
The primary risks associated with the use of futures contracts and
options (commonly referred to as "derivatives") are: (i)
imperfect correlation between the change in market value of the
securities held by the Funds and the price of futures contracts
and options; (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures
contract when desired; (iii) losses, which are potentially
unlimited, due to unanticipated market movements; and (iv) the
Advisor's ability to predict correctly the direction of security
prices, interest rates and other economic factors.
13. Foreign Currency Hedging Strategies
a. Special Considerations
The Funds may use options and futures on foreign currencies and
forward currency contracts to hedge against movements in the
values of the foreign currencies in which the Funds' securities
are denominated. Such currency hedges can protect against price
movements in a security a Fund owns or intends to acquire that are
attributable to changes in the value of the currency in which it
is denominated. While hedging may limit the detriment when a
currency moves against a Fund, the Advisor's ability to anticipate
changes in the price of foreign currencies is not always accurate,
so the hedge may limit the full benefit of a currency move in the
Fund's favor. In addition, such hedges do not protect against
price movements in the securities that are attributable to other
causes.
The value of hedging instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar.
Because foreign currency transactions occurring in the interbank
market might involve substantially larger amounts than those
involved in the use of such hedging instruments, a Fund could be
disadvantaged by having to deal in the odd lot market (generally
consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable
than for round lots.
The Funds might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency
are available or such hedging instruments are more expensive than
certain other hedging instruments.
In such cases, the Funds may hedge against price movements in that
currency by entering into transactions using hedging instruments
on other currencies, the values of which the Advisor believes will
have a high degree of positive correlation to the value of the
currency being hedged. The risk that movements in the price of
the hedging instrument will not correlate perfectly with movements
in the price of the currency being hedged is magnified when this
strategy is used.
Settlement of hedging transactions involving foreign currencies
might be required to take place within the country issuing the
underlying currency. Thus, the Funds might be required to accept
or make delivery of the underlying foreign currency in accordance
with any U.S. or foreign regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
b. Forward Currency Contracts
A forward currency contract involves an obligation to purchase or
sell a specific currency at a specified future date, which may be
any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
The Funds may enter into forward currency contracts to purchase or
sell foreign currencies for a fixed amount of U.S. dollars or
another foreign currency. The Funds also may use forward currency
contracts for "cross-hedging." Under this strategy, the Funds
would increase their exposure to foreign currencies that the
Advisor believes might rise in value relative to the U.S. dollar,
or the Funds would shift their exposure to foreign currency
fluctuations from one country to another.
The cost to each Fund of engaging in forward currency contracts
varies with factors such as the currency involved, the length of
the contract period and the market conditions then prevailing.
Because forward currency contracts are usually entered into on a
principal basis, no fees or commissions are involved. When a Fund
enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so
would result in the loss of any expected benefit of the
transaction.
As is the case with futures contracts, holders and writers of
forward currency contracts can enter into offsetting closing
transactions, similar to closing transactions on futures, by
selling or purchasing, respectively, an instrument identical to
the instrument held or written. Secondary markets generally do
not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency
contracts only by negotiating directly with the contra party.
Thus, there can be
no assurance that the Funds will in fact be
able to close out a forward currency contract at a favorable price
prior to maturity. In addition, in the event of insolvency of the
contra party, the Funds might be unable to close out a forward
currency contract at any time prior to maturity. In either event,
the Funds would continue to be subject to market risk with respect
to the position, and would continue to be required to maintain a
position in securities denominated in the foreign currency or to
maintain cash or securities in a segregated account.
The precise matching of forward currency contracts amounts and the
value of the securities involved generally will not be possible
because the value of such securities, measured in the foreign
currency, will change after the foreign currency contract has been
established. Thus, the Funds might need to purchase or sell
foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward contracts. The
projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
(i) Limitations on the Use of Forward Currency Contracts:
The Funds may enter into forward currency contracts or maintain
a net exposure to such contracts only if (1) the consummation of
the contracts would not obligate the Funds to deliver an amount
of foreign currency in excess of the value of their portfolio
securities or other assets denominated in that currency, or (2)
the Funds maintain cash, U.S. Government securities or liquid,
high-grade debt securities in a segregated account in an amount
not less than the value of their total assets committed to the
consummation of the contract and not covered as provided in (1)
above, as marked to market daily.
14. Options
The Funds may buy put and call options and write covered call and
secured put options. Such options may relate to particular
securities, stock indices, or financial instruments and may or may
not be listed on a national securities exchange and issued by the
Options Clearing Corporation. Options trading is a highly
specialized activity which entails greater than ordinary
investment risk. Options on particular securities may be more
volatile than the underlying securities, and therefore, on a
percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying
securities themselves.
a. Writing Call Options
The Funds may write covered call options from time to time on
portions of its portfolios, without limit, as the Advisor
determines is appropriate in pursuing a Fund's investment goals.
The advantage to the Funds of writing covered calls is that each
Fund receives a premium which is additional income. However, if
the security rises in value, the respective Fund may not fully
participate in the market appreciation.
The Funds will write call options only if they are "covered." In
the case of a call option on a security, the option is "covered"
if a Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional
cash consideration (or, if additional cash consideration is
required, liquid assets, such as cash, U.S. Government securities
or other liquid high-grade debt obligations, in such amount held
in a segregated account by its custodian) upon conversion or
exchange of other securities held by it.
For a call option on an index, the option is covered if a Fund
maintains with its custodian a diversified stock portfolio, or
liquid assets equal to the contract value. A call option is also
covered if a Fund holds a call on the same security or index as
the call written. Here the exercise price of the call held is (i)
equal to or less than the exercise price of the call written; or
(ii) greater than the exercise price of the call written provided
the difference is maintained by the Fund in liquid assets such as
cash, U.S. Government securities and other high-grade debt
obligations in a segregated account with its custodian.
The Funds' obligation under a covered call option is terminated
upon the expiration of the option or upon entering a closing
purchase transaction. In a closing purchase transaction, a Fund,
as writer of an option, terminates its obligation by purchasing an
option of the same series as the option previously written.
Closing purchase transactions will ordinarily be effected to
realize a profit on an outstanding call option, to prevent an
underlying security from being called, to permit the sale of the
underlying security or to enable the Fund to write another call
option on the underlying security with either a different exercise
price or expiration date or both. The Funds may realize a net
gain or loss from a closing purchase transaction depending upon
whether the net amount of the original premium received on the
call option is more or less than the cost of effecting the closing
purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium
received from a sale of a different call option on the same
underlying security. Such a loss may also be wholly or partially
offset by unrealized appreciation in the market value of the
underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a
decline in the market value of the underlying security.
During the option period, a covered call option writer may be
assigned an exercise notice by the broker-dealer through whom such
call option was sold, requiring the writer to deliver the
underlying security against payment of the exercise price. A
closing purchase transaction cannot be effected with respect to an
option once the option writer has received an exercise notice for
such option.
b. Writing Put Options
Each Fund may write put options. The Funds will write put options
only if they are "secured" at all times by liquid assets of cash
or U.S. Government securities maintained in a segregated account
by the Funds' custodian in an amount not less than the exercise
price of the option at all times during the option period.
Secured put options will generally be written in circumstances
where the Advisor wishes to purchase the underlying security for a
Fund's portfolio at a price lower than the current market price of
the security. With regard to the writing of put options, each
Fund will limit the aggregate value of the obligations underlying
such put options to 50% of its total net assets.
Following the writing of a put option, the Fund may wish to
terminate the obligation to buy the security underlying the option
by effecting a closing purchase transaction. This is accomplished
by buying an option of the same series as the option previously
written. The Fund may not, however, effect such a closing
transaction after it has been notified of the exercise of the
option.
c. Purchasing Call Options
The Funds may purchase call options to the extent that premiums
paid by the Funds do not aggregate more than 10% of a Fund's total
assets. When the Funds purchase a call option, in return for a
premium paid by the Fund to the writer of the option, the Fund
obtains the right to buy the security underlying the option at a
specified exercise price at any time during the term of the
option. The writer of the call option, who receives the premium
upon writing the option, has the obligation, upon exercise of the
option, to deliver the underlying security against payment of the
exercise price. The advantage of purchasing call options is that
the Fund may alter portfolio characteristics and modify portfolio
maturities without incurring the cost associated with such
transactions.
