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Fidelity China Special Situations
Investment trust
This trust invests predominantly in companies listed both domestically in China and on the Hong Kong Stock Exchange. The manager is able to make use of Fidelity's investment licences in China, which are among the largest of any international investor, offering investors direct exposure to the China growth story. The manager can also invest in Chinese companies listed on other exchanges around the world, as well as companies with significant interests and primary revenue exposures in China.
Our opinion
Dale has extensive experience in the far east and this, coupled with the breadth and depth of Fidelity’s resources in this region at his disposal, makes the Fidelity China Special Situations trust an attractive proposition for investors looking for exposure to the Chinese market. However, due to its bias towards smaller and medium sized companies in a developing market, this trust is not for the faint hearted and investors should be prepared for large fluctuations in the value of their investment. Those willing to take the risk could be handsomely rewarded over the long term.
Trust manager
Fidelity International is the investment company employed to manage the Fidelity China Special Situations trust. Established in 1969, Fidelity is a financial services corporation with offices in more than 20 countries. Its product range spans mutual funds, defined contribution pensions, segregated portfolios and multi-manager offerings. It compensates managers on long-term performance, illustrating its intention to align interests with clients.
Dale Nicholls was appointed as the manager of the trust in April 2014. Dale joined Fidelity's Tokyo office as a research associate in 1996. He was promoted to portfolio manager for the FF Pacific fund in 2003 and, in 2011, became portfolio manager of the FF Asian Smaller Companies fund. He is now based in Fidelity’s Singapore office. Prior to joining Fidelity, Dale worked at Bankers Trust Asia Securities in Tokyo and as a market and business analyst at Sony Corporation. He graduated from the Queensland University of Technology, Australia.
Being on-the-ground in China allows us to cut through the noise and invest in some of the world’s most innovative and fast-growing companies.
Dale NichollsTrust manager
Investment board
The five-strong board of director is chaired by Nicholas Bull. Nicholas was appointed to the board in February 2010 and subsequently as chairperson in July 2016. He is a senior independent director of Coats PLC and a member of council of the University of Exeter. He was previously a director, then chairperson, of the hotel group De Vere and has worked for 30 years as a corporate finance practitioner in London, Sydney, Singapore and Hong Kong.
The other board members are Elizabeth Scott, The Hon. Peter Pleydell-Bouverie, Mike Balfour and Linda Yueh. Between them, the board members have a vast amount of experience in business and investment companies. The company’s year-end is 31 March.
Investment process
Dale focuses on identifying and analysing companies rather than economies. He believes that the best investments are in those companies that have good long-term prospects: cash-generative business that are controlled by a strong management team. He looks for stocks with these characteristics but crucially, which are underestimated by the market and are therefore undervalued. He will invest in any size of company were this mispricing appears but tends to have a bias towards small and medium-sized companies. This area of the market is generally less well-researched by the market and is where Fidelity's large investment team presence in the region can result in greater opportunities to be found.
Risk
Single country investing, especially in developing markets, is always higher risk than developed markets. The manager also tends to have a bias towards small and medium sized companies, which themselves are normally higher risk than larger blue chips. However, this risk is somewhat mitigated by the extensive research team and systems available to the manager, along with a well-diversified portfolio of stocks, typically between 120 and 160 in number. The manager is also able to invest in unlisted companies – the limit of which was was raised from 5 to 10% in the trust's 2016 annual general meeting. Although this increases the investment opportunity for the manager, its full deployment would also increase the risk profile of the trust. An additional risk which investors should take into account is currency.
Gearing
The board allows the manager to use gearing as and when he finds attractive opportunities. The source of gearing is a combination of a three-year unsecured band debt (put in place in February 2017) and 'contracts for difference', which are a more efficient method of borrowing. The maximum gearing, as per the prospectus, is 30%. As at 30 September 2019, gearing was 25.6%.
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