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Access Asian growth at a discount with Fidelity China Special Situations

Fidelity China Special Situations could be a good way to get into Asian long-term growth.
October 29, 2015

If like some investors you believe that the best time to buy is when others are selling, Asia might be an area of interest at the moment. MSCI Asia ex Japan Index is now near the level it reached in the late 1990s, a time of great turmoil in Asia, and Asian shares look similarly cheap if their market values are compared to their businesses' net assets - the price to book ratio. "In addition, China, the catalyst, is not as weak as the August panic suggested to some - markets tend to shoot first and ask questions later," says Brian Dennehy, managing director of fund research and dealing site FundExpert.co.uk.

IC TIP: Buy at 135p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Widest discount to NAV
  • Strong historical performance
  • Focus on consumer shares
  • Experienced manager
Bear points
  • Performance fee

Mr Dennehy also says that "experience says you should go with the funds that fell most".

So if you too think that markets have overreacted and the long-term growth story for Asia remains intact, you could consider a single-country China fund, as these are among the ones hit hardest over the past few months.

These include IC Top 100 Fund Fidelity China Special Situations (FCSS). This trust's share price is down 22.8 per cent over the past six months - more than broad indices such as MSCI AC Asia Pacific ex Japan. However, in the longer term this trust has a very strong record, beating this index over one, three and five years, as well as its own benchmark, MSCI China, and sector peer JPMorgan Chinese Investment Trust (JMC).

Dale Nicholls, manager of Fidelity China Special Situations, also argues that the recent correction in markets is overdone and says it is creating good buying opportunities. "The fundamental case for China remains intact: growth remains strong in a global context, especially in the area of consumption, which is supported by long-term trends such as urbanisation. The path for reform is set and this will continue to create opportunities, especially for innovative private companies. But stockpicking will be key."

Consumer stocks, where Mr Nicholls says growth remains strong, account for more than a third of the trust's assets. He has also proved his ability to pick stocks - the trust has made strong returns over one year (Mr Nicholls took over its management in 2014) - and he also has a strong record on previous funds, including Fidelity Funds Pacific Fund (LU1033664373).

The trust, trading on a discount to net asset value (NAV) of 15.6 per cent, is at one of the widest discount levels in its history, but if sentiment changes on Asia and its performance picks up, this could come back in.

There is no guarantee that the volatility in Asia is over: markets in that region and funds that invest in them might fall further. Fidelity China Special Situations might not return to outperformance and the discount might not tighten. Fidelity China Special Situations also has a high ongoing charge of 2.01 per cent, when its performance fee is added in

However, funds with specialist mandates have higher fees and if Fidelity China Special Situations continues to underperform, the performance fee will not be incurred. The trust's manager has proved that he can stay well ahead of markets when they are doing well, which compensates for the charges. And the overall charge is lower than it used to be due to a cut in the base fee - at the end of its March 2014 financial year it was 2.47 per cent.

So if you have a long-term time horizon and can take some volatility along the way, Fidelity China Special Situations could offer a good entry point to Asia's long-term consumer growth story. Buy.

 

FIDELITY CHINA SPECIAL SITUATIONS (FCSS)

PRICE135pGEARING25%
AIC SECTOR Country Specialists: Asia PacificNAV141.07p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV15.60%
MARKET CAP£731.2mYIELD1.00%
ONGOING CHARGE2.01%MORE DETAILSfidelity.co.uk
SET-UP DATE: 19 April 2010 

Source: Morningstar

 

Performance

 3-month share price return (%) 6-month share price return (%)1-year share price return (%)3-year cumulative share price return (%)5-year cumulative share price return (%)
Fidelity China Special Sits-17.2 -22.8 13.1 20.4 2.0
JPMorgan Chinese Ord-12.0 -22.7 4.0 9.0 1.1
MSCI AC Asia Pac Ex JPN PR USD-9.8 -19.0 -6.1 -0.1 -1.2
MSCI China PR EUR-15.3 -26.8 5.2 3.5 -1.6
AIC Asia Pacific - Excluding Japan sector average -7.7 -14.6 -2.9 0.3 -2.4

Source: Morningstar, as at 22 October 2015

 

Top 10 holdings as at 31 August 2015 (%)

Tencent 9.5
Ping An Insurance 5.6
China Pacific Insurance 4.1
Shanghai International Airport3.1
Hutchison China Meditech3
China Lodging 2.8
Citic Telecom International 2.2
Netease2.2
Lee's Pharmaceutical2.1
New Oriental Education & Technology1.8

 

Sector breakdown (%)

Consumer discretionary31.9
Information technology24.4
Financials21.4
Industrials14.1
Healthcare11.1
Consumer staples6.9
Materials4.6
Utilities3.1
Energy3.1
Telecommunication services2.9