The Funds may, following the purchase of a call option, liquidate
their position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option
previously purchased. The Funds will realize a profit from a
closing sale transaction if the price received on the transaction
is more than the premium paid to purchase the original call
option; the Funds will realize a loss from a closing sale
transaction if the price received on the transaction is less than
the premium paid to purchase the original call option.
Although the Funds will generally purchase only those call options
for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange may exist. In
such event, it may not be possible to effect closing transactions
in particular options, with the result that the Funds would have
to exercise their options in order to realize any profit and would
incur brokerage commissions upon the exercise of such options and
upon the subsequent disposition of the underlying securities
acquired through the exercise of such options. Further, unless
the price of the underlying security changes sufficiently, a call
option purchased by the Funds may expire without any value to the
Funds, in which event the Funds would realize a capital loss which
will be short-term unless the option was held for more than one
year.
d. Purchasing Put Options
Each Fund may invest up to 10% of its total assets in the purchase
of put options. Each Fund will, at all times during which it
holds a put option, own the security covered by such option. The
purchase of the put option on substantially identical securities
held will constitute a short sale for tax purposes, the effect of
which is to create short-term capital gain on the sale of the
security and to suspend running of its holding period (and treat
it as commencing on the date of the closing of the short sale) or
that of a security acquired to cover the same if at the time the
put was acquired, the security had not been held for more than one
year.
A put option purchased by a Fund gives it the right to sell one of
its securities for an agreed price up to an agreed date. Each
Fund intends to purchase put options in order to protect against a
decline in the market value of the underlying security below the
exercise price less the premium paid for the option ("protective
puts"). The Funds may sell a put option which they have
previously purchased prior to the sale of the securities
underlying such option. Such sale will result in a net gain or
loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the
put option which is sold.
The Funds may sell a put option purchased on individual portfolio
securities. Additionally, the Funds may enter into closing sale
transactions. A closing sale transaction is one in which a Fund,
when it is the holder of an outstanding option, liquidates its
respective position by selling an option of the same series as the
option previously purchased.
FUNDS' POLICIES
The policies set forth below are fundamental and may not be
changed as to a Fund without the approval of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the
Fund. A majority of the outstanding voting securities of a Fund
means the lesser of (a) 67% or more of the voting securities
present at a meeting of shareholders, if the holders of more than
50% of the outstanding voting securities of a Fund are present or
represented by proxy, or (b) more than 50% of the outstanding
voting securities of a Fund. Unless otherwise indicated, all
percentage limitations listed below apply to the Funds and apply
only at the time of the transaction. Accordingly, if a percentage
restriction is adhered to at the time an investment is made, a
later increase or decrease in the percentage which results from a
relative change in values or from a change in a Fund's total
assets will not be considered a violation.
Except as otherwise set forth herein and in the Prospectus each
Fund may not:
1. Issue senior securities or 2. Borrow money, except that each
Fund may borrow from banks and enter into reverse repurchase
agreements for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing; or
mortgage, pledge, or hypothecate any assets, except in connection
with any such borrowing and in amounts not in excess of the lesser
of the dollar amounts borrowed or 10% of the value of the total
assets of the Fund at the time of its borrowing. All borrowing
will be done from a bank and asset coverage of at least 300% is
required. A Fund will not purchase securities when borrowings
exceed 5% of that Fund's total assets;
3. Act as an underwriter of securities, except that, in
connection with the disposition of a security, a Fund may be
deemed to be an "underwriter" as that term is defined in the 1933
Act;
4. Purchase the securities of issuers conducting their principal
business activities in the same industry (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if immediately after such purchase the value of
a Fund's investments in such industry would exceed 25% of the
value of the total assets of the Fund. This Policy does not apply
to the Technology Fund;
5. Purchase or sell real estate, real estate limited partnership
interests, interests in oil, gas and/or mineral exploration or
development programs or leases. This restriction shall not
prevent the Funds from investing directly or indirectly in
portfolio instruments secured by real estate or interests therein
or acquiring securities of real estate investment trusts or other
issuers that deal in real estate;
6. Make loans, except that this restriction shall not prohibit
(a) the purchase and holding of debt instruments in accordance
with a Fund's investment objectives and policies, (b) the lending
of portfolio securities, or (c) entry into repurchase agreements
with banks or broker-dealers;
7. Change its diversification status under the 1940 Act.
8. Purchase or sell commodities or commodity contracts, except
that a Fund may purchase or sell currencies, may enter into
futures contracts on securities, currencies, or on indexes of such
securities or currencies, or any other financial instruments, and
may purchase or sell options on such futures contracts;
9. Make investments in securities for the purpose of exercising
control;
10. Purchase the securities of any one issuer if, immediately
after such purchase, a Fund would own more than 10% of the
outstanding voting securities of such issuer;
11. Invest more than 5% of its total assets in securities of
companies less than three years old. Such three-year period shall
include the operation of any predecessor company or companies.
TEMPORARY DEFENSIVE POSITION
The Advisor intends to be fully invested in the economies
appropriate to each Fund's investment objectives as is
practicable, in light of economic and market conditions and the
Funds' cash needs. When, in the opinion of the Advisor, a
temporary defensive position is warranted, the Funds are permitted
to hold cash or invest temporarily and without limitation in U.S.
Government securities or money market instruments backed by U.S.
Government securities. The Funds' investment objectives may not
be achieved at such times when a temporary defensive position is
taken.
PORTFOLIO TURNOVER
The Advisor buys and sells securities for the Funds whenever it
believes it is appropriate to do so. The rate of portfolio
turnover will not be a limiting factor in making portfolio
decisions. It is currently estimated that under normal market
conditions the annual portfolio turnover rate for the Funds will
not exceed 100%. Portfolio turnover rates may vary greatly from
year to year as well as within a particular year. High portfolio
turnover rates (i.e. over 100%) will generally result in higher
transaction costs to the Fund and also may result in a higher
level of taxable gain for a shareholder. Portfolio turnover for
the Funds' most recent fiscal periods are set forth in the
"FINANCIAL HIGHLIGHTS" tables in the Prospectus.
MANAGEMENT OF THE FUNDS
Trustees and Officers
The operations of each Fund are under the direction of the Board
of Trustees. The Board establishes each Fund's 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
Trustees and executive officers of the Funds, their ages, business
addresses, their principal occupations during the past five years
and other directorships held are set forth below. The "Fund
Complex" refers to the six Matthews Funds.
OTHER
NUMBER OF TRUSTEESHIPS/
NAME (AGE), TERM OF PRINCIPAL PORTFOLIOS DIRECTORSHIPS
ADDRESS AND OFFICE OCCUPATION(S) IN FUND (NUMBER OF
POSITION(S) AND LENGTH DURING PAST COMPLEX PORTFOLIOS)
WITH TRUST OF TIME 5 YEARS OVERSEEN HELD BY
SERVED [1] BY TRUSTEE TRUSTEE
DISINTERESTED TRUSTEES
Richard K. Lyons Since Professor, Haas 6 Director, iShares Fund
(41) 1994 School of Complex consisting of
Haas School of Business iShares, Inc. and iShares
Business, S545 University of Trust managed by Barclays
University of California Global Investors (65 portfolios);
California since 1993. Trustee, Barclays Global Investor
Berkeley, CA 94720 (12 portfolios)
Chairman of the
Board of Trustees
and Trustee
- - - - - -
Robert K. Since Retired since 6
Connolly (71) 1994 8/90. Prior
P.O. Box 941990 thereto: Institutional
Sonoma, CA 95476 Sales Manager and
Securities Analyst for
Trustee Barrington Research Associates.
- - - - - - -
Norman W. Since Registered Investment 6
Berryessa (75) 1996 Advisor since 1996;
100 Bush Street Independent
Suite 1000 Contractor, Emmett
San Francisco, CA Larkin Co., since 1983.
94109
Trustee
- - - - - - - -
INTERESTED TRUSTEES[2]
G. Paul Matthews (46) Since Chairman, Co-Chief 6
456 Montgomery Street 2001 Executive Officer
Suite 1200 and Chief Investment
San Francisco, CA Officer, Matthews
94104 International Capital
Management, LLC since 1991.
