Fidelity China Special Situations 09 September 2019
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
To achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China and Chinese companies listed elsewhere.
Fidelity China Special
Fidelity (FIL Fund Management Limited)
Association of Investment Companies (AIC) Sector
Country Specialist: Asia Pacific ex Japan
12 Mo Yield
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
Turnover Ratio %
(Discount)/ Premium (Cum Fair)
Daily Closing Price
Fidelity China Special Situations (FCSS) invests in Chinese equities, aiming to identify companies with long-term growth prospects that are underappreciated by the market. The portfolio has a strong bias to small and mid caps and a wide remit. This allows it to invest in domestic and Hong Kong-listed Chinese companies as well as those listed elsewhere which do business with the country and unlisted, private stocks. The portfolio can also take up short positions in companies or indices.
The trust has been managed by Dale Nicholls for just over five years, during which time it has handsomely outperformed the MSCI China index [see performance section for more]. Dale invests in companies benefitting from the growth of the middle class in China, which means the portfolio is tilted towards consumer-facing companies, information technology and insurance.
The trust has structural gearing worth 10% of NAV and a track record of maintaining borrowings closer to 25%. Along with the SMID exposure this raises the volatility on the trust: over five years the standard deviation of the Fidelity China Special Situations share price has been 23.2% annualised, compared to 19.08% for the MSCI China benchmark.
The trust trades on a discount of 9.3%. Since February 2019 the board has targeted a single digit discount, and used its buyback authority to that effect.
While the trust aims for capital growth, dividend growth has also been strong, and the trust now yields 1.8%.
The trust has an innovative charging structure. There is a base management fee of 0.9%, which can be 0.2% higher or lower depending on whether the trust has outperformed or underperformed the index, a “fulcrum fee”.
FCSS is well-positioned to benefit from secular trends in China being directed by the central government and demographics and also from the opening up of the China A-Share market to global investors. Unusually, the small and mid-cap concentration was a hindrance in the 2016-2017 bull market in China, but over the long run should be expected to generate greater return potential. The trust is not for the faint-hearted, with the market cap exposure, high levels of gearing and exposure to unlisted companies raising the risks of investment. However, the manager is well-resourced with a locally-based analyst team and has a good track record since taking over the trust.
|Exposure to secular growth trends, small and mid-caps and significant gearing give high return potential
||The structural gearing would be a headwind in any market downturn
|Dividend growth has been strong and there are significant revenue reserves||As a single country trust, FCSS is highly exposed to the trade war between the US and China
|At £1.2bn in market cap and with majority retail shareholders, the trust is highly liquid||While improving, corporate governance and regulatory issues in China are still sometimes problematic|