Commentary

Quarter Ending September 30, 2008

For the three months ending September 30, 2008, the Matthews Asian Technology Fund fell –18.46%, slightly ahead of its benchmark the MSCI/Matthews Asian Technology Index, which declined –20.85%.

It has been a difficult period for Asian technology firms as the U.S. credit crisis continues to worsen and spread to other global markets. The weakening demand for IT products and services in the global market is painting a gloomy picture for the upcoming holiday shopping season, typically the biggest driver for consumer electronics products every year. Many industry analysts are forecasting the upcoming holiday season in the U.S. to be one of the weakest in decades.

On a sector basis, the software and services sector was the worst performing. Internet firms, which fall within this sector, have been good defensive holdings during past global technology downturns. But this year, they have not been immune from the global credit troubles. The Internet segment was sold off as investors became more risk averse and as liquidity in the market declined. Despite the volatility, our initial rationale for holding Internet stocks has not changed and the fundamentals of these business models have not been affected by the global credit crunch. As the number of Internet users continues to increase throughout Asia, we continue to believe that the long-term potential of this industry remains strong, and Internet companies remain among the portfolio’s top holdings.

The technology hardware segment was also hit hard during the quarter. The U.S. market is the largest market for technology products and a slowdown there has a direct impact on Asian technology manufacturers. However, the overall valuation of the technology hardware sector remains very attractive and we continue to invest in leading consumer electronics and technology hardware manufacturers that we believe can withstand the crisis.

Health care was the best-performing sector during the three-month period. Health care companies are a component of the Fund’s investment universe, given that many of these firms are developing and adopting new technologies. The defensive nature of this sector helped it outperform during the difficult period, and the Fund’s Indian pharmaceutical holdings performed well. Outside of Japan, Asia’s pharmaceutical industry is still small relative to other regions, and has been growing at a steady pace.

On a company basis, New Oriental Education, the leading education service provider in China, was the best performer during the quarter. Based in Beijing, the firm has one of the best online platforms in China, and provides preparatory test courses to Chinese students and adults. The education sector is viewed as another defensive sector, and performed well during the quarter’s sell-off in Asian markets.

JVM, a designer and manufacturer of medical equipment, was the Fund’s worst performer during the quarter. JVM, which makes equipment for both domestic and overseas markets, was hurt by its hedge that was positioned against the Korean won’s steep depreciation. By the end of September, the won dropped approximately 29% against the U.S. dollar year-to-date, causing the company massive unrealized losses. The fundamental business of the company, however, has remained steady: its sales growth has been on track to meet this year’s guidance and new products have received good feedback from existing clients. The hedging contracts remain a key risk for the company, and we continue to monitor the situation closely.

The depth of the global credit crisis and its impact has been hard to quantify and uncertainties in the market have negatively impacted Asian technology firms. Yet despite the volatility, we continue to believe that Asia offers exciting growth stories for high quality technology companies, and we remain focused on finding companies that can benefit from long-term growth opportunities in the region.

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.

As of 9/30/08, New Oriental Education & Technology Group, Inc. accounted for 4.1% of the Matthews Asian Technology Fund, and JVM Co., Ltd. accounted for 1.6% of the Fund.