Commentary

Quarter Ending March 31, 2008

For the first quarter ending March 31, 2008, the Matthews Pacific Tiger Fund declined –11.99%, while the MSCI All Country Far East ex-Japan Index lost –12.61% and the MSCI All Country Asia ex-Japan Index, fell –14.35%.

During the first three months of the year, most major Asian markets, with the exception of Taiwan, suffered from weakening equity prices. Thailand did not see gains but held up relatively better than other markets. Maintaining a diversified portfolio and staying focused on domestically oriented companies in sectors like consumer staples and health care helped the relative performance of the Fund. The lack of exposure to energy and other commodities also benefited the portfolio.

In many parts of Asia, it is our opinion that the economy is shifting from an environment of low inflation and robust growth to a period of rising inflation and moderating growth in the short to medium term. Amid escalating cost pressures and tightening liquidity, the management teams of companies in the region are starting to build more cushion in their outlooks, a process that is still continuing. While it may lead to uncertainty in the medium term, as long-term investors we find it encouraging that companies are starting to again budget for risk.

During the quarter, the performance of Asian equity markets was also influenced by political developments with key elections in Taiwan, Korea and Malaysia. The prospect of improving relations between China and Taiwan led to a sharp rally in some Taiwanese stocks. The Matthews Pacific Tiger portfolio has carried a relatively small exposure to Taiwan due to the overhang from the country’s prior political climate. The Fund does not target any country-specific weighting. If anything, we believe that country of origin will play a lesser role in determining investment returns for the long term. The recent Taiwan election and expectations for a more constructive government mean that constraints on investment across the Taiwan Strait may start to be lifted over time. However, it remains to be seen whether improving political relations between China and Taiwan will add a new leg of growth for some Taiwanese companies.

The Fund aims to remain consistent with its goal of offering shareholders a diversified vehicle that looks across a spectrum of geographies and industries to identify the right investment opportunities without paying speculative prices. Since the beginning of 2007, we have been wary of expectations that were becoming embedded in some of the region’s stock prices. However, the recent weakness, particularly in China and India, is offering the opportunity to acquire quality companies, capable of generating sustainable long-term growth. One such example is China Resources Enterprise (CRE), which derives growth from private retail consumption. Even as investment spending is slowing in China, the government is taking steps to boost consumption activity, which should help to rebalance the economy and reduce pressure on the currency. Furthermore, wages have been growing at a low-teens rate both in urban and rural parts of China. This has helped retail sales post annual gains of 18% to 20% in recent months. CRE is well-geared to benefit from this trend as it is one of China’s largest consumer conglomerates. The company, a leading retailer, also runs the largest brewery in the country. Its management has demonstrated a commitment to sharpen the company’s focus on consumer-related businesses, and is actively looking to divest non-core assets. The company also continues to unlock value on its balance sheet and return it to shareholders through cash dividends. The inflation of raw material prices, particularly in CRE’s brewery business, is a near-term threat but we believe growing economies of scale place CRE in a better position than its competitors.

The coming months are likely to remain volatile, but in our view, the fundamentals underlying Asia’s economic evolution still remain intact. As existing markets are deregulated, and as new markets are formed—especially those born of rising household incomes in the region—entrepreneurs enjoy greater opportunities to build attractive businesses. The challenge is for capital markets to continue developing at the same rate in order for these opportunities to take shape. For instance, there are large parts of the Chinese economy that are not represented in the equity market. Even though the private sector accounts for close to 80% of GDP, it makes up less than 25% of the equity market’s capitalization. We believe that the development of capital markets is an ongoing process, and will translate into attractive investment prospects for the portfolio over time.

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 March 31, 2008, China Resources Enterprise accounted for 0.5% of the Matthews Pacific Tiger Fund.