"Matthews Asia Small Companies Fund (MSMLX) was among the top-performing funds of the first half of 2009, with a return of more than 47%," says Mark Salzinger.

In his No-Load Fund Investor, he suggests, "Though volatile, it wouldn’t surprise us in the least if Matthews Asia Small Cap turned out to be one of the top-performing funds we cover over the next decade." Here is the fund's expert's review.

"The fund has benefited so far this year from its focus on China and India, two of the year’s best-performing stock markets.

"However, the fund’s mandate to invest in developing Asia’s small companies also has been a boon. 

"Generally speaking, small Asian companies tend to be more targeted to their domestic economies and less export oriented than many large Asian companies.

"With domestic demand throughout some developing Asian countries holding up better than demand in the U.S., Western Europe and Japan, the domestic focus has benefited small Asian companies disproportionately. 

"The small-cap market in Asia has developed considerably over the past five years; about 2,000 small caps in developing Asia have come public during this time, increasing the total number of such companies to more than 8,000 (vs. about 6,000 in the U.S.). 

"Matthews certainly has the experience to manage a small-cap Asia offering successfully. An Asia-only investment firm, Matthews has traditionally focused more on midsize and smaller companies than its peers.

"Matthews Asia Small Companies opened for business last September, in the middle of one of the worst periods ever for equity investing. 

"In recognition of the difficult times in which the fund was launched, the fund’s lead manager, Lydia So, initially favored small companies that she believed offered high levels of quality and durability. In recent months, as the global economic crisis has abated somewhat, she has added some riskier holdings. 

"Assisted especially by co-manager Noor Kamruddin, who formerly managed a global technology fund with an emphasis on small caps, So favors stocks with market capitalizations of $3 billion or less experiencing strong growth in expanding industries and markets. 

"Before adding a stock to the fund, at least one member of the team speaks with management and often visits the company. So wants to be as sure as possible that each holding in the fund has a management team that’s dedicated to success and holds itself accountable

"She looks for financially strong companies with strong cash flows and relatively predictable earnings. That’s one reason, she says, that she prefers companies in growth industries as opposed to companies in cyclical industries, where earnings are impacted heavily by volatile, external forces. 

"Like the managers of other Matthews funds, So attempts to form a portfolio reflective of how developing Asia may develop over the next several years rather than how it looks right now.

"Fluent in Cantonese and conversational in Mandarin, So does much of the duo’s frontline analysis for China/Hong Kong and East Asia stocks generally.

"Fluent in Hindi, Kamruddin is the frontline analyst of Indian stocks. (Michael Han, co-manager of Matthews Korea and a native speaker of Korean, provides assistance with Korean stocks.) 

"After the huge rebound in small-cap Asian stocks so far this year, the investment area is no longer the great value it apparently was six months ago.

"However, it’s still attractive. Weighted by the sizes of its holdings, the fund’s price/earnings ratio is less than 10. That’s lower than what you’ll find in most other equity markets right now. 

"Matthews Asia Small Companies is designed to hold between 50 and 70 stocks at any one time. Matthews has agreed to limit the fund’s expense ratio to 2% until at least April 30, 2012. While 2% may seem high, it shouldn’t make or break your decision of whether or not to invest. 

"First, the returns of the fund are likely to be so volatile (whether up or down) that the expense ratio will be swamped by the performance of the fund’s holdings.

"Second, the 2% figure is as likely to be a ceiling as a floor. On its other funds, Matthews charges very reasonable expense ratios, especially as compared to other specialists in international investing and emerging markets. 

"Consider Matthews Asia Small Companies if you want to position yourself aggressively to benefit from likely growth in the middle classes of domestic economies within developing Asia, especially China and India.

"And, if you buy now, you get in when the fund is young, small and flexible, with only about $20 million in assets."