Confident in the long-term outlook

Fidelity China Special Situations 25 January 2019 Review
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Fidelity China Special Situations

Confident in the long-term outlook

Investment trusts

25 January 2019

Price

194.6p

Market cap

£1,069m

AUM

£1,585m

NAV*

220.9p

Discount to NAV

11.9%

*Including income. As at 24 January 2019.

Yield

1.8%

Ordinary shares in issue

549.6m

Code

FCSS

Primary exchange

LSE

AIC sector

Country Specialists: Asia Pacific

Benchmark

MSCI China

Share price/discount performance

Three-year performance vs index

52-week high/low

268.0p

182.4p

307.6p

204.7p

*Including income.

Gearing

Gross market gearing*

23.7%

Net market gearing*

17.8%

*As at 31 December 2018.

Analysts

Gavin Wood

+44 (0)20 3681 2503

Mel Jenner

+44 (0)20 3077 5720

Fidelity China Special Situations is a research client of Edison Investment Research Limited

Fidelity China Special Situations (FCSS) had a challenging year in 2018, heavily influenced by the correction in Chinese equities that was longer and deeper than in other major stock markets. However, the trust’s longer-term returns have been strong, with an impressive 14.0% annualised NAV total return over five years, which is well ahead of its benchmark MSCI China index, as well as the MSCI World and FTSE All-Share indices. The market fall created compelling opportunities for manager Dale Nicholls, who added to holdings in high-quality companies that were trading at historically low valuations. The manager is optimistic about the long-term outlook, but he anticipates that volatility may persist and cut net market gearing from c 23% to c 18% in December 2018, mainly via index hedges.

12 months ending

Share price
(%)

NAV
(%)

MSCI China

(%)

MSCI China Small Cap (%)

MSCI World

(%)

FTSE All-Share (%)

31/12/14

27.4

32.5

15.0

5.9

12.1

1.2

31/12/15

8.2

12.5

(2.3)

9.5

5.5

1.0

31/12/16

20.3

17.5

20.6

12.2

29.0

16.8

31/12/17

39.8

40.3

41.0

13.8

12.4

13.1

31/12/18

(18.8)

(21.6)

(13.7)

(14.5)

(2.5)

(9.5)

Source: Thomson Datastream. Note: All % on a total return basis in pounds sterling.

Investment strategy: Unconstrained stock selection

Following a bottom-up process, unrestricted by top-down allocations, the manager seeks cash-generative companies with experienced management in structurally faster-growing areas of the economy. The trust has a bias to small/mid-cap stocks, which tend to be under-researched and often provide better opportunities. Fidelity’s extensive analyst team conducts in-depth company research, with site visits and company meetings a key part of the investment process, and risk management is a priority. Contracts for difference (CFDs) are used to add gearing, take short positions and hedge market risks, alongside futures and options. Unlisted holdings may represent up to 10% of the portfolio and there is a 15% limit on short positions.

Market outlook: Relatively attractive fundamentals

The pace of China’s GDP growth is favourable for corporate earnings prospects, although it is broadly expected to slow over time. Currently, deleveraging policies are affecting business and consumer confidence, along with ongoing concerns over trade with the US. However, the resulting slowdown has largely been reflected in the 2018 stock market correction and Chinese equity valuations are now lower than for many other major markets. While stock price volatility may remain elevated, a form of stimulus or a prospective resolution of the US-China trade dispute could act as a near-term catalyst for a stock market upturn. Longer term, increasing inclusion of Chinese shares in global equity indices could support higher valuation levels.

Valuation: Discount at narrow end of three-year range

FCSS’s current 11.9% share price discount to NAV (including income) is towards the narrow end of its 9.7% to 20.0% three-year range and compares with its 12.1%, 13.9% and 13.4% averages over one, three and five years respectively.

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

Fidelity China Special Situations aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China or Hong Kong and Chinese companies listed elsewhere. It may also invest in listed companies with significant interests in China and Hong Kong. Futures, options and CFDs are used to provide gearing, as well as to take short positions.

23 November 2018: Interim results to 30 September 2018 – NAV TR -9.1% versus benchmark TR -4.0%; share price TR -8.8%.

22 October 2018: Vera Hong Wei resigned from board, effective 31 October 2018.

25 July 2018: Mike Balfour appointed as a director, effective 1 October 2018; John Ford stepped down from the board, having departed Fidelity at end-2017; David Causer to step down at 2019 AGM after nine years as a director.

