Fund Profile

Fidelity China Special Situations 23 May 2024

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Fidelity China Special Situations. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
FCSS has outperformed in a challenging year…
Overview

Fidelity China Special Situations (FCSS) offers investors direct exposure to the Chinese growth story from a diverse range of sources. Manager Dale Nicholls has a bias to small- and mid-cap companies as he views them as the best way to capture the growth opportunities from the increasing wealth of the Chinese consumer and to generate excess returns. The trust also has structural Gearing in place to support the upside potential. Furthermore, the manager can invest in private companies, with a current weighting in the mid-teens, to create further differentiation from the benchmark and broaden the growth opportunities.

Whilst the manager is focussed primarily on capital growth, FCSS has increased its Dividend in every year since inception with the most recent annual dividend offering a historic yield of 3%. The trust was awarded Kepler’s Income & Growth rating for 2024.

Dale has delivered significant outperformance of the benchmark over the long term. Relative performance in the short term has also been strong, albeit against the backdrop of challenging conditions for broader Chinese markets. This has contributed to the shares trading at a wide Discount to NAV of c. 9%, wider than the five-year average. The board has been active with share buybacks as part of their discount control approach.

The trust has recently combined with abrdn China, having completed in March 2024. This has led to a growth in the asset base and is expected to contribute towards lower Charges going forward.

Kepler View

We believe FCSS is a good example of a manager maximising the capabilities of the investment trust structure (see Portfolio). By investing in a well-diversified portfolio with a bias to small and mid-sized businesses, unlisted companies and by running structural Gearing, manager Dale Nicholls offers investors something totally different to what they could get from an index tracker, and can capitalise on the plethora of opportunities that the Chinese growth story still offers due to his strong active management approach. As such, we believe FCSS could make for an attractive holding as part of a core global equity portfolio that can deliver very strong alpha over the long term, albeit with some periods of volatility.

We believe the opportunity right now is particularly compelling. China has been through a very challenging period, though the headwinds are arguably easing, and valuations remain very attractive. Recently published GDP figures came in above expectations which could indicate the economy is beginning to turn around. Furthermore, the trust is trading at a wide Discount which could make for an attractive entry point, especially when the board has an effective discount control mechanism to keep the level within single figures.

FCSS also has an impressive Dividend track record which we believe can complement total returns. Despite not being a focus for Dale, the dividend has been raised every year since the trust’s inception, is fully covered by revenues and there are enough revenue reserves to cover the dividend for nearly two years. As such, we believe the dividend is likely to continue to be a feature going forward, with the current share price weakness making the current c. 3% historic yield an attractive entry point.

Bull

  • Strong relative performance over a number of time-periods
  • Portfolio offers a range of features that differentiate it from peers and the index
  • Trust pays an attractive dividend with growth potential that can complement total returns

Bear

  • Use of structural gearing can amplify downside as well as supporting upside
  • Small- and mid-cap bias can often struggle in weak economic conditions
  • Ability to sell private holdings is hindered by weak markets limiting potential for IPOs
Continue to Portfolio
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

10 Jul 2024 Things can only get better
Discounts are yawning but markets are thawing and boards are on the offensive; Labour might not be the only thing making a comeback this year...
23 May 2024 Fund Analysis
FCSS has outperformed in a challenging year…
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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