Profile: Fidelity’s Dale Nicholls on the fear behind valuations

Moving to Japan straight after university to explore the technology boom was a natural call for Fidelity’s Dale Nicholls.

The manager of the £790m China Special Situations investment trust has been focused on the Asia Pacific region for more than 20 years. Originally attracted by the strength of Japanese companies, he left his native Australia to set up home there in the late-1990s.

“Part of the reason I moved to Japan was a natural interest in business and that was a time when Japanese companies were doing very well globally. I wanted to go and experience that.”

But the country started to feel small for Nicholls after a few years and his interests soon spread to the rest of the continent. He says: “I was working on a number of different sectors and one was technology. If you are a technology analyst in Japan you have got to be well aware of what is happening in the rest of Asia because it is where the competition and the customers are.”

Nicholls, who is a fluent Japanese speaker and highly proficient in Chinese, started with Fidelity Worldwide Investments in its Tokyo’s office in 1996.

“I worked through a number of different sectors and started to manage some local investment trusts but it was really in 2003, when I took over the Pacific fund, that it became a full-time fund management job: my first core mandate.”

After just a year managing the fund,  the similarity of Nicholls’ investment style with Fidelity’s China-focused team brought him closer to the China Special Situations trust. He took over from veteran fund manager Anthony Bolton in 2014, while retaining management of the Pacific fund too.

He says: “China was always a major focus for me with the Pacific fund and a big source of ideas and contributors to performance. Over that period, being focused on that, anything style-wise tended to overlap. I suspect that having similar investment ideas was a factor behind the board’s decision for me to take over.”

Since Nicholls took charge, shares in the trust are up more than 30 per cent and nearly doubling the return of its benchmark, the MSCI China index. He is supported across both the vehicles he manages by 50 analysts, with over half of them purely focused on Chinese stocks.

Although times are currently hard for managers focused on emerging markets, Nicholls says the key challenges in fund management remain the same regardless of market conditions.

He says: “The challenge is always getting the best stocks in the portfolio. That is the constant process. Obviously we have been in a period of great volatility, particularly in the last six months, and you have to deal with that. However, that has actually provided some pretty good opportunities as well, which has been good, given the flexibility I have with the trust.”

For Nicholls, the real opportunity in China is consumption and new developments on increasing internet usage in the retail space, where he believes the country is ahead of the US.

“So much of the consumption story is going to happen naturally and that goes across goods and services. It is just a natural development of the middle class.

”The trend of things moving online is happening globally but you can argue it is happening a lot faster in China. If you look at ecommerce penetration, it has already gone beyond that in the US.”

Nicholls cites giant online retailer Alibaba as the biggest player but also holds fast-growing names such as Jingdong Mall and BysoftChina.

Another area of interest for the manager is healthcare. He says: “The healthcare sector needs to catch up in terms of social-enabling companies and the health insurance industry. These are themes that are going to increase.”

Nicholls is disappointed by the Chinese government’s intervention in stockmarket activity over the past few months. He says government policies and companies’ corporate governance will continue to play a critical role as the world’s second largest economy gradually attempts to open up its market.

“You have got to accept the Chinese government plays a big role in the economy, so you have got to be well aware of policies and how those are changing,” he says.

“Corporate governance generally is also challenging in China, alongside other emerging markets. Many companies have not been around for that long, so that is a risk you need to be factoring in when you look at any individual company because you want that extra level of valuation support.”

The Chinese government introduced a number of measures aimed at stabilising the A-share market earlier this year, starting with the People’s Bank of China cutting interest rates and the reserve requirement ratio.

This was followed by the suspension of IPOs, the injection of liquidity into the China Securities Finance Corporation to help support the market and the creation of a “stabilisation fund” by onshore brokers, which collected ¥120bn (£12bn). The government has also banned major shareholders from selling their own shares.

Just last month, the PBC cut base rates for the sixth time in 12 months by another quarter point to 4.35 per cent in an attempt to boost the economy.

Nicholls says: “The government intervention over the last few months has been disappointing.  The mid-term story for China is about opening up and liberalising the markets, yet we have seen a pretty heavy-handed reaction, which has been a backward step.”

However, following the recent falls in the market, Nicholls says things look “pretty compelling” from a valuation perspective.

He says: “There is a great deal of fear out there that is being reflected in valuations, which are close to their historical low. As a stockpicker, that sort of environment, with a lot of value and a lot of negative sentiment, is generally a good environment. I am more positive now than I was six months ago.”


2014-present: Fund manager, Fidelity China Special Situations PLC

2003-present: Fund manager, Fidelity Funds Pacific fund

2003-present: Portfolio manager, regional and China mandates at Fidelity

1999-2003: Portfolio manager, Japanese mandates at Fidelity

1996-2003: Research analyst, Japan, at Fidelity

1994-1996: Analyst at Bankers Trust Asia Securities