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Tapping into the biggest risk/reward market of 2023
This article first appeared on portfolio-adviser.com on 22nd December 2022 If you had asked me two...
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 is chaired by Mike Balfour. Mike is also a non-executive Director of Standard Life Investment Property Income Trust plc and Schroders BSC Social Impact Trust plc. He is also Chairman of the Investment Committee of TPT Retirement Solutions and sits on its Management Board. Mike was chief executive of Thomas Miller Investment Ltd until 2016 and was previously chief executive at Glasgow Investment Managers and chief investment officer at Edinburgh Fund Managers Limited.
The other board members are Linda Yueh, Alastair Bruce, Vanessa Donegan and Georgina Field. 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.
ESG
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.
Risk
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.
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 (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).
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