Trustee
- - - - - - - -
David Since Retired in 6 Director, Fidelity Asian
FitzWilliam- 1994 1993. Prior Values Investment Trust;
Lay (72) thereto Chairman Director, Eastern European
Bloxham of GT Management, Investment Trust, Director
Great Bedwyn PLC, United Kingdom and Chairman, Prospect Japan
Marlborough Investment Trust - all UK
Wiltshire, UK SN8 3NT closed-end investment trusts
Listed on the London stock
Trustee Exchange
- - - - - - - -
John H. Since International 6
Dracott (74) 1994 mutual fund
P.O. Box 162 consultant.
Tiburon, CA 94920 Emeritus since
1998.
Trustee Emeritus
- - - - - - - -
OFFICER(S) WHO ARE NOT TRUSTEES[2]
Mark W. Since Co-Chief Executive 6 N/A
Headley (43) 1999 Officer, President and
456 Portfolio Manager, Matthews
Montgomery International Capital Management,
Street LLC since 2001; President and
Suite 1200 Portfolio Manager, 1999-2001;
San Francisco, Portfolio Manager and
CA 94104 Managing Director 1996-1999.
Vice President
- - - - - - -
James E. Since Vice President, 6 N/A
Walter (32) 2000 Investment Operations,
456 Matthews International
Montgomery Capital Management,
Street LLC since 2000; Operations
Suite 1200 Manager, 1998-2000; Fund
San Francisco, Accountant, 1996-1998.
CA 94104
Treasurer
- - - - - -
Downey L. Since Senior Vice President, 6 N/A
Hebble (32) 2001 Matthews International
456 Capital Management,
Montgomery LLC since 2001; Vice
Street President, 1999-2001;
Suite 1200 Manager, Montgomery Asset
San Francisco, Management LLC, 1997-1999;
CA 94104 Marketing Manager, Matthews
International Capital
Secretary Management, LLC, 1995-1997.
- - - - - -
[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.
BOARD OF TRUSTEES. The primary responsibility of the Board is to
represent the interests of the shareholders of the Trust and to
provide oversight management of the Trust. Currently the Board is
comprised of six individuals, three of whom are considered
Interested Trustees as defined by the 1940 Act. The remaining
Trustees are referred to as "Disinterested" or "Independent"
Trustees. The Board meets multiple times during the year (i.e. at
least quarterly) to review the investment performance of each Fund
and other operational matters, including policies and procedures
with respect to compliance with regulatory and other requirements.
The Board met five times during the fiscal year ended August 31,
2002. Currently, the Board has an Audit Committee and a Pricing
Committee. The responsibilities of each committee and its members
are described below.
AUDIT COMMITTEE. The Board has an Audit Committee comprised only
of the Independent Trustees, (currently, Messrs. Berryessa,
Connolly and Lyons). Pursuant to its charter, the Audit Committee
has
the responsibility, among other things, to (1) recommend the
selection of the Funds' independent auditors; (2) review and
approve the scope of the independent auditors' audit activity; (3)
review the financial statements which are the subject of the
independent auditors' certifications; and (4) review with such
independent auditors the adequacy of the Funds' basic accounting
system and the effectiveness of the Funds' internal accounting
controls. During the fiscal year ended August 31, 2002, there was
one meeting of the Audit Committee.
PRICING COMMITTEE. The Board has a Pricing Committee, comprised
of one Trustee of the Trust, certain officers of the Trust and of
the Advisor, which reviews and monitors the pricing policies
adopted by the Board. The Pricing Committee is responsible for
determining the fair value of each Fund's securities as needed in
accordance with the pricing policies and performs such other tasks
as the Board deems necessary. The Pricing Committee meets on an
ad hoc basis to discuss issues relating to the valuation of
securities held by the Funds. Committee members are required to
report actions taken at their meetings at the next scheduled Board
meeting following the Pricing Committee's meeting. During the
fiscal year ended August 31, 2002, there were 11 meetings of the
Pricing Committee.
SECURITY AND OTHER INTERESTS. The following table sets forth the
dollar range of equity securities beneficially owned by each
Trustee in each Fund and in all registered investment companies
overseen by the Trustee within the family of investment companies,
as of December 31, 2001.
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED
INVESTMENT COMPANIES OVERSEEN
DOLLAR RANGE OF EQUITY BY TRUSTEE WITHIN THE FAMILY
NAME OF DIRECTOR SECURITIES IN EACH FUND OF INVESTMENT COMPANIES
DISINTERESTED TRUSTEES
Richard K. Lyons Matthews Pacific Tiger $10,001-$50,000
Fund $1-$10,000
Matthews Asian Growth and
Income Fund $10,001-$50,000
Robert K. Matthews Asian Growth and $1-$10,000
Connolly Income Fund $1-$10,000
Norman W. Matthews Japan Fund $50,001-$100,000
Berryessa $1-$10,000
Matthews Asian Growth
and Income Fund
$10,001-$50,000
Matthews Korea Fund
$10,001-$50,000
Matthews China Fund
$50,001-$100,000
INTERESTED TRUSTEES
G. Paul Matthews Matthews Asian Technology 50,001-$100,000
Fund $1-$10,000
Matthews Japan Fund
$1-$10,000
Matthews Asian Growth
and Income Fund
$10,001-$50,000
Matthews China Fund
$10,001-$50,000
Matthews Korea Fund
$10,001-$50,000
Matthews Pacific Tiger Fund
$10,001-$50,000
David None None
FitzWilliam-Lay
As of December 31, 2001, none of the Independent Trustees or their
respective immediate family members (spouse or dependent children)
owned beneficially or of record an interest in the Advisor or the
Funds' distributor, or in any person directly or indirectly
controlling, controlled by, or under common control with the
Advisor or the Funds' distributor.
APPROVAL OF INVESTMENT ADVISORY AGREEMENTS
The Trust has retained Matthews International Capital Management,
LLC (the "Advisor") to manage its assets. The Advisor has been
retained by each of the Funds pursuant to an investment advisory
agreement (collectively, the "Advisory Agreements") which have
been approved by the Board of Trustees of Trust, including the
Independent Trustees. The Advisory Agreements have an initial
term of two years and continue in effect from year to year
provided such continuance is specifically approved at least
annually by the vote of the holders of at least a majority of the
outstanding shares of the respective Fund, or by the Board of
Trustees, and in either event, by a majority of the Independent
Trustees of the Trust casting votes in person at a meeting called
for such purpose.
In approving the continuation of the Advisory Agreements at a
meeting held on August 9, 2002, the Board of Trustees of the Trust
(including the Independent Trustees) primarily consider whether
approving the Advisory Agreements would be in the best interests
of the Funds and their shareholders. The Board of Trustees
considered, among other things, the following matters:
information regarding the Advisor, the nature and quality of the
services provided and to be provided by the Advisor under the
Advisory Agreements, the fees and expenses borne by the Funds; the
Funds' respective expense limitations, fee waivers, and
performance benchmarks; comparable fee and expense information
respecting other similar unaffiliated mutual funds; the level of
profits that could be expected to accrue to the Advisor from the
fees payable under such Advisory Agreements; and the Funds'
brokerage, related commissions, and the use of soft dollars by the
Advisor. The Board of Trustees also considered the proposed total
expenses of each Fund in comparison to other funds. After
reviewing such information as they deemed necessary, the Board of
Trustees of the Trust concluded that the approval of the Advisory
Agreements was in the best interests of the Funds and their
shareholders. The Advisory Agreements may be terminated by the
Trust or the Advisor on sixty days written notice without penalty.
The Advisory Agreements will also terminate automatically in the
event of their assignment, as defined in the 1940 Act.
Additional information regarding the Advisory Agreements may be
found in the section entitled "Investment Advisory and Other
Services."
COMPENSATION
The fees and expenses of the Independent Trustees are paid by the
Funds. The following table shows the fees paid during the fiscal
year ended August 31, 2002 to the Independent Trustees for their
service to the Funds and the total compensation paid to the
Trustees by the Fund Complex.
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
AGGREGATE BENEFITS ANNUAL FROM FUND
COMPENSATION ACCRUED AS BENEFITS COMPLEX
FROM THE PART OF FUND UPON PAID TO
INDEPENDENT TRUSTEE FUND EXPENSES RETIREMENT TRUSTEES
Richard K. Lyons $12,000 None None $12,000
Robert K. Connolly $8,000 None None $8,000
Norman W. Berryessa $8,000 None None $8,000
No officer or employee of the Advisor receives any compensation
from the Funds for acting as a Trustee of the Trust. The officers
of the Trust receive no compensation directly from the Funds for
performing the duties of their offices. Note that neither the
Trustees nor the officers of the Trust receive any pension or
retirement benefits from the Funds.
