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Fund Profile

Fidelity China Special Situations 06 July 2023

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 is a highly differentiated way to access the growth potential in China…
Overview

Fidelity China Special Situations (LON:FCSS) offers a highly differentiated way to invest in the growth potential in China via an active strategy which gives the manager the freedom to generate alpha in multiple ways.

FCSS has been managed by Dale Nicholls since 2014, and he runs a portfolio which is heavily tilted towards small- and mid-caps and has substantial unlisted equity exposure, currently in the mid-teens. Dale also uses derivatives to take long or short positions in companies as well as to effectively gear up the portfolio. In fact, Gearing is a feature of the trust, adding to the growth potential: it has averaged 20% since Dale took over.

Thematically, the largest feature of the portfolio is the exposure to the growing wealth and changing purchasing choices of the Chinese consumer. While he is happy to own the well-known large-caps when he sees value in them, the portfolio is packed with lesser-known companies which are strong in their niche and/or which are at an earlier stage of their growth trajectory. As such, these tend to be in the small-cap part of the investible universe. Growth is the aim and earnings growth is a key characteristic which Dale looks for. But he is also sensitive to valuations, as we discuss under Portfolio.

Dale has the advantage of working with Fidelity’s large, locally based analyst teams, with analysts working in onshore China, as well as elsewhere in the Asia Pacific region. Their coverage of Chinese companies, and their peers elsewhere, gives Dale a 360-degree view of many companies’ operations, and the deep human resources allows for substantial investment in the unlisted sphere.

FCSS’s shares trade at a wide Discount of 10.9% at the time of writing compared to a five-year average of 7.3%. Chinese markets have been weak overall since the end of the pandemic, but Dale sees as many exciting growth stories as before.

Analyst's View

We think FCSS looks like an excellent way for long-term investors to access the growth potential in China. The gearing, small and mid-cap tilt and active approach all bring risks, but they all add extra growth potential, which could reap dividends in the long run. Interestingly, large-caps have outperformed SMIDs in recent years in China. This is in contrast to the long-term tendency for smaller companies to deliver greater earnings growth. Dale does own large-caps, where he sees the best long-term earnings growth potential, but nonetheless a return to the historical norm would help FCSS in relative terms. We think this shift in market dynamics may be brought about by structurally higher interest rates and a retreat from globalisation.

At the time of writing, FCSS trades at a double-digit discount. We think this represents an opportunity. Historically, the trust has seen its discount narrow when Chinese equities are in favour and we see the potential for the same to happen again. That said, we cannot predict when, and it may not be in the short term. Nonetheless, the discount provides extra return potential in any rally and is defended by the board with buybacks.

Bull

  • Manager has full toolkit for adding alpha
  • Offers differentiated exposure to Chinese small and mid-caps via the work of a broad local analyst team
  • Current wide discount could provide good entry point

Bear

  • Gearing brings sensitivity to falling markets, as well as rising markets
  • Political risk is high in China
  • Although charges are higher relative to peers when the trust outperforms, shareholders pay less when the trust underperforms, as a result of the performance-related component. This aligns the interests of manager and shareholders.
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

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…
12 Jan 2024 Facing the future without fear
Do STEM graduates = money making companies?
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...
17 May 2018 Fund Analysis
A diversified all cap portfolio tilted to the secular growth in Chinese middle class consumption.
17 May 2018 Blast off!
As China A-Shares join the global indices, many investors remain structurally underexposed to this exciting region...
19 Apr 2018 What now for Asia?
We examine battered Asian equities amid talk of a trade war between the US and China...
30 Nov 2017 Race ready?
We analyse the outlook for emerging markets and, in particular, the genuine active funds that focus on them…
29 Nov 2017 Fund Analysis
A China-focused, multi-cap portfolio that has generated significant levels of alpha relative to the index...
02 Jun 2017 Finely balanced...
We take a closer look at the Asia Pacific ex Japan sector following a period of improved inflows into the open-ended sector and the recent outperformance of Asian equities...
26 Apr 2017 The greatest...
We use technical analysis to identify some of the best stock picking fund managers over the long-term...
View all

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