The portfolio invests in Asia-focused companies that feature strong and sustainable growth and/or solid potential for valuation multiple expansion over the long term. Each position is a result of our bottom-up stock selection based on fundamental research.

During the quarter, we continued to identify companies that may emerge from the crisis in a stronger position and benefit from a potential recovery. These tend to be companies that are leaders in their industry and continue to gain share in their sectors under adverse market conditions. We also looked at companies that have a strong capital structure that can allow them to weather a potentially prolonged downturn in business activity.

We pursued positions in better-quality companies that we found expensive prior to the coronavirus outbreak. This led to a reduced allocation in China as we found new compelling investment opportunities elsewhere such as in Hong Kong, Singapore, and Taiwan.

Domestic consumption remains an overarching theme in our portfolio. We believe that Asian households are generally under levered and consumption is a secular opportunity. In China, for instance, we look for companies that will benefit from the increasing demand for premium products while across countries, there may be opportunities in businesses that will benefit from consolidation in fragmented industries. Across the region, we also favor beneficiaries of import substitution as domestic companies come up with ways to replace imports with local products. When we think about our bottom-up stock picks, we also look at the extent of a company's innovation, not merely in the use of technology, but in other ways it seeks to improve market positioning.

We Turned Overweight Hong Kong; Added to Quality Growth Stocks

We moved to an overweight allocation in Hong Kong during the quarter, taking advantage of undemanding valuations following the market's weakness in the first half of the year, to boost our position in quality growth stocks and potential beneficiaries of a recovery that looked more compelling in value.

We added to our existing positions in AIA, Hong Kong Exchanges and Sun Hung Kai Properties while establishing a new position in Health and Happiness. AIA is a life insurer with an inimitable footprint in southeast Asia and a growing business in China and backed by a strong management team. It has secured approval to sell all its key products in Hong Kong with virtually no face-to-face requirement, raising hopes of a recovery in volumes for the domestic business. Moreover, it may be poised to gain market share across some regional businesses as some local rivals find it difficult to transition their businesses to online. In China, the insurer is looking at an acceleration of growth in agents in China, which augurs well for its expectations of a recovery in the value-of-new-business growth in 2021.

Hong Kong Exchanges and Clearing (HKEX) is the largest vertically integrated exchange in the region that in the quarter benefited from the trading volume growth and expectations of a potential increase in Chinese companies seeking a listing in Hong Kong. The U.S. Senate passed a bill in May that could force Chinese companies to withdraw from American stock exchanges if they do not comply with U.S. accounting standards. Although there has been no immediate impact yet, we believe the shift of Chinese companies' listings to Hong Kong will boost HKEX's profitability.

We also increased our positions in Sun Hung Kai Properties, a property developer and landlord that derives the bulk of its earnings from highly cyclical properties and residential developments in Hong Kong. We boosted our stake in the company due to its attractive valuation as it traded at about 50% discount to its net asset value with a 5% yield. In addition, the company is a beneficiary of a potential economic recovery in Hong Kong as the social unrest that has wracked Hong Kong since last year appeared to have stabilized, with no large protests or demonstrations held during the quarter.

We initiated a new position in Health and Happiness, a consumer company targeting younger demographics for its products that include high-end infant milk and nutrition supplements. Aside from the rising health and wellness trend in Asia, especially China, we believe the company is a beneficiary of the increasing demand for premium products in China.

We Sold Shares in China but Sought Recovery Beneficiaries

China was the portfolio's largest allocation at period-end, but we exited several names to give ourselves room to add stocks that will likely gain from a return to normalcy and eventual recovery in demand. We shifted some of our resources invested in China to better opportunities elsewhere during the quarter. We eliminated Minth Group, a supplier of exterior auto body parts; 58.com, a leading online marketplace for classified advertising; and ENN Energy following their gains during the second quarter.

We also closed our positions in transport infrastructure companies on the realization that it will take time for international travel to recover, while other businesses may see a faster turnaround or may benefit from a potential recovery from the coronavirus lockdown. Hence, we exited our positions in Shanghai International and Beijing Capital International Airport.

Within China, we preferred investments in businesses which may not have benefited from the coronavirus outbreak, but which instead may gain from the return to normal business activity. For instance, we built a position in Huayu Automotive Systems, a high-quality auto parts supplier, which will gain from a potential recovery in China auto volumes. Huayu's dominant market share in various segments gives it strong bargaining power over upstream suppliers, which in turn leads to strong free cash flow generation and stable margins. Its new business ventures will likely deliver gains for the company in two to three years.

We started investing in search engine Baidu on expectations of a recovery in the advertising market driven by a general improvement in the macroeconomic picture and helped partly by the company's cost control efforts.

Within China's health care sector, we increased our holdings in Sino Biopharmaceutical, a leading generic drug company and one of the highest-quality pharmaceutical companies in the country with a strong sales team and an efficient research and development system. We think the company is executing better given its improving pipeline, which may mean that it would be seeking more approvals over the next few years. Within the sector, we prefer names of better quality in terms of product cycle and future growth prospects.

We started to invest in Deppon Logistics, a logistics service provider, which has ventured into the fast-growing express segment. We like its profitable niche business, strong execution, undemanding valuation, and we expect it to benefit from the management change, new incentive system and technology investments in recent years.

Within Southeast Asia, Singapore Beckoned on Recovery Hopes After Reopening Economy

In Southeast Asia, we added to Singapore-listed names in the transport and real estate sectors as they stand to benefit from potential recovery as the city-state in June further eased one of the world's toughest coronavirus lockdowns after more than two months. The positions are in line with our search for companies that may emerge from the coronavirus outbreak in a stronger position. For instance, we initiated a position in ComfortDelGro, a land transport company that has the balance sheet and cashflows to weather the near-term difficulties brought about by the outbreak, supported by a decent dividend yield. We see an earnings recovery in 2021 once the coronavirus crisis recedes. We turned less overweight �in industrial and business services and became slightly overweight Singapore.

We added to our position in Frasers Centrepoint, a local real estate investment trust that is operating a shopping mall. We believe it will hold up relatively well given its suburban retail exposure which should be more resilient to the impact of the coronavirus outbreak. We like its undemanding valuations and the return of normalcy in business activities in Singapore augurs well for the company.

Information Technology Allocation Increased on Boost from Stimulus Packages

We invested in firms that may benefit from the stimulus measures deployed by governments to mitigate the impact of the coronavirus outbreak, resulting in our overweight allocation in information technology from the previous quarter's neutral position. We invested in Vanguard International Semiconductor and increased our stake in Taiwan Union Technology as we think that stimulus packages will include measures to encourage enterprises to upgrade their technology, which favor select hardware companies.

Vanguard, a unit of Taiwan Semiconductor Manufacturing, focuses on 8-inch wafer fabrication foundry services. We expect the 8-inch wafer supply to be tight over the longer term owing to the limited incremental 8-inch wafer capacity expansion mainly due to lack of depreciated tools in the market. We view Vanguard as a well-managed company with good corporate governance, and a steady dividend growth over time. Moreover, it may be less affected by U.S.-China trade tensions which centers more on leading-edge technology. Taiwan Union is a maker of materials of printed circuit boards, which we think will benefit from the expected growth in data centers. These new positions reduced our underweight in Taiwan.