CODE OF ETHICS
The Trust and the Advisor have adopted a Code of Ethics pursuant
to Section 17(j) of the 1940 Act and Rule 17j-1 thereunder. The
Code of Ethics conforms to the provisions of Rule 17j-1 as adopted
by the SEC on October 29, 1999. Currently, the Code of Ethics
prohibits personnel subject to the Code of Ethics from buying or
selling securities for their own individual accounts if such
securities at the time of such purchase or sale (i) are being
considered for purchase or sale by the Trust or (ii) are then
being purchased or sold by the Trust. Notwithstanding these
prohibitions, there are limited circumstances in which personnel
subject to the Code of Ethics may buy or sell securities for their
own account (e.g. purchases which are part of an automatic
dividend reinvestment plan). The Funds' principal underwriter has
also adopted a Code of Ethics pursuant to Rule 17j-1.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of November 30, 2002 the Trustees and officers as a group owned
less than 1% of the outstanding shares of any of the Funds.
As of November 30, 2002 the following persons owned of record or
beneficially more than 5% of the outstanding voting shares of the:
Account Holders Name, Address and Percentage of Shares
Matthews Pacific Tiger Fund:
Charles Schwab & Co., Inc. 45.33%
FBO, Special Custody Acct
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 14.68%
FBO, c/o Sal Vella
ATTN: Mutual Funds
200 Liberty St., 5th Floor
New York, NY 10281-1003
Boston Safe Deposit and Trust Co. 7.84%
135 Santilli Highway
Everett, PA 02149
National Investor Services Corp. 5.52%
FBO, 55 Water Street, Floor 32
New York, NY 10041-3299
Matthews Asian Growth and Income Fund:
Charles Schwab & Co., Inc. 40.69%
FBO, Special Custody Acct
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 20.99%
FBO, c/o Sal Vella
Attn: Mutual Funds
200 Liberty Street, 5th Floor
New York, NY 10281
National Investor Services Corp. 9.77%
FBO, 55 Water Street, Floor 32
New York, NY 10041-3299
Matthews Korea Fund:
Merrill Lynch Pierce Fenner & Smith, Inc. 21.59%
Attn: Service Team
4800 Deer Lake Drive East, 3rd Floor
Jacksonville, FL 32246
Morgan Stanley & Co. 21.05%
1 Pierrepont Plaza
Brooklyn, NY 11201
Charles Schwab & Co., Inc. 18.40%
FBO, Special Custody Acct
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 14.41%
FBO, c/o Sal Vella
ATTN: Mutual Funds
200 Liberty Street, 5th Floor
New York, NY 10281
Matthews China Fund:
Charles Schwab & Co., Inc. 42.74%
FBO, Special Custody Acct
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 20.68%
FBO, c/o Sal Vella
ATTN: Mutual Funds
200 Liberty Street, 5th Floor
New York, NY 10281
National Investor Services Corp. 6.54%
FBO, 55 Water Street, Floor 32
New York, NY 10041-3299
Matthews Japan Fund:
Charles Schwab & Co., Inc. 44.94%
FBO, Special Custody Acct
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 23.11%
FBO, c/o Sal Vella
ATTN: Mutual Funds
200 Liberty Street, 5th Floor
New York, NY 10281
National Investor Services Corp. 6.18%
FBO, 55 Water Street, Floor 32
New York, NY 10041-3299
Bear Stearns Securities Corp. 6.09%
1 Metrotech Center North
Brooklyn, NY 11201-3859
Matthews Asian Technology Fund
Charles Schwab & Co., Inc. 45.08%
FBO, Special Custody Acct
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 25.48%
FBO, c/o Sal Vella
Attn: Mutual Funds
200 Liberty Street, 5th Floor
New York, NY 10281
National Investor Services Corp. 6.94%
FBO, 55 Water Street, Floor 32
New York, NY 10041-3299.
INVESTMENT ADVISORY AND OTHER SERVICE PROVIDERS
The Investment Advisor
Currently the Trust employs only one investment advisor, Matthews
International Capital Management, LLC. CCM Holdings ("CCM"),
located at 190 LaSalle Street, Suite 2800, Chicago, IL 60603-3416
is a control person of the Advisor. CCM is a holding company that
owns and maintains ownership interests in the Advisor and other
asset management firms, however the Advisor operates independently
of CCM. Gordon Paul Matthews and David FitzWilliam-Lay are each
affiliated persons to the Fund as well as affiliated persons to
the Advisor. They are both Trustees of the Fund and also have
ownership interests in the Advisor. In addition, G. Paul Matthews
serves as President of the Funds as well as Chief Investment
Officer, Co-Chief Executive Officer and Chairman of the Advisor.
The Advisor performs its duties and is paid pursuant to its
agreement with each Fund. Some of the terms of these agreements
are set by the 1940 Act such as that it is reviewed each year by
the Board of Trustees and that the Board may cancel it without
penalty on 60 days' notice.
The advisory services provided by the Advisor and the fees
received by it for such services are described in the Prospectus.
As stated in the Prospectus, the Advisor may from time to time
voluntarily waive its advisory fees with respect to any Fund.
Under each Advisory Agreement, the Advisor is not liable for any
error of judgment or mistake of law or for any loss suffered by
the Trust or a Fund in connection with the performance of the
Advisory Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its duties
and obligations thereunder.
The terms of each Advisory Agreement provide that it will continue
from year to year provided that it is approved at least annually
by the vote of the holders of at least a majority of the
outstanding shares of the respective Fund, or by the Trustees of
the respective Fund. Each Advisory Agreement may be
terminated with respect to a Fund by vote of the Board of Trustees
or by the holders of a majority of the outstanding voting securities
of the Fund, at any time without penalty, on 60 days' written notice to
the Advisor. The Advisor may also terminate its advisory
relationship with respect to a Fund on 60 days' written notice to
the Trust. Each Advisory Agreement can only be assigned with
prior shareholder approval. In the event that an Advisory
Agreement is assigned without shareholder approval, the Advisory
Agreement automatically terminates.
Under its respective Advisory Agreement, each Fund pays the
following expenses:
1. the fees and expenses of the Trust's disinterested Trustees;
2. the salaries and expenses of any of the Trust's officers or
employees who are not affiliated with the Advisor;
3. interest expenses;
4. taxes and governmental fees;
5. brokerage commissions and other expenses incurred in acquiring
or disposing of portfolio securities;
6. the expenses of registering and qualifying shares for sale
with the SEC and with various state securities commissions;
7. accounting and legal costs;
8. insurance premiums;
9. fees and expenses of the Trust's custodian, administrator and
transfer agent and any related services;
10. expenses of obtaining quotations of the Funds' portfolio
securities and of pricing the Funds' shares;
11. expenses of maintaining the Trust's legal existence and of
shareholders' meetings;
12. expenses of preparation and distribution to existing
shareholders of reports, proxies and prospectuses; and
13. fees and expenses of membership in industry organizations.
The ratio of each Fund's expenses to its relative net assets can
be expected to be higher than the expense ratios of funds
investing solely in domestic securities, since the cost of
maintaining the custody of foreign securities and the rate of
investment management fees paid by each Fund generally are higher
than the comparable expenses of such other funds.
General expenses of the Trust (such as costs of maintaining
corporate existence, legal fees, insurance, etc.) and expenses
shares by the Funds will be allocated among the Funds on a basis
deemed fair and equitable, which may be based on the relative net
assets of the Funds or the nature of the services
performed and relative applicability to each Fund. Expenses
which relate exclusively to a particular Fund, such as certain
registration fees, brokerage commissions and other portfolio expenses,
will be borne directly by that Fund.
Each Fund pays the Advisor an annual fee of 1.00% of its total
assets for advisory services. During the fiscal years ended
August 31, 2000, 2001 and 2002, the aggregate advisory fees earned
by the Advisor, before voluntary waivers, totaled $3,522,268,
$2,526,860 and $4,353,546, respectively. Under a written
agreement between the Fund and the Advisor, the Advisor agrees to
reimburse money to the Fund if its expense ratio exceeds 2.00%.
