Fidelity China Special Situations

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 potential opportunities.

Single-country investing, especially in developing markets, is always higher risk than developed markets. This is particularly true in China where government intervention in sectors has consistently taken place in recent years – sometimes to the detriment of those affected. 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 raised to 15% in 2021. 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.

ESG - Integrated  

ESG is fully integrated within the stock research and investment decision-making process with this fund. Dale believes that you cannot separate ESG from financial analysis, as ESG issues have a direct impact on fundamentals. In order to incorporate this analysis, Fidelity’s research team produces its own in-depth analysis on each company in the investable universe. It will also perform sector and thematic analysis to complement this. The output is available for all fund managers, including Dale. As such, ESG risks and opportunities are monitored and checked throughout the process, including when Dale is putting the portfolio together as he can see the exposures each stock could add. To monitor this there is oversight from the risk governance team. This work is also used for good, with Dale and the wider Fidelity group using their shareholding to influence corporate behaviour and create more value for both investors and society.

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 (the most recent of which was put in place in 2020) and 'contracts for difference', which are a more efficient method of borrowing. The maximum gearing, as per the prospectus, is 30% (net gearing stood at 23.5 per cent at 31 March 2022 – the end of the last financial year).

The trust share price has been volatile in the past few years given the impact of Covid, government intervention in certain sectors and ongoing geopolitical concerns within China. In the past five years it has traded between a premium of 2.7% and a discount of 17.7% (figures to 14 September 2022).