Commentary

Quarter Ending March 31, 2008

For the quarter ending March 31, 2008, the Matthews Asia Pacific Equity Income Fund declined
-3.11%, while its benchmark, the MSCI All Country Asia Pacific Index, fell -10.95% during the same period.

The volatility in equity markets experienced in the fourth quarter of 2007 extended into the first quarter of this year. The Fund, however, exhibited lower volatility than its benchmark, as some of its higher-yielding holdings with defensive business models held up better than the general market. During the quarter, the two main contributors to portfolio performance were convenience store operators Lawson of Japan and President Chain Stores of Taiwan. Convenience stores are often perceived as more defensive businesses since they generate earnings from a high volume of repeat visitors buying small-ticket daily items. CLP Holdings, an integrated electrical power company in Hong Kong with a growing regional footprint, also posted positive returns for the quarter. The regulatory framework under which the company operates was revised, giving investors greater clarity into future earnings. Since Hong Kong’s monetary policy is tied to that of the U.S., interest rates fell in lock step with the interest rate cuts introduced by the Federal Reserve. This made the dividend yield of a power utility like CLP, with some fixed-income characteristics, more attractive, which increased demand for the company’s shares.

By country, our Taiwan holdings were the main contributors to Fund performance. Taiwanese equities have generally underperformed equities elsewhere in the region over the last decade, resulting in higher dividend yields and greater attraction for income-oriented investors. Taiwanese equities moved counter to global markets, posting positive returns for the first quarter leading up to and following Taiwan’s presidential election. President-elect Ma Ying-jeou of the Kuomintang (KMT) party is widely expected to strike a reconciliatory stance vis-à-vis the People’s Republic of China, improving relations which had become strained by Taiwan’s outgoing administration. Improved cross-strait relations could lead to fewer restrictions on the transfer of people, capital, goods and services, and therefore benefit Taiwanese businesses. However, while the prospect of improved cross-strait relations is positive, past overtures have generally fallen short, leaving investors wary.

Conversely, the Fund’s Indian holdings were the main detractors to performance during the quarter. Small- and mid-capitalization companies generally fared worse than larger companies. The broad sell-off of companies in quite different industries indicated that lower valuations were driven less by company-specific events and more by market-based liquidity as foreign investors became net sellers.

Volatile equity markets often represent a time of opportunity for long-term investors. Companies with good growth potential, both in terms of earnings and dividends, often sell at more reasonable valuations and dividend yields. During the quarter, the Fund added Billabong, an Australian manufacturer and retailer of well-known surfing apparel and accessories. The company’s stock had fallen sharply, in great part due to concerns of a slowdown in U.S. sales as well as currency headwinds from the Australian dollar’s gains against the U.S. dollar. However, while earnings in the U.S. have contracted slightly, earnings outside of the U.S. continue to post healthy growth. We believe the company’s ability to grow dividends over the coming years and its track record of doing so fits with the Fund’s investment focus.

The Fund also initiated an investment in the preferred shares of Ito En, Japan’s leading ready-to-drink green tea beverage manufacturer. Last year, the company conducted a preferred share offering. Dividend payments on preferred shares are 25% higher than that on common shares. However, in order to receive higher dividends, preferred shareholders only have limited voting rights under certain circumstances. The preferred offering was not well received by the market partly because such shares remain unknown to many Japanese investors. As a result the preferred shares slumped relative to the common shares, selling at about a 40% discount in spite of the higher claim to the dividend. The combination of the deep discount and the higher claim to future dividends allowed the Fund to take a position in a company that has historically sold at low dividend yields due to high valuations.

During the quarter, the Fund distributed its first quarterly dividend of 5.86 cents. Since the Fund’s inception, income has been distributed on a semi-annual basis. However, to better reflect its income-oriented strategy, the Fund now intends to distribute its dividends quarterly. It is important to note that quarterly income distributions will likely fluctuate in part to reflect the actual dividend distributions received each quarter from the securities in the portfolio. Individual quarterly distributions will therefore not necessarily be an indication of the total annual dividend distribution.

The Fund continues to be invested in companies we believe can sustain or grow their dividend, even during periods of volatility. As noted above, volatility brings with it opportunities and, as such, we continue to search for attractive investment candidates across the region.

The views and opinions in this commentary were current as of March 31, 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.

As of 3/31/08, Lawson accounted for 3.7% of the Matthews Asia Pacific Equity Income Fund, President Chain Stores accounted for 1.8%, CLP Holdings accounted for 2.6%, Billabong accounted for 1.7%, and Ito En accounted for 1.7% of the Fund.