In turn, if the Fund's expenses fall below the level noted within
three years after the Advisor has made such a reimbursement, the
Fund may reimburse the Advisor up to an amount not to exceed its
expense limitation. This agreement will continue through at least
August 31, 2003.
GROSS ADVISORY GROSS ADVISORY GROSS ADVISORY
FEES EARNED FEES EARNED FEES EARNED
DURING FYE DURING FYE DURING FYE
MATTHEWS FUND 08-31, 2000 08-31, 2001 08-31, 2002
Pacific Tiger $1,169,262 $859,562 $1,002,556
Growth and Income $114,463 $164,505 $630,055
Korea $1,783,564 $1,100,527 $2,221,793
China $77,085 $143,738 $291,484
Japan $260,067 $125,198 $96,012
Asian Technology $117,827 $133,330 $111,646
Principal Underwriter
The Trust entered into an Underwriting Agreement dated December
31, 2000 (the "Underwriting Agreement") with PFPC Distributors,
Inc., which is currently located at 3200 Horizon Drive, King of
Prussia, PA ("PFPC Distributors" or the "Underwriter").
Effective January 3, 2003, PFPC Distributors will be located at
760 Moore Road, King of Prussia, PA. PFPC Distributors acts as an
underwriter of the Funds' shares for the purpose of facilitating
the registration of shares of the Funds under state securities
laws and assists in the continuous offering of shares pursuant to
the Underwriting Agreement approved by the Board of Trustees.
In this regard, PFPC Distributors has agreed at its own expense to
qualify as a broker-dealer under all applicable Federal or state
laws in those states which the Trust shall from time to time
identify to PFPC Distributors as states in which it wishes to
offer its shares for sale, in order that state registrations may
be maintained for the Funds.
PFPC Distributors is a broker-dealer registered with the SEC and a
member in good standing of the National Association of Securities
Dealers, Inc.
Pursuant to its Underwriter Compensation Agreement with the Trust,
PFPC Distributors is paid for certain registration and transaction
fees.
Service Agreements
PFPC Inc. is located at 760 Moore Road, P.O. Box 9791, King of Prussia,
PA 19406. PFPC provides certain administrative services to the Trust
pursuant to an Investment Company Services Agreement (the
"Investment Company Services Agreement").
Under the Investment Company Services Agreement, PFPC: (1)
coordinates with the custodian and transfer agent and monitors the
services they provide to the Funds; (2) coordinates with and
monitors any other third parties furnishing services to the Funds;
(3) provides the Funds with necessary office space, telephones and
other communications facilities and personnel competent to perform
administrative and clerical functions; (4) supervises the
maintenance by third parties of such books and records of the
Funds as may be required by applicable Federal or state law; (5)
prepares or supervises the preparation by third parties of all
Federal, state and local tax returns and reports of the Funds
required by applicable law; (6) prepares and files and arranges
for the distribution of proxy materials and periodic reports to
shareholders of the Funds as required by applicable law; (7)
prepares and arranges for the filing of such registration
statements and other documents with the SEC and other Federal and
state regulatory authorities as may be required by applicable law;
(8) reviews and submits to the officers of the Trust for their
approval invoices or other requests for payment of the Funds'
expenses and instructs the custodian to issue checks in payment
thereof; and (9) takes such other action with respect to the Trust
or the Funds as may be necessary in the opinion of the
Administrator to perform its duties under the agreement.
During the fiscal years ended August 31, 2000, 2001 and 2002, the
aggregate fees paid to the Administrator by the Funds totaled
$292,263, $387,038 and $731,732, respectively and are broken down
as follows:
ADMIN. FEES ADMIN. FEES ADMIN. FEES
PAID DURING PAID DURING PAID DURING
MATTHEWS FUND FYE 08-31, 2000 FYE 08-31, 2001 FYE 08-31, 2002
Pacific Tiger $94,411 $133,523 $168,544
Growth and Income $8,834 $26,633 $107,375
Korea $141,042 $167,204 $372,633
China $5,991 $20,648 $49,666
Japan $25,239 $17,642 $15,216
Asian Technology $16,746 $21,388 $18,298
Rule 12b-1 Plan (Distribution Plan)
The Funds' 12b-1 Plan (the "Plan") is not currently active. The
Plan was active, however, from September 1, 2000 to December 15,
2000 of the fiscal year ended August 31, 2001, when the Matthews
Pacific Tiger Fund and the Matthews Korea Fund made distribution
payments to the Underwriter pursuant to the Plan in the
approximate total amount of $8,623. Such payments made by the
Matthews Pacific Tiger Fund consisted of payments of
approximately: $0 for printing, postage and stationary, and $0 for
compensation to brokers. Such payments made by the Matthews Korea
Fund consisted of payments of approximately: $0 for printing,
postage and stationary, and $0 for compensation to brokers.
Shareholder Services Agreement
The Trust entered into a Shareholder Services Agreement with
Matthews International Capital Management, LLC, the investment
advisor to the Funds, on April 17, 1998 (the "Services
Agreement"). The Advisor (or its affiliate serves as the service
provider under the Services Agreement and, as such, receives any
fees paid by the Funds pursuant to the Services Agreement. On
April 3, 2002, the Board of Trustees of the Trust, including a
majority of the Trustees who are not interested persons of the
Trust and who have no direct or indirect financial interest in the
operation of the
Services Agreement or in any agreement related to
the Services Agreement, at a special meeting, voted to implement
the provisions of the Services Agreement with respect to each
Fund, effective March 1, 2002.
Under the Services Agreement, each Fund will pay a continuing
service fee to the Advisor or other service providers, in an
amount, computed and prorated on a daily basis, up to 0.25% per
annum of the average daily net assets of each Fund. Currently,
each Fund imposes an annual shareholder servicing fee of 0.15% of
the Fund's average daily net assets. Such amounts are
compensation for providing certain services to shareholders owning
shares of the Funds, including personal services such as
processing purchase and redemption transactions, assisting in
change of address requests and similar administrative details, and
providing other information and assistance with respect to a Fund,
including responding to shareholder inquiries.
Transfer Agent
PFPC Inc. ("PFPC"), which has its principal business address at
400 Bellevue Parkway, Wilmington, DE 19809, provides transfer
agency and dividend disbursing agent services for the Funds. As
part of these services, PFPC maintains records pertaining to the
sale, redemption, and transfer of Fund shares and distributes each
Fund's cash distributions to shareholders.
Custodian
The Bank of New York, One Wall Street, New York, New York 10286 is
the custodian of the Trust's assets pursuant to a custodian
agreement. Under the custodian agreement, The Bank of New York
(i) maintains a separate account or accounts in the name of each
Fund (ii) holds and transfers portfolio securities on account of
each Fund, (iii) accepts receipts and makes disbursements of money
on behalf of each Fund, (iv) collects and receives all income and
other payments and distributions on account of each Fund's
securities and (v) makes periodic reports to the Board of Trustees
concerning each Fund's operations.
Counsel to the Trust
Paul, Hastings, Janofsky and Walker LLP, 55 Second Street, 24th
Floor, San Francisco, CA 94105 serves as counsel to the Trust.
Independent Auditors
Tait, Weller and Baker, 1818 Market Street, Suite 2400,
Philadelphia, Pennsylvania 19103 serves as the independent
auditors of the Trust. The independent auditors provide audit
services and assistance and consultation with respect to
regulatory filings with the SEC. The books of each Fund will be
audited at least once each year by Tait, Weller and Baker.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Advisor is responsible for decisions to buy and sell
securities for the Funds and for the placement of its portfolio
business and the negotiation of commissions, if any, paid on such
transactions. Fixed-income securities and many equity securities
in which the Funds invest are traded in over-the-counter
markets. These securities are generally traded on a net basis with
dealers acting as principal for their own accounts without a stated
commission. In over-the-counter transactions, orders are placed
directly with a principal market-maker unless a better price and
execution can be obtained by using a broker. Brokerage
commissions are paid on transactions in listed securities, futures
contracts and options thereon.
The Advisor is responsible for effecting portfolio transactions
and will do so in a manner deemed fair and reasonable to the
Funds. The primary consideration in all portfolio transactions
will be prompt execution of orders in an efficient manner at the
most favorable price.
