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Fund Profile

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. 

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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”.

Kepler View

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.

Bull bear
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
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2024 Kepler Income & Growth Rated Fund

This trust has been awarded a rating by Kepler Trust Intelligence for income & growth... Find out more

Fund History

24 Jan 2024 Share the wealth, Xi...
The world's most successful communist country could benefit from a decent welfare state...
17 Jan 2024 Top of the Pops
We reveal the winners of our investment trust ratings for 2024…
30 Nov 2023 Fidelity China Special Situations
Dale Nicholls
Rewatch this webinar which is part of our single manager November event
Watch Recording
06 Jul 2023 Fund Analysis
FCSS is a highly differentiated way to access the growth potential in China…
11 Jan 2023 Solving the Rubik’s Cube
We reveal the winners of our investment trust ratings for 2023…
13 Oct 2021 Beyond the Middle Kingdom
As momentum falters in the emerging markets powerhouse, we examine the options for investors outside China...
24 Sep 2020 Bull in the Chinese market?
The Chinese stock market has been a notable winner thus far in 2020. Should investors stay the course, or take profits?
16 Jan 2020 Drifting apart: how emerging markets have become less correlated
We examine how correlations between different emerging markets have evolved, and whether single country strategies could diversify returns going forward....
09 Sep 2019 Fund Analysis
Fidelity China Special Situations has outperformed its index by over 20% in five years...
16 May 2018 Blast off!
Many institutional investors are structurally underexposed to one of the fastest growing parts of the world even as China A-Shares join the global indices...
16 May 2018 Fund Analysis
A diversified "all-cap" portfolio tilted to the secular growth in Chinese middle class consumption
19 Apr 2018 When others are fearful...
We ask whether it is time to be greedy after the recent selloff in Asia equities...
30 Nov 2017 Race ready
Our analysis suggests conditions are right for emerging markets fund managers who can add real alpha to generate strong returns...
29 Nov 2017 Fund Analysis
A multi-cap Chinese equity trust that has generated significant alpha over the years yet trades on a double-digit discount
26 Apr 2017 Fund Analysis
26 Apr 2017 The greatest
We use technical analysis to identify some of the best stock picking fund managers in the world today...
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