We believe we are well positioned for an eventual recovery from the coronavirus pandemic. While most Asia ex-Japan stocks are pricing in a return to more normal conditions, we have identified opportunities in Southeast Asia, where markets have yet to fully rerate and earnings estimates have not been adjusted to reflect the positive impact of vaccine availability.

We remained comfortable with our positioning following the significant changes that we made to our holdings in the first half of 2020. We continued to take the opportunity to invest in quality companies that can reliably compound earnings - companies that can deliver consistent earnings regardless of the economic cycle. We favor businesses which are run by a reliable management team, and which are cash-generative with an attractive dividend yield. We think the strength of domestic consumption in the region will prevail and will yield ample secular growth opportunities.

Consumer Discretionary

We have a significant exposure in the consumer discretionary sector. Our preference is for cash-generative fast-food restaurants, auto dealers benefiting from China's auto demand recovery and increasing share in a fragmented market, as well as ecommerce companies gaining from people working, shopping and consuming media from home. In the quarter, we avoided exposure to the electric vehicle space, which was favored by many local investors in China, but whose valuation we deemed unattractive given its fundamentals. Instead, we invested in new quality positions and added to names that will likely benefit from the broadening of China's recovery.

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• We bought shares in Gree Electric Appliance, the largest air conditioner maker in China. We think the company can resume its original earnings growth trajectory, helped by channel reform and the absence of price wars as the sector focuses on profitability.� It has also been buying back shares for its stock incentive program.

• We sought to diversify our exposure to the China online space and bought a position in Pinduoduo, choosing it over its rival Meituan Dianping which we sold. While Alibaba Group, the country's dominant internet platform company and a core holding of the portfolio, has a solid ecommerce business with robust cashflow generation capability, Pinduoduo is able to grow the market, helped in part by its differentiated positioning as a marketplace for value-for-money products. We think Pinduoduo, where Tencent has a stake, is a well-managed company. It has found innovative ways to help expand the ecommerce pie and its community grocery business will likely be a new growth driver.

• We increased our positions in the core quality companies that we own, adding to Yum China, fast-food operator in China. The fast-food business of Yum China, which operates the KFC and Pizza Hut chains, remained resilient during the coronavirus outbreak, helped by their early decision to handle their own delivery services. We continue to like its cash-generative business model and strong balance sheet as well as the quality of its corporate governance. We think Yum China is likely to benefit from the end of the pandemic given its plans to increase the number of stores it is set to open.

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Consumer Staples

The portfolio has a sizeable exposure to consumer staples. We believe that Asian households are generally under levered and consumption is a secular opportunity. Our focus has been on cash-rich domestic quality companies.

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• However, in the quarter we sold Treasury Wine Estates on the back of concerns over increasing political tensions between Australia and China. The Australia-listed winemaker's Penfolds brand has enabled its strong growth in China in recent years, a market that was viewed as a significant long-term opportunity for them. China, however, announced in November the imposition of higher duties on Australian wine imports.

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Industrials and Business Services

We have a considerable position in industrials and business services. We preferred select transport and property management companies, which we think are likely to weather the near-term economic difficulties with either their strong balance sheet or increased discipline concerning new investments. They are also likely to gain once mobility restrictions are lifted. We also favored companies benefiting from the trend toward increased imports created by the U.S.-China trade dispute.

• We took the opportunity to invest in Singapore-listed Jardine Matheson, an ASEAN-focused conglomerate. Notably, the company has been buying back its stock, which we liked, and its valuation was undemanding.� It has exposure to the Hong Kong office property market through Hongkong Land and its other units include pan-Asian retailer Dairy Farm and Astra International, an Indonesian automobile maker. Dairy Farm's earnings will likely improve on the turnaround of its Southeast Asian grocery business, which has already shown signs of margin improvement in the first half. We like its strong cashflow generation capabilities and shareholder return discipline. It also owns the IKEA and Starbucks franchises in Hong Kong and Singapore. Astra's third-quarter results showed a gradual recovery and we expect improvement as coronavirus restrictions are eased. Astra is a market proxy for Indonesia's wealth recovery and consumption.

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Communication Services

The portfolio has a sizable position in the communication services sector in absolute terms. Our focus here is on social media platforms and search engine companies that are benefiting from developments such as increased remote working and consumption of goods and services from home. We added to our positions in these companies and found an opportunity in a company catering to the Southeast Asian region.

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• We bought Sea Limited, an internet platform provider domiciled in Singapore whose ecommerce business is gaining shares in Southeast Asia. This new addition to the portfolio further diversified our investments in the sector. We think Sea Limited is well positioned to grow market share in the Southeast Asian online gaming and ecommerce market. The company continues to demonstrate strong execution as reflected in its above-consensus results for the third quarter.

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Health Care

The portfolio has a relatively low weighting to the health care space. However, we found opportunities and bought selected quality Chinese pharmaceutical companies, including Jiangsu Hengrui Medicine and Sino Biopharmaceutical, with favorable growth prospects over the quarter.

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• Jiangsu Hengrui Medicine, which started as a local state-owned enterprise, is a high-quality company in China's fast-growing oncology market. �Its PD-1 inhibitor, a cancer treatment, made it to China's annual list of drugs to be covered by the country's national insurance fund in December. The average price cut was less than last years, a relief to both domestic and foreign drug makers whose profits were reduced by China's push to cut health-care costs. We expect the company's earnings to compound amid the rising incidence of cancer in China, higher penetration of better cancer treatment, and its strong product cycle. Hengrui has a deep pipeline that can support its growth for the next five years.

• Sino Biopharmaceutical is a leading generic drug company in China and is also penetrating the oncology market. It has one of the strongest sales team among pharmaceutical companies in China with an efficient research and development system. In December, it announced that it had agreed to acquire a stake in COVID-19 vaccine developer Sinovac Life Sciences.

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