In selecting and monitoring broker-dealers and negotiating
commissions, the Advisor may consider a number of factors,
including, for example, net price, reputation, financial strength
and stability, efficiency of execution and error resolution, block
trading and block positioning capabilities, willingness to execute
related or unrelated difficult transactions in the future, order
of call, offering to the Advisor on-line access to computerized
data regarding the Funds' accounts, and other matters involved in
the receipt of brokerage services generally.
The Advisor may also purchase from a broker or allow a broker to
pay for certain research services, economic and market
information, portfolio strategy advice, industry and company
comments, technical data, recommendations, general reports,
consultations, performance measurement data and on-line pricing
and news service and periodical subscription fees.
The Advisor may pay a brokerage commission in excess of that which
another broker-dealer might charge for effecting the same
transaction in recognition of the value of these research
services. In such a case, however, the Advisor will determine in
good faith that such commission is reasonable in relation to the
value of brokerage and research provided by such broker-dealer,
viewed in terms of either the specific transaction or the
Advisor's overall responsibilities to the portfolios over which
the Advisor exercises investment authority. Research services
furnished by brokers through whom the Advisor intends to effect
securities transactions may be used in servicing all of the
Advisor's accounts; not all of such services may be used by the
Advisor in connection with accounts which paid commissions to the
broker providing such services. In conducting all of its soft
dollar relationships, the Advisor will seek to take advantage of
the safe harbor provided by Section 28(e) of the Securities
Exchange Act of 1934, as amended.
The Advisor will attempt to equitably allocate portfolio
transactions among the Funds and other accounts whenever
concurrent decisions are made to purchase or sell securities by
the Funds and other accounts. In making such allocations between
the Funds and others, the main factors to be considered are the
respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally
held, and the opinions of the persons responsible for recommending
investments to the Funds and the others. In some cases, this
procedure could have an adverse effect on the Funds. In the
opinion of the Advisor, however, the results of such procedures
will, on the whole, be in the best interests of each of the
clients.
For the fiscal years ended August 31, 2000, 2001 and 2002, the
aggregate brokerage commissions paid by the Trust on behalf of the
Funds amounted to $1,976,298, $1,471,371 and $2,140,750,
respectively. The total brokerage commissions attributable to
each Fund are set forth below.
BROKERAGE BROKERAGE BROKERAGE
COMMISSIONS COMMISSIONS COMMISSIONS
PAID DURING FYE PAID DURING FYE PAID DURING FYE
MATTHEWS FUND 08-31, 2000 08-31, 2001 08-31, 2002
Pacific Tiger $525,729 $432,176 $600,298
Growth and Income $23,471 $45,901 $366,305
Korea $956,244 $648,648 $870,314
China $60,490 $106,249 $152,710
Japan $229,967 $47,475 $54,669
Asian Technology $180,397 $190,922 $96,454
There are no brokers which the Advisor uses which are affiliated
with the Trust or the Advisor.
SHARES OF BENEFICIAL INTEREST
Each Fund is authorized to issue an unlimited number of shares of
beneficial interest, each with a $0.001 par value. Shares of each
Fund represent equal proportionate interests in the assets of that
Fund only, and have identical voting, dividend, redemption,
liquidation and other rights. All shares issued are fully paid
and non-assessable, and shareholders have no preemptive or other
right to subscribe to any additional shares and no conversion
rights.
The validity of shares of beneficial interest offered by this
registration statement has been passed on by Paul, Hastings,
Janofsky and Walker LLP, 55 Second Street, 24th Floor, San
Francisco, CA 94105.
All accounts will be maintained in book entry form and no share
certificates will be issued.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Purchase of Shares
The shares are offered to the public through the Underwriter or
through investment professionals who may charge a fee for their
services.
Determination of Net Asset Value
Generally, the net asset value ("NAV") per share of a Fund will
be determined as of the close of trading on each day the New York
Stock Exchange ("NYSE") is open for trading. The Funds do not
determine NAV on days that the NYSE is closed and at other times
described in the Prospectus. However, the Funds may, under
extraordinary circumstances, calculate the NAVs of their
respective shares on days in which the NYSE is closed for trading.
The NYSE is closed on the day which the following holidays are
observed: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the
aforementioned holidays falls on a Saturday, the NYSE will not be
open for trading on the preceding Friday and when such holiday
falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such
as the ending of a monthly or the yearly accounting period.
Securities listed on any U.S. securities exchange are valued at
their last sale price on the exchange where the securities are
principally traded or, if there has been no sale on that date, at
the mean between the
last reported bid and asked prices. Securities traded over-the-counter
are priced at the mean of the last bid and asked prices. Securities
are valued through valuations obtained from a commercial pricing
service or at the most recent mean of the bid and asked prices
provided by investment dealers in accordance with procedures established
by the Board of Trustees.
Short-term fixed-income securities having a maturity of 60 days or
less are valued at amortized cost, which the Board of Trustees
believes represents fair value. When a security is valued at
amortized cost, it is first valued at its purchase price. After
it is purchased, it is valued by assuming a constant amortization
to maturity of any discount or premium (because the Fund will hold
the security until it matures and then receive its face value),
regardless of the way of changing interest rates could change the
market value of the instrument.
Trading in securities on Asian and Pacific Basin securities
exchanges and over-the-counter markets is normally completed well
before the close of the business day in New York. In addition,
Far Eastern securities trading may not take place on all business
days in New York. Furthermore, trading takes place in Japanese
markets and in various foreign markets on days which are not
business days the NYSE is open and therefore a Funds' respective
NAVs are not calculated.
The calculation of the Funds' NAVs may not take place
contemporaneously with the determination of the prices of
portfolio securities held by the Funds. Events affecting the
values of portfolio securities that occur between the time their
prices are determined and the close of the NYSE will not be
reflected in the Funds' calculation of NAV unless the Board of
Trustees deems that the particular event would materially affect
the NAV in which case an adjustment will be made. Assets or
liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the NAV of the
Funds' shares into U.S. dollars at the prevailing market rates.
The fair value of all other assets is added to the value of
securities to arrive at the total assets.
Portfolio securities for Matthews Korea Fund and Matthews Japan
Fund which are traded on the Korean and Japanese exchanges,
respectively, are valued at the most recent sale price reported on
the exchange. If no sale occurred, the security is then valued at
the calculated mean between the most recent bid and asked
quotations. If there are no such bid and asked quotations, the
most recent bid quotation is used. All other securities are
valued at fair value as determined in good faith by the Board of
Trustees including certain investments in Korean equity securities
and Japanese equity securities that have met the limit for
aggregate foreign ownership and for which premiums to the local
stock exchange prices are offered by prospective foreign
investors.
Generally portfolio securities subject to a "foreign share"
premium are valued at the local share prices (i.e., without
including any foreign share premium) because of the uncertainty of
realizing the premium and the recent trend toward the reduction or
disappearance of such foreign premiums.
Redemption in Kind
At the organizational meeting of the Trust, the Trustees directed
that the Trust elect to pay redemptions in cash as consistent with
Rule 18f-1 of the 1940 Act. The Trustees further directed that
Form N-18F-1 be filed with the SEC on the Trust's behalf
committing the Trust to pay in cash all requests for redemption by
any shareholder of record, limited in amount with respect to each
shareholder during any 90-day period to the lesser of $250,000 or
1 percent of the net asset value of
such company at the beginning of such period. This means that the
Trust could, if the redemption is larger that $250,000 or 1% of
the net asset value of the Trust, pay a redemption with the securities
held in the Trust's portfolios. If this occurred, the shareholder
receiving these portfolio securities would incur transaction charges
if they were to convert the securities into cash.
Equalization
For any of its fiscal years, each Fund may use the equalization
method to allocate taxable income. Equalization allocates a pro-
rata share of taxable income to departing shareholders when they
redeem shares of a Fund, reducing the amount of the distribution
to be made to remaining shareholders of that Fund. This should
contribute to the tax-efficiency of a Fund for its long-term
shareholders.
TAXATION OF THE TRUST
In General
Each Fund has elected and intends to continue to qualify each year
as a regulated investment company under Subchapter M of the Code.
