Commentary

Quarter Ending September 30, 2008

For the quarter ending September 30, 2008, the Matthews Pacific Tiger Fund declined –16.53%, while the MSCI All Country Asia ex-Japan Index fell –22.89%. Steady stock performance in the consumer staples industry, and positive contributions from Indian financials helped the relative performance of the portfolio.

The third quarter’s returns were characterized by considerable weakness in some Asian currencies, most notably the Indian rupee and Korean won, which depreciated by 9% and 15%, respectively. In Thailand, political uncertainties were also an important factor behind the negative returns for the Fund.

In recent months, fears over a collapse in growth and a squeeze in liquidity have overshadowed earlier concerns over rising inflation for the Asia ex-Japan region. The shorter-term supply of capital has been impacted due to global events. That said, Asia’s financial institutions seem well capitalized after undergoing a process of deleveraging that started in the late 1990s. If anything, the recent squeeze is likely to further help refine the pricing of credit, although it will also expose those business models that have come from easy money. With improvements to the pricing of credit, there will be an opportunity for well-run banks to generate returns by extending loans to both companies and consumers in the longer term. The Fund has taken advantage of the broad-based weakness in financials to add to some of its holdings, especially where we have a strong conviction in the strength of a bank’s deposit franchise.

As we have discussed before, we expect that there will be a moderation in growth in the region, particularly as export markets around the world witness demand destruction. The portfolio is geared toward domestic demand, which is likely to be less severely impacted. The financial crisis in the Western world may force a rebalancing of Asia's economic growth with a focus on domestic consumption, particularly in China. In that context, it is encouraging to see that the Chinese government has started to embrace private property rights, and is actually considering allowing citizens the right to trade their property rights in rural areas. Continuing land reforms and steady progress toward better health care systems are all measures that should provide an impetus to private retail consumption. The Fund is increasingly being positioned to benefit from these trends.

During the quarter, we were pleased to re-open the Fund to new investors with the conviction that the economies and capital markets in the region have grown wider and deeper. Thus far, the Asian household has tried to bridge the gap to prosperity through a strong work ethic, which means the rise in living standards is likely to be more sustainable. However, given the troubles faced by free market economies such as the U.S., there is an increasing risk of fatigue in the reform process pursued by policy makers in the region. If there were a reversal away from deregulation and privatization, then long-term returns from the region could be negatively impacted. However, we see no strong evidence of a reversal happening at present.

As events unfold elsewhere around the globe, Asian capital markets may continue to go through a period of heightened weakness. At the time of writing, the sharp sell-off in Asian markets suggests that stocks are being priced on their ability to survive, which seems egregious, since the epicenter of the crisis lies outside the region. A look at the fundamentals suggests that if current earnings expectations are to hold, then by some measures, stocks in the Asia ex-Japan region are trading at valuations not seen since the Asian crisis. It is our belief that these moments of extreme fear will offer good long-term investing opportunities for the Fund.

The views and opinions in this commentary were current as of September 30, 2008. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Funds' future investment intent.

Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.