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Research: Investment Companies
Fidelity China Special Situations (FCSS) aims to deliver long-term capital growth, following a bottom-up approach to investing in companies listed in China, and Chinese companies listed elsewhere. The trust marks its 10th anniversary in April 2020 and, since inception, it has generated an annualised NAV total return of 11%. Chinese equities have been relatively out of favour for some time against a backdrop of the US-China trade dispute, Hong Kong political protests and, more recently, the coronavirus. The manager, Dale Nicholls, is finding exciting opportunities at attractive valuations, and continues to focus primarily on smaller companies that can benefit from long-term secular growth trends.
Written by
Fidelity China Special Situations |
Weak sentiment providing opportunities |
Investment trusts |
19 February 2020 |
Share price/discount performance
Three-year performance vs index
Gearing
Analysts
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Fidelity China Special Situations (FCSS) aims to deliver long-term capital growth, following a bottom-up approach to investing in companies listed in China, and Chinese companies listed elsewhere. The trust marks its 10th anniversary in April 2020 and, since inception, it has generated an annualised NAV total return of 11%. Chinese equities have been relatively out of favour for some time against a backdrop of the US-China trade dispute, Hong Kong political protests and, more recently, the coronavirus. The manager, Dale Nicholls, is finding exciting opportunities at attractive valuations, and continues to focus primarily on smaller companies that can benefit from long-term secular growth trends.
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Solid NAV outperformance versus the benchmark since inception |
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Source: Refinitiv, Edison Investment Research |
The market opportunity
China’s GDP growth rate is slowing, and the recent outbreak of the coronavirus is likely to further reduce expectations for 2020. However, the economy is still relatively robust compared to the developed world. Furthermore, the headline GDP growth belies many areas of economic activity that are vibrant, with strong prospects for multi-year high growth. Investors seeking exposure to Chinese equities may benefit from a selective bottom-up approach, with a long-term horizon.
Why consider investing in FCSS?
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Dale Nicholls has over 24 years’ investment experience and a successful track record managing the trust since April 2014.
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Rigorous, research-driven approach to investing in China, supported by Fidelity’s well-resourced team of analysts based in China and Asia.
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Offers direct exposure to China’s continuing growth, with a bias to less well-researched small- and mid-sized companies.
Proactive board manages discount volatility
In June 2019, the board adopted a formal policy aiming to maintain the discount in single digits. FCSS currently trades at a 9.3% discount to cum-income NAV, and the board has been proactive in helping to stabilise the volatility of the discount and the trust’s share price during the coronavirus outbreak. There is scope for the discount to narrow should investor sentiment towards China improve.
Exhibit 1: Trust at a glance
Investment objective and fund background |
Recent developments |
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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, and Chinese companies listed elsewhere. It may also invest in listed companies with significant interests in China. Futures, options and CFDs are used to provide gearing, as well as to take short positions. |
■ 27 November 2019: Interim results to 30 September 2019 – NAV TR -5.9% versus benchmark TR -3.3%, share price TR -6.0%. ■ 5 June 2019: Adoption of formal single-digit discount control policy. ■ 5 June 2019: Annual results to 31 March 2019 – NAV TR -5.3% versus benchmark TR +0.9%, share price TR -0.3%. ■ 5 June 2019: FY19 dividend increased by 10% to 3.85p per share. |
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Forthcoming |
Capital structure |
Fund details |
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AGM |
July 2020 |
Ongoing charges |
1.0% end-September 2019 |
Group |
Fidelity International |
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Annual results |
June 2020 |
Net market gearing* |
19.2% |
Manager |
Dale Nicholls |
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Year end |
31 March |
Annual mgmt fee |
Variable: 0.7–1.1% of net assets |
Address |
Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP |
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Dividend paid |
July 2020 |
Performance fee |
None |
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Launch date |
April 2010 |
Trust life |
Indefinite |
Phone |
0800 41 41 10 |
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Continuation vote |
No |
Loan facilities |
US$150m revolving |
Website |
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Dividend policy and history (financial years) |
Share buyback policy and history (financial years) |
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Although focused on capital growth, FCSS pays an annual dividend, which has been increased every year since its inception. |
FCSS has authority to buy back up to 14.99% and allot up to 10% of its shares in issue. A formal single-digit discount control policy was adopted in June 2019. |
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Shareholder base (as at 31 January 2020) |
Portfolio exposure by market cap (as at 31 December 2019) |
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Top 10 holdings (as at 31 December 2019) |
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Source: Fidelity China Special Situations, Edison Investment Research, Bloomberg, Morningstar. Note: *Gearing net of short positions. **Adjusted for gearing and index hedges (holdings data may differ from non-adjusted data displayed in FCSS’s factsheet). ***N/A where not in end-December 2018 top 10.
The fund manager: Dale Nicholls
The manager’s view: well-positioned portfolio
Nicholls believes that investor sentiment towards China has been dented over the past 18 months by media headlines relating to the US-China trade dispute and, more recently, the coronavirus outbreak. On the latter, he believes that the economic impact may be greater than that associated with the SARS virus in 2003, and the recovery period could be more drawn out. The Chinese government has already responded with supportive economic policies, and it may introduce further measures to help underpin the economy. Nicholls believes that the economic impact of the coronavirus will differ from sector to sector, and that some may emerge stronger. For example, online activities should fare relatively well, while there may be a boost for the healthcare and insurance sectors. He believes the trust is well positioned to benefit from these trends, and is closely monitoring how companies navigate this difficult period.
Looking longer term, Nicholls notes that China’s GDP growth rate is on a slowing trend, but is nevertheless relatively robust compared to developed economies. Furthermore, he explains that the headline figures belie many areas of very strong secular growth, mostly within domestic sectors. He believes domestic consumption will be the future driver for the economy, and key trends include consumers trading up in goods and services as incomes rise. He also finds leading technological innovation among Chinese companies across a broad range of sectors, including financial services and healthcare.