1 July 2018: New variable 0.70-1.10% management fee effective, replacing fixed management fee and variable performance fee structure.

Forthcoming

Capital structure

Fund details

AGM

July 2019

Ongoing charges

1.11% (1.35% incl interest chgs)

Group

Fidelity International

Final results

June 2019

Net market gearing*

17.8%

Manager

Dale Nicholls

Year end

31 March

Annual mgmt fee

Variable: 0.7-1.1% of net assets (see page 7)

Address

Beech Gate, Millfield Lane,

Lower Kingswood, Tadworth, Surrey, KT20 6RP

Dividend paid

July 2019

Performance fee

None

Launch date

April 2010

Trust life

Indefinite

Phone

0800 41 41 10

Continuation vote

No

Loan facilities

US$150m revolving

Website

www.fidelity.co.uk/chinaspecial

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

Although focused on capital growth, as an investment trust FCSS pays out at least 85% of income received as an annual dividend.

FCSS has authority to buy back up to 14.99% of its shares (at a discount) and allot up to 10% (at a premium). There is no strict discount control mechanism.

Shareholder base (as at 31 December 2018)

Portfolio exposure by market cap (as at 31 December 2018)

Top 10 holdings (as at 31 December 2018)

Portfolio weight %**

Benchmark weight (%)

Active weight vs benchmark (%)

Company

Country

Sector

31 Dec 2018

31 Dec 2017***

Tencent

China

Communication services

11.3

13.3

15.7

(4.4)

Alibaba

China

Consumer discretionary

7.2

8.0

12.2

(5.0)

China Pacific Insurance

China

Financials

3.7

4.1

0.6

3.1

China Life Insurance

China

Financials

2.2

2.4

1.1

1.1

Hutchison China MediTech

Hong Kong

Healthcare

2.0

3.4

0.1

1.9

China MeiDong Auto

China

Consumer discretionary

1.8

N/A

0.0

1.8

Noah

China

Financials

1.7

1.6

0.1

1.6

China Petroleum

China

Energy

1.5

1.5

1.3

0.2

Undisclosed

China

Information technology

1.5

N/A

0.0

1.5

Netease

China

Communication services

1.5

N/A

1.3

0.2

Top 10 (% of holdings)

34.5

39.6

Source: Fidelity China Special Situations, Edison Investment Research, Bloomberg, Morningstar. Note: *Gearing net of short positions. **Adjusted for gearing and index hedges. ***N/A where not in end-December 2017 top 10.

Market outlook: Promising longer-term fundamentals

The Chinese stock market correction in 2018 was longer and deeper than the stock market declines in many other regions, with the MSCI China index falling 25% in sterling terms from mid-June to mid-October, compared with a 16% drop in the MSCI World index between late August and late December. The weakness of Chinese equities in 2018 broadly offset their outperformance in 2017, and over three years to end-December 2018, the MSCI China and MSCI World indices delivered reasonably similar returns, significantly ahead of the FTSE All-Share index (Exhibit 2 chart). The market fall and strong underlying corporate earnings growth in 2018 have led to a decline in the Chinese stock market forward P/E multiple to 10.0x at end-December 2018, slightly lower level than emerging markets overall, and at a c 26% discount to developed markets (Exhibit 2 table).

Exhibit 2: Market performance and valuation

Chinese equities performance vs World and UK indices (£ terms)

Chinese equities valuation metrics vs World and UK indices

 

Forward P/E (x)

Price/book
(x)

Dividend yield (%)

China

10.0

1.5

2.4

Developed markets

13.5

2.2

2.8

Emerging markets

10.5

1.5

2.9

World

13.0

2.1

2.8

UK

11.2

1.6

5.0

Source: Thomson Datastream, Edison Investment Research, MSCI. Note: Valuation data as at end-December 2018.

The International Monetary Fund’s (IMF) October 2018 forecasts show 6.1% annualised Chinese GDP growth from 2018 to 2023, compared with 3.8% for other emerging market economies and 1.8% for advanced economies. China’s superior economic growth provides a favourable backdrop for corporate earnings growth, which supports a positive market outlook, alongside relatively low valuation metrics. While elevated volatility may remain a feature of the Chinese stock market due to changing views over the risk of economic slowdown, progress towards resolution of the US-China trade dispute could act as a catalyst for a near-term re-rating of Chinese stocks. Longer term, the rising inclusion of Chinese equities in global market indices could support higher valuation levels.

