Fidelity China Special Situations has taken a fair amount of flack since its launch in 2010. Launched with renowned fund manager Anthony Bolton at its head, the investment trust has failed to live up to many investors’ expectations.
However, the trust beat the MSCI China index over Bolton’s tenure – something that tends to be overlooked. I cannot help but feel some of the media had some responsibility for scaring investors away at exactly the wrong time, following a short spell of poor performance in the trust’s early days. As I write, the trust is only around 3 per cent ahead of its launch price, though it is often forgotten the broader Chinese market has also been poor over this time.
That was the past. With 18 years’ investment experience and a similar philosophy to Bolton, Dale Nicholls took over management of the trust at the start of April.
Stockpicking drives the portfolio. Nicholls looks at companies’ growth over five to 10 years, seeking cash-generative businesses with the potential to reinvest capital in high-growth opportunities. He favours exceptional management teams.
Nicholls has worked closely with Bolton since the start of this year. The portfolio has not changed dramatically, though profits have been taken from some holdings such as Wing Hang Bank. The stock has since been sold amid a prospective takeover. A position in Tencent, one of the world’s largest internet companies, was also topped up after its share price fell by around 30 per cent amid a global sell-off in the technology sector. The stock has since recovered.
The big story is China’s shift from an investment-led to a consumption-led economy. Consumer-related sectors could benefit from China’s increasingly affluent middle-class, while government reform, such as greater rights for migrant workers, should boost consumer power.
Greater domestic consumption could also positively impact the technology sector. There are already over 500 million internet users in China, yet internet usage is underpenetrated relative to the developed world. Online consumption is also gaining traction. This trend could attract Westerners when Alibaba lists on the New York Stock Exchange, expected to take place in September. Expected to be valued at around $150bn (£89bn), Alibaba is a profitable online commerce company, similar to Amazon and eBay. This is exactly the catalyst that could spark interest in Chinese shares once more.
Nicholls thinks the Chinese stock market has been held back by wider economic concerns, which I tend to agree with. But there are bright spots such as the consumption story.
Second, the banking system has been a worry, which the Chinese bears like to shout about.
Third, in the property market prices have started to fall but incomes have been rising, suggesting affordability has not been impacted. Overall, Nicholls remains upbeat in his outlook for China. Chinese firms are delivering strong earnings growth, yet share prices are being held back by wider economic concerns. It is hard to know what will be the catalyst to change this but a successful listing of a firm such as Alibaba will improve sentiment.
The trust is now trading on a discount of 11 per cent and gearing stands at 22 per cent, representing Nicholls’ confidence towards the market. Fidelity also operates an active share buyback policy. If you are positive on China, this trust looks like a bargain to me.
Mark Dampier is head of research at Hargreaves Lansdown