Fidelity Investments has established a Luxemburg-domiciled Sicav that invests mainly in companies based in mainland China and Hong Kong or those deriving most of their income from this region.
Unlike greater China funds which invest in the surrounding areas such as Taiwan, this fund is 90 per cent invested in China itself. In keeping with its name, the Fidelity china focus fund will contain no more than 50 holdings. A concentrated portfolio is intended to maximise exposure to the fund manager's best investment ideas without diluting returns through a larger number of holdings.
The fund will be managed by Patrick Lo, who joined Fidelity as a Hong Kong based analyst in 1997. He was appointed portfolio manager in 2003 to run the FF China fund, established at the same time. Although the fund is benchmarked against the MSCI Chine Index, Lo will not be bound to its constraints.
Lo will invest mainly in large caps with some exposure to small and mid caps that have good prospects for growth. He will use a bottom-up approach to stock selection, drawing heavily on Fidelity's network of analysts as well as first hand research. Lo meets the management teams of the companies he is considering for the portfolio which enables him to have a full understanding of how they operate and to assess their growth potential. Lo favours industry leaders, low-cost producers and companies that are successful in areas that competitors find it hard to break into. He believes companies with these characteristics are more likely to perform well throughout the economic cycle.
According to Fidelity, China is one of the fast growing economies in the world. Developed economies have tended to move in line with each other, whereas China is different and will diversify a clients' portfolio.
There is strong demand for China-produced goods both domestically and internationally. Fidelity notes that the emerging middle class in China has added to a rise in domestic consumption. Also the Government is promoting business through reforms, companies are more transparent and low interest rates are helping businesses to expand.
However, inflationary pressure could lead to interest rate rises and earnings growth could slow. Investors in this will be adventurous with a large portfolio that can withstand a higher risk and more volatile investment.