For most of the year, we have steered the portfolio towards high-quality growth names that we think will emerge from the coronavirus crises in a stronger position. These tend to be companies that are leaders in their industry, and which continue to gain share in their sectors under adverse market conditions. We pursued positions in better-quality companies that we found expensive prior to the coronavirus outbreak. We also looked at companies that have a strong capital structure that can allow them to weather a potentially prolonged downturn in business activity.

During the quarter, we sought opportunities among "growth cyclicals." We pursued these businesses with secular growth opportunities but have been impeded by a cyclical downturn due to the coronavirus pandemic. In the quarter, the market favored high-growth names with less proven businesses, but we shifted the portfolio away from those and favored these "growth cyclicals."�

Domestic consumption remains an overarching theme in our portfolio. We believe that Asian households are generally under levered and consumption is a secular opportunity. Across the region, we also favor beneficiaries of import substitution as domestic companies come up with ways to replace imports with local products, especially amid heightened geopolitical tensions.

In China, 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. 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 Reduced Allocation in China but Moved into Higher Conviction Names

In China, our largest allocation at period-end, we exited several names where our investment thesis had panned out and was reflected in their stock prices. That gave us room to shift to investment opportunities which are well-managed and show a re-acceleration of growth. We also pursued names that we think are likely to gain market share and those with undiscounted changes or catalysts.�

• Within China's property sector, for example, we eliminated Shimao Group, a nationwide homebuilder with a focus on Tier 1 and 2 cities, as our thesis of growth acceleration backed by market share gains in a consolidating market has played out. While we remain confident of Shimao's growth, we think rival China Resources Land (CR Land), which is also a shopping mall operator, may benefit more in an environment where volume growth is reaching a peak, and investor attention may focus more on companies with grade A investment portfolios. We think that CR Land, which is part of the well-run state-owned enterprise CR Group, has some of the best retail assets in China. Moreover, it has a disciplined balance sheet with low gearing and funding cost.� In a declining margin or return environment, companies with low funding cost will be more competitive and profitable. A low gearing balance sheet also means CR Land can accelerate growth if needed. Within the CR Group, there could also be some future catalysts such as the spinoff of its property management arm.
• Within the consumer discretionary sector in China, we consolidated the travel-related names that we owned, focusing more on domestic travel. Hence, we eliminated our position in Trip.com, China's dominant online Chinese travel agency, taking advantage of its share price recovery after a sharp fall in the first quarter. While its second-quarter results were better than expected, outbound travel remains at a minimal level. Our base case is for domestic travel to fully recover next year and international travel the year after. While we exited Trip.com, we initiated a position in Huazhu Group, where we have higher conviction as we view it as one of the most efficient and leading hotel operators in China that can potentially lead the consolidation of non-branded hotels.
• Still within consumer discretionary, we sold out of Pinduoduo, an ecommerce firm where Tencent holds a stake, locking in gains.
• We eliminated our position in Songcheng Performance, one of the better-managed, show-based theme park operators in China, which we viewed as a beneficiary of domestic travel and leisure growth. The stock rallied on news of China allowing group tours and cross province travel. However, we think that the stock has discounted the expected acceleration in earnings growth ahead of new park openings in 2021 and 2022.
• Among household durables, we exited Haier Electronics as the privatization thesis has played out, with controlling shareholder Haier Smart Home taking its household appliance maker unit private.� Instead, we added to our position in Gree Electric Appliance, China's largest air conditioner manufacturer, which declared an interim dividend, positive news on corporate governance, and has completed its channel destocking. We started a position in Gree last year amid its improving shareholding structure. Its state-owned parent sold part of its stake in the company to an investment fund. This state-owned enterprise reform plan will likely result in improved corporate governance, better channel efficiency, a potential rerating and further market consolidation.
• Outside of China's consumer discretionary sector, we eliminated PICC Property & Casualty, one of the country's largest property and casualty insurance companies, as the departure of its well-respected chairman and risk management issues cast a pall on our thesis of an improving return on equity. Aside from these, continued concerns on auto reform deregulation and elevated combined operating ratio from floods dragged down its share price. We decided to redeploy funds to higher conviction ideas such as life insurer AIA, which has an inimitable footprint in southeast Asia and a growing China business.

We Boosted Positions in Taiwanese Semiconductor and Retail Names

We bought more shares of Taiwanese semiconductor names amid the prospect of their continued earnings growth. We added to our stake in MediaTek, a fabless design house which in our view remains a key 5G solution provider for Chinese smartphone makers even as the U.S. expanded its curbs on Huawei Technologies. MediaTek is the only non-US independent 5G solution supplier globally.

Outside of IT, we bought more shares in President Chain Store, a franchisee for the 7-Eleven convenience stores in Taiwan, as valuations are more palatable following a stock price correction. Moreover, we started to feel more comfortable about the macro environment in Taiwan and while the coronavirus pandemic has severely affected its Philippine business, we think the Philippines remains an attractive market for convenience store operators over the medium to long term. At the end of the quarter, these changes led to a reduced underweight allocation in Taiwan.

We Invested in Lagging Names with Growth Prospects in the Utilities Sector

We invested in two new companies within the utilities sector with good growth prospects, taking advantage of their share price weakness. This significantly reduced our underweight allocation in this sector. We established a position in China Resources Gas, a gas distribution company. In China, we view gas distribution as an attractive sector with multiple tailwinds. We like the sector as it enjoys government policy support, volume growth, continuing gas consumption growth compared to other energy sources, and potential merger and acquisition opportunities. We also initiated a position in Guangdong Investments, a well-run water distribution and sewage treatment company, following sharp share price weakness due to concerns about the impact of the coronavirus pandemic on the earnings of its non-water division. We think the company, which provides natural water to Hong Kong, is committed to maintaining its dividend per share growth as the impact of the pandemic on its business is likely to be temporary.

Within Industrials, We Added an Electrical Equipment Maker Poised for Further Growth

Within the industrials sector, we own companies that are gaining market share and expanding margins such as the abovementioned Shenzhen Inovance. During the quarter, we initiated a position in NARI Technology, which makes electrical equipment and counts China's major state-owned grid companies as key customers. It has a leading position in secondary power grid equipment. We view NARI as a good quality company which will benefit from the digitalization of China's power grid. The company should see a re-acceleration of growth from next year due to the higher power grid upgrades. In the near term, its revenue is expected to grow faster in the second half of 2020 as orders in grid automation and information and communications increase. It has a cash generative and recurring business and we believe its position is well entrenched as many of its equipment items are vital and related to safety.