Fund profile: Chinese equity growth portfolio

Launched in April 2010, FCSS is an LSE-listed investment trust that aims to generate long-term capital growth from a diversified portfolio of Chinese equities, primarily comprising companies listed in China or Hong Kong, as well as Chinese companies listed on other exchanges. Performance is benchmarked against the MSCI China index (sterling adjusted), but exposures are unconstrained by index weightings. Portfolio construction is based on in-depth, bottom-up analysis conducted by Fidelity’s extensive team of research analysts, who cover c 600 stocks in the Greater China investment universe. The manager favours investing in areas of the economy with stronger structural growth prospects – mainly as a result of rising domestic consumption and ongoing structural reforms – and the trust also has a bias to small/mid-cap companies. The portfolio typically comprises 130-140 stock holdings, and includes unlisted investments as well as short positions. Gearing is permitted up to 30% of net assets, with CFDs used in addition to bank borrowings. Fidelity International is FCSS’s investment manager, and Dale Nicholls has managed the portfolio since April 2014. Based in Hong Kong, Nicholls has 15 years’ experience investing in China.

The fund manager: Dale Nicholls

The manager’s view: Confident in the long-term outlook

Even if there is further near-term market weakness, Nicholls remains confident in the long-term outlook for the trust’s investments. While acknowledging that the Chinese stock market is likely to remain volatile, he is reassured by current low valuations and negative factors already being well publicised. The manager emphasises that medium-term earnings growth prospects for portfolio companies remain strong, even with the prospective backdrop of a broad economic slowdown. He also reiterates that portfolio companies are predominantly focused on the domestic Chinese market with only 1.5% of revenues derived from the US.

Nicholls highlights that the portfolio included a number of strong performers in 2018 such as hotpot condiment supplier Yihai International, which continued to deliver strong growth, helped by its collaboration with restaurant chain Haidilao, which successfully listed on the Hong Kong stock exchange in September 2018. However, FCSS’s lack of exposure to some of the stronger performers in the benchmark index contributed to portfolio underperformance. Additionally, certain portfolio holdings were marked down sharply, such as apparel e-commerce platform Vipshop, which faced a challenging environment with strong competition, and software and internet services company Kingsoft, which experienced delays in launching new online games.

The manager comments that recent portfolio activity has centred around compelling opportunities created by the relatively indiscriminate nature of the market sell-off. He points out that certain sectors, such as insurance and investment companies, are particularly market sensitive and many companies have seen their valuations drop to historically low levels which significantly discount their long-term growth prospects. Although some ‘A’ shares have recently been included in MSCI indices, which has supported share prices, others have fallen to historically low valuations and FCSS has made selective investments in industrial companies in the ‘A’ share market, in segments such as artificial intelligence and surveillance. Nicholls had increased the trust’s net market gearing from c 15% in March 2018 to c 23% at end-November 2018, but cut it to c 18% at end-December 2018, mainly through increasing index hedge positions.

Asset allocation

Investment process: Fundamentals-driven, bottom-up selection

Portfolio construction is driven by bottom-up stock selection based on company fundamentals, with no restrictions imposed over sector allocations. The portfolio manager is supported by Fidelity’s team of 23 research analysts (based in Hong Kong, Singapore and Shanghai) who conduct detailed analysis on Chinese equities. The manager seeks to invest in highly cash-generative companies run by capable management teams, and focuses on industries with above-average structural growth prospects within the Chinese economy. The portfolio has a bias to small- and mid-cap stocks, as the manager tends to find greater investment opportunities in this area of the market, due to stocks being under-researched and valuations not reflecting companies’ long-term growth prospects. Company meetings and site visits are key aspects of the research process for assessing prospective investments, as well as monitoring existing holdings. Risk management is an important part of the process, particularly as investing in small-cap stocks can carry higher risks.

The same overall research-intensive approach is applied to investments in listed and unlisted companies, as well as short positions. Individual holdings are restricted to 15% of the portfolio at the time of acquisition, with a 10% limit on the total value of unlisted investments and a 15% limit on total short exposure. Investments in China ‘A’ shares are made using Fidelity’s Qualified Foreign Institutional Investor (QFII) licence, as well as via brokers who hold a QFII.

