Buy the dip with Fidelity China Special Situations

“With US monetary policy normalisation only just beginning, we can expect ongoing pressure on the emerging world as a whole,” says Didier Saint-Georges, managing director at asset manager Carmignac. “We should keep our eye on economic fundamentals – the only reliable wellspring of lasting market performance. With that in mind, we can assert that China’s growth stocks, most of them catering to domestic demand and many operating in the tech segment, now hold out tremendous potential for long-term performance.”

A good way to get exposure to the potential returns on offer is via IC Top 100 Fund, Fidelity China Special Situations (FCSS), a growth-focused investment trust that invests in Chinese companies either listed in China, or elsewhere.

The trust's share price has risen higher than its benchmark, the MSCI China index, over three and five years, rising 80 per cent and 128 per cent compared with 60 and 65 per cent. The trust’s manager, Dale Nicholls, has been at the helm since April 2014 and over this period the share price rose 96 per cent compared with a 60 per cent rise in the index.

Mr Nicholls invests in companies which exploit opportunities in consumer-driven areas of the Chinese economy, particularly the growing middle class. These include information technology and consumer discretionary companies, which make up almost three-quarters of the trust’s assets. Its largest two holdings are the Chinese tech giants Tencent (HKG:700) and Alibaba (US:BABA). The manager believes these companies have strong fundamentals despite their share prices coming under pressure in the recent sell-off.

The trust invests in companies of all size and has substantial exposure to small- and medium-sized stocks, further boosting return potential. It is one of a few funds to have a large exposure to China’s A-share market, which has historically been restricted to international investors and includes many high-growth domestically focused companies. As of 31 July, the trust has 11.3 per cent in A-shares.

Fidelity China Special Situations also holds six unlisted holdings that account for 5.3 per cent of its assets. These include Didi, a technology-driven taxi service similar to Uber; Meituan, which provides various online services; Jiguang, which helps app developers with marketing; and SenseTime, which develops artificial intelligence for government and commercial use. Meituan and Jiguang are reported to be close to launching initial public offerings (IPOs).

Recently the trust’s performance fee was changed and it unveiled a new variable fee structure. The annual fee is now 0.9 per cent of net assets a year, although this could rise or fall by 0.2 per cent based on the trust’s net asset value (NAV) per share performance relative to the MSCI China index.

However, over one year the trust has made a loss of 3 per cent, broadly in line with the 4 per cent lost by the index, and there could be further volatility to come if the trade war leads to a slowdown in Chinese economic growth, which while higher than most western countries, is falling. It is also worth remembering single-country funds are always riskier than broader focused funds such as those investing in emerging markets or the Asia Pacific.

However, the fund remains popular with investors and analysts alike. Simon Elliott, head of research at Winterflood Securities, says: “We believe that the long-term investment case for Fidelity China Special Situations remains intact, given its emphasis on domestically focused companies, particularly mid and small caps."

So, if you can stomach the risks, Fidelity China Special Situations' good performance, experienced manager and potentially high-growth holdings make it an exciting opportunity. Buy. EA.

Fidelity China Special Situations (FCSS)

Source: Winterflood Securities as at 18/09/2018, *Fidelity International as at 31/07/2018, **Association of Investment Companies

Performance

Source: Winterflood Securities as at 19/09/2018

Top 10 holdings as at 31/07/2018 (%)

Sector breakdown as at 31/07/2018 (%)

Source: Fidelity International