The portfolio
Chinese equities are relatively out of favour and global portfolios are underweight this market. This has presented the manager with opportunities to add to a number of existing positions where he feels stocks have been oversold relative to their long-term prospects. These include online travel agent, Trip.com. The company has a dominant market position, which Nicholls believes to be unassailable in the mid- to high-end segment. In his view, although the environment for travel is bleak in the short term, prospects for long-term structural growth are very bright, with just 13% of Chinese nationals owning a passport.
The political discontent in Hong Kong has been punitive for its retail sector, especially the luxury segment, and Nicholls added to jewellery retailer Luk Fook. Although the company’s origins are in Hong Kong, its growth has been driven by China, which accounts for over half of its profits. The share price has fallen to levels where the manager sees compelling long-term value and, in his view, no longer ascribes value to its long-established Hong Kong business.
Nicholls also added to the portfolio’s holding in WuXi AppTec (WuXi), a leading contract research organisation (CRO) for the pharmaceuticals, biotech and medical device industries. The company is the largest CRO in Asia and one of the leading players globally. The manager believes increasing demand for CROs is a global structural trend, and that WuXi is particularly well-positioned to benefit given its strong track record in drug research, and established long-term relationships with its customers (which include all of the top 20 global pharmaceutical companies by 2017 revenues).
The manager topped up the position in internet data centre company, 21Vianet. The company is the leading carrier-neutral player in China, providing hosting, cloud and business virtual private network (VPN) services. Nicholls notes that China’s internet infrastructure industry is among the fastest growing in the world, underpinned by increasing consumer usage of the internet via mobile phones, and demand for cloud and IT services from corporates. 21Vianet added Alibaba as a corporate client last year, which reinforced the manager’s positive view on the company’s competitive advantages.
The portfolio is predominantly domestically focused, with around 90% of revenues for the underlying holdings derived from Greater China (China, Hong Kong, Macau and Taiwan), and just 1.5% exposed to the US. During Q419, the manager shifted the portfolio, becoming slightly more defensive, including reducing net gearing from 22% to 19% by end-December 2019. More recently, in response to the increased uncertainty for near-term market prospects caused by the coronavirus, he has also used derivatives to add downside protection to the portfolio.
Performance: Solid track record
As shown in Exhibits 3 and 4, FCSS has a solid performance track record, and its NAV total return has outpaced its benchmark over most periods shown, with the exception of three years. Over that period, the performance of the MSCI China Index has, at times, been led by a relatively narrow set of large-cap names. FCSS’s focus on investing with a long-term horizon, and with a bias in favour of small- and mid-cap companies, means the trust’s returns can diverge meaningfully from the index. FCSS has significantly outperformed the MSCI China Small Cap Index over all periods shown.
Exhibit 2: Five-year discrete performance data
12 months ending |
Share price |
NAV |
MSCI China |
MSCI China Small Cap (%) |
MSCI World (%) |
CBOE UK All Companies (%) |
31/01/16 |
(9.4) |
(4.7) |
(16.5) |
(6.5) |
1.1 |
(5.3) |
31/01/17 |
49.2 |
42.3 |
39.5 |
30.0 |
32.8 |
20.9 |
31/01/18 |
45.0 |
40.6 |
43.8 |
14.0 |
11.9 |
11.3 |
31/01/19 |
(21.5) |
(20.3) |
(13.3) |
(13.9) |
1.6 |
(3.9) |
31/01/20 |
13.2 |
9.2 |
5.8 |
(4.9) |
18.2 |
10.5 |
Source: Refinitiv. Note: All % on a total return basis in pounds sterling.
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Exhibit 3: Investment trust performance to 31 January 2020 |
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Price, NAV and benchmark total return performance, one-year rebased |
Price, NAV and benchmark total return performance (%) |
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Source: Refinitiv, Edison Investment Research. Note: Three-, five- and SI (since inception) performance figures annualised. Inception date is 16 April 2010. |
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Exhibit 4: Share price and NAV total return performance, relative to indices (%)
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One month |
Three months |
Six months |
One year |
Three years |
Five years |
SI |
Price relative to MSCI China |
0.2 |
2.9 |
(0.5) |
7.0 |
(2.3) |
13.4 |
27.5 |
NAV relative to MSCI China |
1.7 |
2.2 |
0.9 |
3.3 |
(7.2) |
8.0 |
41.1 |
Price relative to MSCI China Small Cap |
0.2 |
8.1 |
8.5 |
19.0 |
38.0 |
53.6 |
116.2 |
NAV relative to MSCI China Small Cap |
1.8 |
7.3 |
10.1 |
14.8 |
31.1 |
46.3 |
139.2 |
Price relative to MSCI World |
(4.0) |
2.5 |
(3.8) |
(4.2) |
(4.1) |
(3.4) |
(15.5) |
NAV relative to MSCI World |
(2.6) |
1.8 |
(2.4) |
(7.5) |
(8.9) |
(8.0) |
(6.5) |
Price relative to CBOE UK All Companies |
(0.7) |
4.2 |
(3.0) |
2.5 |
9.1 |
28.9 |
23.9 |
NAV relative to CBOE UK All Companies |
0.8 |
3.5 |
(1.6) |
(1.1) |
3.6 |
22.7 |
37.1 |
Source: Refinitiv, Edison Investment Research. Note: Data to end-January 2020. Inception date is 16 April 2010. Geometric calculation.
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Exhibit 5: NAV total return performance relative to benchmark over five years |
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Source: Refinitiv, Edison Investment Research |
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