Current portfolio positioning

FCSS’s portfolio is diversified across 130-140 investments, but is relatively concentrated in the top 10 holdings, which accounted for 34.5% of the portfolio at end-December 2018 (Exhibit 1). The two largest holdings, Tencent and Alibaba, represented 18.5% of the portfolio, but this is underweight relative to their 27.9% combined index weight. Certain Global Industry Classification Standard (GICS) sector definitions were changed in September 2018, leading to the reclassification of Tencent and Alibaba from information technology to communication services and consumer discretionary, respectively, and this contributed to the largest changes in FCSS’s sector exposure over the year to end-December 2018 (Exhibit 3).

Exhibit 3: Portfolio sector exposure vs benchmark (% unless stated)

Portfolio end-Dec 2018

Portfolio end-Dec 2017

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

Consumer discretionary

27.2

26.0

1.2

20.0

7.2

1.4

Communication services

19.2

1.1

18.0

27.4

(8.2)

0.7

Financials

14.2

11.0

3.2

23.3

(9.0)

0.6

Information technology

14.0

32.3

(18.3)

2.5

11.5

5.6

Industrials

10.1

11.4

(1.4)

5.4

4.7

1.9

Healthcare

6.1

5.2

0.9

2.8

3.3

2.2

Consumer staples

5.8

6.2

(0.5)

2.6

3.2

2.2

Energy

1.7

2.1

(0.5)

5.2

(3.5)

0.3

Materials

1.1

1.1

(0.0)

2.1

(1.0)

0.5

Real estate

0.5

1.4

(0.9)

5.8

(5.3)

0.1

Utilities

0.3

2.1

(1.7)

3.1

(2.8)

0.1

100.0

100.0

100.0

Source: Fidelity China Special Situations, Edison Investment Research. Note: Adjusted for gearing.

FCSS’s portfolio is broadly diversified but exposures are highly differentiated from the index, with sector weightings broadly reflecting the focus on faster-growing areas of the Chinese economy, mainly driven by rising domestic consumption and structural reforms. Information technology and consumer discretionary are the trust’s most notable overweights, with financials and communication services the largest underweights. FCSS does not hold any bank shares, and its 10 largest underweight stock positions include four banks, which together represent 12.3% of the index.

Two of FCSS’s prior unlisted holdings, Aurora Mobile and Meituan Dianping listed during 2018, and two new unlisted stocks were added: SenseTime – an artificial intelligence technology company, and an unnamed leading drone manufacturer. At end-December 2018, the current four unlisted investments represented c 5% of the portfolio. Some short positions, particularly in more cyclical stocks, were closed as share prices fell during the second half of 2018, but new short positions were added, and short exposure equated to c 3% of net assets at end-December 2018.

Performance: Ahead of benchmark over longer term

As illustrated in Exhibit 4, FCSS’s weak shorter-term performance largely reflects the sell-off in Chinese equities, with the trust’s NAV dropping 31% between mid-June and mid-October 2018 when the MSCI China index fell 25% in sterling terms. Underperformance during this period of market weakness is not entirely unexpected given the trust’s c 20% net market gearing, which amplifies both positive and negative returns. The trust’s longer-term returns have been reasonably strong, with its share price and NAV total returns outperforming the MSCI China index over five years to end-December 2018 and since its inception in 2010. From its launch to end-December 2018, which also includes a 32% fall in NAV during 2011, FCSS has achieved a 10.0% pa NAV total return, meaningfully ahead of the MSCI China index’s 6.1% pa return.

While underperforming over one year, FCSS’s NAV total return is ahead of the FTSE All-Share index over three and five years and since the trust’s inception, as shown in Exhibit 5. FCSS has also outperformed the MSCI World index over five years.

Exhibit 4: Investment trust performance to 31 December 2018

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Thomson Datastream, Edison Investment Research. Note: Three-year, five-year and SI (since inception) performance figures annualised. Inception date is 16 April 2010.