In order to so qualify for any taxable year, a fund must, among
other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to certain securities
loans, gains from the sale of securities or foreign currencies, or
other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies; (ii)
distribute at least 90% of its dividend, interest and certain
other taxable income each year; and (iii) at the end of each
fiscal quarter maintain at least 50% of the value of its total
assets in cash, government securities, securities of other
regulated investment companies, and other securities of issuers
which represent, with respect to each issuer, no more than 5% of
the value of a fund's total assets and 10% of the outstanding
voting securities of such issuer, and have no more than 25% of its
assets invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any one
issuer or of two or more issuers which the fund controls and which
are engaged in the same, similar or related trades and businesses.
To the extent the Funds qualify for treatment as regulated
investment companies, they will not be subject to Federal income
tax on income paid to shareholders in the form of dividends or
capital gains distributions.
An excise tax will be imposed on the excess, if any, of the Funds'
"required distributions" over actual distributions in any
calendar year. Generally, the "required distribution" is 98% of
a fund's ordinary income for the calendar year plus 98% of its
capital gain net income recognized during the one-year period
ending on October 31 plus undistributed amounts from prior years.
The Funds intend to make distributions sufficient to avoid
imposition of the excise tax. For a distribution to qualify as
such with respect to a calendar year under the foregoing rules, it
must be declared by a Fund during October, November or December to
shareholders of record during such months and paid by January 31
of the following year. Such distributions will be taxable in the
year they are declared, rather than the year in which they are
received.
Shareholders will be subject to Federal income taxes on
distributions made by the Funds whether received in cash or
additional shares of the Funds. Distributions of net investment
income and net
capital gains, if any, will be taxable to shareholders without
regard to how long a shareholder has held shares of the Funds.
Dividends paid by the Funds may qualify in part for the dividends
received deduction for corporations.
The Funds will notify shareholders each year of the amount of
dividends and distributions, and the portion of their dividends
which qualify for the corporate deduction.
Taxes Regarding Options, Futures and Foreign Currency Transactions
When the Funds write a call, or purchase a put option, an amount
equal to the premium received or paid by them is included in the
Funds' accounts as an asset and as an equivalent liability. In
writing a call, the amount of the liability is subsequently
"marked-to-market" to reflect the current market value of the
option written. The current market value of a written option is
the last sale price on the principal exchange on which such option
is traded or, in the absence of a sale, the mean between the last
bid and asked prices. If an option which a Fund has written
expires on its stipulated expiration date, the Fund recognizes a
short-term capital gain. If the Fund enters into a closing
purchase transaction with respect to an option which the Fund has
written, the Fund realizes a short-term gain (or loss if the cost
of the closing transaction exceeds the premium received when the
option was sold) without regard to any unrealized gain or loss on
the underlying security, and the liability related to such option
is extinguished. If a call option which the Fund has written is
exercised, the Fund realizes a capital gain or loss from the sale
of the underlying security and the proceeds from such sale are
increased by the premium originally received.
The premium paid by the Fund for the purchase of a put option is
recorded in the Fund's assets and liabilities as an investment and
subsequently adjusted daily to the current market value of the
option. For example, if the current market value of the option
exceeds the premium paid, the excess would be unrealized
appreciation and, conversely, if the premium exceeds the current
market value, such excess would be unrealized depreciation. The
current market value of a purchased option is the last sale price
on the principal exchange on which such option is traded or, in
the absence of a sale, the mean between the last bid and asked
prices. If an option which the Fund has purchased expires on the
stipulated expiration date, the Fund realizes a short-term or
long-term capital loss for Federal income tax purposes in the
amount of the cost of the option. If the Fund exercises a put
option, it realizes a capital gain or loss (long-term or short-
term, depending on the holding period of the underlying security)
from the sale which will be decreased by the premium originally
paid.
Accounting for options on certain stock indices will be in
accordance with generally accepted accounting principles. The
amount of any realized gain or loss on closing out such a position
will result in a realized gain or loss for tax purposes. Such
options held by a Fund at the end of each fiscal year on a broad-
based stock index will be required to be "marked-to-market" for
Federal income tax purposes. Sixty percent of any net gain or
loss recognized on such deemed sales or on any actual sales will
be treated as long-term capital gain or loss, and the remainder
will be treated as short-term capital gain or loss ("60/40 gain
or loss"). Certain options, futures contracts and options on
futures contracts utilized by the Fund are "Section 1256
contracts." Any gains or losses on Section 1256 contracts held by
the Fund at the end of each taxable year (and on October 31 of
each year for purposes of the 4% excise tax) are "marked-to-
market" with the result that unrealized gains or losses are
treated as though they were realized and the resulting gain or
loss is treated as a 60/40 gain or loss.
Unique Foreign Tax Issues
Under the United States-Korea income tax treaty, as presently in
effect, the government of Korea imposes a nonrecoverable
withholding tax and resident tax aggregating 16.5% on dividends
and 13.2% on interest paid to Matthews Korea Fund by Korean
issuers. Under United States-Korea income tax treaty, there is no
Korean withholding tax on realized capital gains.
The above discussion and the related discussion in the Prospectus
are not intended to be complete discussions of all applicable
Federal tax consequences of an investment in the Funds. Dividends
and distributions also may be subject to state and local taxes.
Shareholders are urged to consult their tax advisors regarding
specific questions as to Federal, state and local taxes.
The foregoing discussion relates solely to U.S. Federal income
tax law. Non-U.S. investors should consult their tax advisors
concerning the tax consequences of ownership of shares of the
Funds, including the possibility that distributions may be subject
to a 30% United States withholding tax (or a reduced rate of
withholding provided by treaty).
CALCULATION OF PERFORMANCE DATA
In General
From time to time, the Trust may include general comparative
information, such as statistical data regarding inflation,
securities indices or the features or performance of alternative
investments, in advertisements, sales literature and reports to
shareholders. The Trust may also include calculations, such as
hypothetical compounding examples or tax-free compounding
examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an
express set of assumptions and are not indicative of the
performance of any Fund.
In addition, the yield and total return of a Fund may be quoted in
advertisements, shareholder reports or other communications to
shareholders.
Average Total Return Quotations
The Funds compute their average annual total return by determining
the average annual compounded rate of return during specified
periods that equate the initial amount invested to the ending
redeemable value of such investment.
This is done by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the
quotient to a power equal to one divided by the number of years
(or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be
expressed as follows:
P(1+T)n = ERV
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000. n = period covered by
the computation, expressed in terms of years. T = average annual
total return.
The Funds compute their aggregate total return by determining the
aggregate compounded rate of return during specified period that
likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
Aggregate Total Return = [ ERV - 1 ] P ERV = ending redeemable
value at the end of the period covered by the computation of a
hypothetical $1,000 payment made at the beginning of the period. P
= hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital
gain distributions on the reinvestment dates during the period.
The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical
investment and the deduction of all nonrecurring charges at the
end of the period covered by the computations.
The Funds compute their average annual total return after taxes on
distributions by determining the average annual compounded rates
of return during specified periods that equate the initial amount
invested to the ending redeemable value of such investment after
taxes on fund distributions but not after taxes on redemptions.
This is done by dividing the ending redeemable value after taxes
on fund distributions of a hypothetical $1,000 initial payment by
$1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation
can be expressed as follows:
Average Annual Total Return (after taxes on distributions):
ATVD
[--- to the 1/nth power-1] =
P
ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the beginning
of the period and at the end of such periods after taxes on fund
distributions but not after taxes on redemption. P = hypothetical
initial payment of $1,000.
The Funds compute their average annual total return after taxes on
distributions and redemptions by determining the average annual
compounded rates of return during specified periods that equate
the initial amount invested to the ending redeemable value of such
investment after taxes on fund distributions and redemptions.
This is done by dividing the ending redeemable value after taxes
on fund distributions and redemptions of a hypothetical $1,000
initial payment by $1,000 and raising the quotient to a power
equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the
result. This calculation can be expressed as follows:
Average Annual Total Return (after taxes on distributions and
redemptions):
ATVD
[--- to the 1/nth power-1] =
P
ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the beginning
of the period and at the end of such periods, after taxes on fund
distributions and redemption. P = hypothetical initial payment of
$1,000.
After-tax returns are calculated using the historical highest
individual federal marginal income tax rates and do not reflect
the impact of state and local taxes. Actual after-tax returns
depend on an investor's tax situation and may differ from those
shown, and after-tax returns shown are not relevant to investors
who hold their Fund shares through tax-deferred arrangements, such
as 401(k) plans or individual retirement accounts.