Exhibit 5: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

Since inception

Price relative to MSCI China

0.5

(4.0)

(8.8)

(5.9)

(6.9)

14.2

21.9

NAV relative to MSCI China

(1.4)

(5.5)

(11.0)

(9.2)

(11.9)

16.8

36.9

Price relative to MSCI China Small Cap

(2.0)

(3.5)

(5.5)

(5.0)

25.1

48.8

78.1

NAV relative to MSCI China Small Cap

(3.8)

(4.9)

(7.8)

(8.3)

18.5

52.3

100.1

Price relative to MSCI World

2.1

(1.2)

(17.3)

(16.7)

(3.4)

12.6

(12.4)

NAV relative to MSCI World

0.2

(2.7)

(19.3)

(19.6)

(8.6)

15.3

(1.6)

Price relative to FTSE All-Share

(1.7)

(2.3)

(12.3)

(10.3)

14.3

54.1

20.7

NAV relative to FTSE All-Share

(3.6)

(3.7)

(14.4)

(13.4)

8.2

57.7

35.6

Source: Thomson Datastream, Edison Investment Research. Note: Data to end-December 2018. Inception date is 16 April 2010. Geometric calculation.

FCSS’s outperformance over five years includes shorter periods of relative strength and weakness, highlighting the differentiation in the trust’s performance from the MSCI China index (Exhibit 6).

Exhibit 6: NAV total return performance relative to benchmark over five years

Source: Thomson Datastream, Edison Investment Research

Discount: At the narrower end of its three-year range

As illustrated in Exhibit 7, FCSS’s share price discount to NAV (including income) has largely remained in a 10–15% range since October 2016. The discount reached a three-year wide point of 20% in early 2016, when the MSCI China index had fallen by c 40% (in sterling terms) from its 2015 peak, which compares to its c 25% fall during 2018. FCSS’s current 11.9% discount is towards the narrow end of its 9.7% to 20.0% three-year range and compares with its 12.1%, 13.9% and 13.4% averages over one, three and five years respectively. Since its launch in April 2010, FCSS’s shares have traded between a 13.2% premium and a 23.4% discount to NAV, usually with a strong influence from changes in broad investor sentiment towards Chinese equities.

Exhibit 7: Share price discount to NAV (including income) over three years (%)

Source: Thomson Datastream, Edison Investment Research

Capital structure and fees

FCSS has 549.6m ordinary shares in issue, with a further 21.8m shares held in treasury. The trust has authority to buy back up 14.99% of its outstanding shares at a discount to NAV and allot up to 10% of issued capital at a premium. There is no strict discount control mechanism, and buybacks have been modest since FY16 (Exhibit 1), with 1.8m shares (0.3% of issued capital) repurchased so far in FY19. Borrowing is restricted to 25% of net assets, while total gearing is permitted up to 30% of net assets. Gearing is achieved via a fully-drawn US$150m credit facility (equating to c 8% gearing), supplemented by long CFDs on a number of portfolio holdings. The credit facility runs to February 2020 and charges interest at a fixed 3.01% pa, while CFDs incur a lower cost. Short positions on individual stocks are also taken using CFDs, while market risk is hedged using CFDs, index futures and options. At end-December 2018, FCSS had 23.7% gross market gearing and 17.8% net market gearing (net of short positions).

Since July 2018, FCSS has paid a management fee of 0.90% pa on net assets, with a ±0.20% variation fee, based on the trust’s NAV returns relative to the benchmark index. This new variable fee structure has reduced the range of potential fees payable to 0.7-1.1% pa, from 1.0-2.0% pa previously. A £0.1m annual administration fee is also paid to the manager (£0.6m prior to FY19). Management fees and finance costs are allocated 75% to capital and 25% to revenue, reflecting historical contributions to total returns. The published FY18 ongoing charge of 1.35% includes interest charges (0.24pp), and the comparable underlying 1.11% charge was slightly lower than the 1.16% published FY17 ongoing charge.

Dividend policy and record

FCSS pays an annual dividend in July/August each year, distributing at least 85% of its revenue earnings, as required to maintain its investment trust status. The fund has a capital growth objective and no commitment has been made in relation to growing or maintaining the dividend. However, the manager’s focus on cash-generative companies has led to the portfolio consistently producing a material level of income, and FCSS’s dividend has been increased every year since its inception. The allocation of management fees and finance costs between revenue and capital accounts was revised in FY18, which increased the amount available for distribution. As a result, the FY18 dividend was increased by 40.0% to 3.50p (Exhibit 1), which equates to a 1.8% dividend yield, based on the current share price. While the annual payout will vary according to portfolio income generation, FCSS has revenue reserves equating to 2.06p per share, which could be used to smooth future dividend distributions.