Since performance will fluctuate, performance data for the Funds
should not be used to
compare an investment in the Funds' shares with bank deposits,
savings accounts and similar investment alternatives which often
provide an agreed-upon or guaranteed fixed yield for a stated
period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments
held in a portfolio, portfolio maturity, operating expenses and
market conditions.
1 Year 5 Years Inception
through through through
8/31/02 8/31/02 8/31/02
Pacific Tiger
Return Before Taxes 8.44% (2.21%) 0.18%
Return After Taxes on Distributions 8.28% (3.46%) (0.64%)
Return After Taxes on Distributions
and Sale of Fund Shares 5.22% (2.35%) (0.25%)
Growth and Income
Return Before Taxes 21.11% 7.52% 7.90%
Return After Taxes on Distributions 19.88% 3.83% 5.11%
Return After Taxes on Distributions
and Sale of Fund Shares 12.90% 3.92% 4.85%
Korea
Return Before Taxes 68.49% 6.43% (2.06%)
Return After Taxes on Distributions 67.70% 1.74% (4.94%)
Return After Taxes on Distributions
and Sale of Fund Shares 42.43% 2.42% (3.23%)
China
Return Before Taxes (1.16%) N/A (0.27%)
Return After Taxes on Distributions (1.77%) N/A (1.11%)
Return After Taxes on Distributions
and Sale of Fund Shares (0.70%) N/A (0.65%)
Japan
Return Before Taxes (12.20%) N/A 2.78%
Return After Taxes on Distributions (13.07%) N/A 1.25%
Return After Taxes on Distributions
and Sale of Fund Shares (7.46%) N/A 1.73%
Asia Technology
Return Before Taxes (10.40%) N/A (33.85%)
Return After Taxes on Distributions (10.76%) N/A (34.37%)
1 Year 5 Years Inception
through through through
8/31/02 8/31/02 8/31/02
Return After Taxes on Distributions
and Sale of Fund Shares (6.32%) N/A (25.03%)
*Pacific Tiger commenced operations on September 12, 1994; Asian
Growth and Income commenced operations on September 12, 1994;
Korea commenced operations on January 3, 1995; China commenced
operations on February 19, 1998; Japan commenced operations on
December 31, 1998; and Asian Technology commenced operations on
December 27, 1999.
Yield Quotation
Yield, in its simplest form, is the ratio of income per share
derived from the Fund's investments to a current maximum offering
price expressed in terms of percent. The yield is quoted on the
basis of earnings after expenses have been deducted. The yield of
a Fund is calculated by dividing the net investment income per
share earned during a 30-day (or one month) period by the maximum
offering price per share on the last day of the period and
annualizing the result. The Funds' net investment income per
share earned during the period is based on the average daily
number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the
period minus expenses accrued for the period, net of
reimbursements. This calculation can be expressed as follows:
YIELD = 2 [(a - b + 1)6 - 1 ] cd
Where:
a = dividends and interest earned during the period. b = expenses
accrued for the period (net of reimbursements). c = the average
daily number of shares outstanding during the period that were
entitled to receive dividends. d = maximum offering price per
share on the last day of the period.
For the purpose of determining net investment income earned during
the period (variable "a" in the formula), dividend income on
equity securities held by a Fund is recognized by accruing 1/360
of the stated dividend rate of the security each day that the
security is in the Fund. Except as noted below, interest earned
on any debt obligations held by a Fund is calculated by computing
the yield to maturity of each obligation held by that Fund based
on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of the
month, the purchase price (plus actual accrued interest) and
dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest)
in order to determine the interest income on the obligation for
each day of the subsequent month that the obligation is held by
that Fund. For purposes of this calculation, it is assumed that
each month contains 30 days. The date on which the obligation
reasonably may be expected to be called or, if none, the maturity
date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted
monthly to reflect changes in the market values of such debt
obligations.
Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder
accounts in proportion to the length of the base period and the
Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the offering price per capital share
(variable "d" in the formula).
Performance and Advertisements
The Funds' performance may from time to time be compared, in
marketing and other fund literature, to the performance of other
mutual funds in general or to the performance of particular types
of mutual funds with similar investment goals, as tracked by
independent organizations. Among these organizations, Lipper,
Inc. ("Lipper"), a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives,
and assets, may be cited. Lipper performance figures are based on
changes in net asset value, with all income and capital gains
dividends reinvested. Such calculations do not include the effect
of any sales charges imposed by other funds. The Funds will be
compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings. The Funds' performance may also
be compared to the average performance of their Lipper category.
The Funds' performance may also be compared to the performance of
other mutual funds by Morningstar, Inc. ("Morningstar") which
ranks funds on the basis of historical risk and total return.
Morningstar's rankings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for
three, five and ten year periods. Ranks are not absolute or
necessarily predictive of future performance.
Matthews Asian Growth and Income Fund and Pacific Tiger Fund may
compare their performance to a wide variety of indices including
the Morgan Stanley All Country Far East Free ex-Japan Index. The
index is expressed in U.S. dollars to provide a benchmark for U.S.
dollar-denominated investors.
The Matthews China Fund may compare its performance to a wide
variety of indices including the Morgan Stanley Capital
International China Free Index, a capitalization-weighted index of
Chinese stocks that are listed in Hong Kong and are adjusted for
the free float, as well as the Credit Lyonnais China World Index,
a market capitalization weighted index of Chinese equities which
are listed on the Hong Kong, Shanghai, and Shenzen stock
exchanges.
The Matthews Japan Fund may compare its performance to a wide
variety of indices including the Tokyo Stock Price Index (TOPIX),
a market capitalization weighted index of over 1100 stocks traded
in the Japanese market.
The Matthews Korea Fund may compare its performance to a wide
variety of indices including the South Korea Stock Market Price
Index, a market capitalization weighted index of all common stocks
traded in the South Korean Market.
The Matthews Asian Technology Fund may compare its performance to
a wide variety of indices including the MSCI/Matthews Asian
Technology Index, a market capitalization weighted index of Asian
equities tracking a broad range of technology stocks.
In assessing such comparisons of yield, return, or volatility, an
investor should keep in mind that the composition of the
investments in the reported indices and averages is not identical
to those of the Funds, that the averages are generally unmanaged,
and that the items included in the calculations of such averages
may not be identical to the formula used by a Fund to calculate
its figures.
Because the Funds' investments primarily are denominated in
foreign currencies, the strength or weakness of the U.S. dollar as
against these currencies may account for part of the Funds'
investment performance. Historical information regarding the
value of the dollar versus foreign currencies may be used from
time to time in advertisements concerning the Funds. Marketing
materials may cite country and economic statistics and historical
stock market performance for any of the countries in which the
Funds invest. Sources for such statistics may include official
publications of various foreign governments, exchanges, or
investment research firms.
OTHER INFORMATION
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other
document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement of
which the Prospectus and this Statement of Additional Information
form a part. Each such statement is qualified in all respects by
such reference.
Reports to Shareholders
Shareholders will receive unaudited semi-annual reports describing
the Funds' investment operations and annual financial statements
audited by independent certified public accountants. Inquiries
regarding the Funds may be directed to the Advisor at (800) 789-
2742.
Financial Statements
The financial statements for the Funds, including the notes
thereto as of August 31, 2002 are incorporated by reference from
the Funds' 2002 Annual Report to Shareholders and the Funds' 2002
Semi-Annual Report to Shareholders as filed with the SEC on Form
N-30D.
APPENDIX
Bond Ratings
Moody's Investors Service, Inc. ("Moody's") describes
classifications of corporate bonds as follows:
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade
bonds.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate, and therefore not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other market shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2,
and 3 in each generic rating classification from Aa through B in
its corporate and municipal bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Corporation ("S&P") describes classification of
corporate and municipal debt as follows:
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest-rated issues only in
small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade
bonds.
BB Debt rated BB has less near-term vulnerability to default than
other speculative grade debt. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payment.
B Debt rated B has a greater vulnerability to default but
presently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions
would likely impair capacity or willingness to pay interest and
repay principal.
CCC Debt rated CCC has a current identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payments of interest and
repayments of principal. In the event of adverse business,
financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC - debt rating.
CI The rating CI is reserved for income bonds on which no interest
is being paid.
D Debt rated D is in default. The D rating is assigned on the day
an interest or principal payment is missed.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that S&P
does not rate a particular type of obligation as a matter of
policy.