Peer group comparison

Exhibit 8 shows a comparison of FCSS with a range of open- and closed-ended funds that invest primarily in Chinese equities. FCSS is a member of the AIC Country Specialists: Asia Pacific sector, but JPMorgan Chinese is the only other fund in the sector that focuses on China, so we show averages for the AIC Asia Pacific ex-Japan sector, which is more relevant due to its 39% aggregate exposure to China & Greater China. We also include IA China/Greater China open-ended funds larger than £300m with more than five years’ track record in the comparison.

FCSS’s NAV total return is lower than the open- and closed-ended peer group averages over one and three years, but is clearly ahead of the averages over five years and is the highest of all funds shown over the 8.8 years since its inception in April 2010. The shorter-term weak relative performance is not unexpected given the scale of the Chinese market correction in 2018 relative to other markets, and FCSS’s relatively high gearing, which amplifies positive and negative returns. The trust’s NAV total return is better than JPMorgan Chinese over one year, marginally weaker over three years, and appreciably higher over the longer periods shown. FCSS’s ongoing charge is higher than the AIC Asia Pacific ex-Japan sector average, but is one of the lowest among its open- and closed-ended single-country fund peers. FCSS has significantly higher gearing than average among its closed-ended peers, although its net market gearing (net of short positions) is slightly more modest at c 18%. FCSS’s share price discount to NAV is wider than the 11.2% average for the AIC Country Specialists: Asia Pacific sector, and its dividend yield is above average among single-country fund peers.

Exhibit 8: Selected peer group investing in Chinese equities as at 24 January 2019*

% unless stated

Market cap/ fund size £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
SI**

Discount (cum-fair)

Ongoing charge

Perf.
fee

Gearing

Dividend yield

Fidelity China Special Situations

1,069.5

(24.7)

56.9

98.6

134.2

(11.4)

1.11

Yes

124

1.8

JPMorgan Chinese

170.5

(28.6)

57.7

59.8

89.6

(12.1)

1.34

No

119

1.5

Asia Pacific ex-Japan average

360.0

(8.2)

58.8

65.4

109.0

(4.8)

1.01

103

2.1

Open-ended funds

Aberdeen Global Chinese Equity

393.6

(10.6)

50.3

45.2

51.8

1.98

No

0.0

Allianz China Equity

375.5

(17.3)

48.6

56.6

56.3

2.28

No

0.0

Barings Hong Kong China

1,162.5

(17.0)

55.6

58.5

46.4

1.70

No

0.1

Fidelity China Focus

3,587.0

(12.3)

71.9

99.1

91.7

1.93

No

0.9

First State Greater China Growth

442.9

(11.8)

62.9

67.4

118.9

1.81

No

0.5

GAM Star China Equity

335.7

(26.5)

31.4

25.4

1.10

No

0.6

HSBC GIF Chinese Equity

930.2

(20.0)

56.3

61.8

48.0

2.40

No

0.0

Invesco Hong Kong & China

347.5

(11.2)

59.6

65.8

105.3

1.69

No

0.4

Janus Henderson China Opps

1,157.0

(21.0)

64.0

73.4

86.1

1.72

No

0.5

JPM Greater China

366.7

(21.6)

56.4

61.0

1.82

No

0.5

Schroder ISF Greater China

895.6

(12.1)

76.1

87.4

97.5

1.86

No

2.7

Templeton China

327.7

(9.0)

64.7

56.2

43.9

2.45

No

0.0

Open-ended funds average

860.2

(15.9)

58.2

63.1

74.6

1.90

0.8

Source: Morningstar, Edison Investment Research. Note: *Performance to 23 January 2019. **SI is since FCSS’s inception in April 2010. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).

The board

Following the appointment of Mike Balfour as a director and the resignation of Vera Hong Wei (appointed March 2016), both in October 2018, FCSS’s board comprises five independent non-executive directors. The other board members are chairman Nicholas Bull (appointed director February 2010, chairman July 2016), senior independent director Elisabeth Scott (appointed November 2011), David Causer (appointed February 2010) and Peter Pleydell-Bouverie (appointed February 2010). Causer will step down from the board at the conclusion of the 2019 AGM, when he will have completed more than nine years’ service. The board has engaged a specialist consultancy firm to assist in identifying a suitable candidate for recruitment as a new director.

General disclaimer and copyright

This report has been commissioned by Fidelity China Special Situations and prepared and issued by Edison, in consideration of a fee payable by Fidelity China Special Situations. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Fidelity China Special Situations and prepared and issued by Edison, in consideration of a fee payable by Fidelity China Special Situations. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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