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Fidelity China Special Sits stays ahead in world’s second economy

Fidelity China Special Sits stays ahead in world’s second economy

Last year was, to parody the Chinese calendar, ‘The Year of the Tech Bro’ and companies, mainly in the US, associated with the AI-revolution, such as Nvidia NASDAQ:NVDA had stratospheric rises. However, earlier this week with the launch of Chinese start-up, DeepSeek’s, R1 artificial intelligence model, saw the wheels come off the unstoppable AI machine, to an extent.

The Armchair Trader covered the threat that DeepSeek offers to the Tech Bro’s of Silicon Valley in greater detail, and the fact that China is competing on multiple fronts – militarily, technologically, economically, diplomatically – with the West taking direction from a newly-installed Sinophobic President in the White House.

As China slithers into The Year of the Snake, lanterns are taken down, the lion-dancers pack their amazing outfits away for another year, and the nation faces an increasingly fractious relationship with America, we look at the Fidelity China Special Situations Fund [LON:FCSS] in this week’s Investment Trust roundup.

The GBP1.3bn fund was launched in April 2010, and is in the Association of Investment Companies’ China/Greater China sector, which bearing in mind China is the second largest economy in the world, and represents a quarter of the world’s population, is only made up of three funds.

The fund aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China and Chinese companies listed elsewhere. Arguably, you could say China is a special sit in its own right, given the disruptive nature of its corporations, recently illustrated by DeepSeek.

Broad exposure to Chinese economy

The fund says that it offers a broad exposure to the Chinese economy, and will invest across the whole Chinese market (and Sinosphere) from tech giants through to smaller manufacturing companies involved in global supply chains.

Managed by Dale Nicholls, an Australian who has spent most of his finance career in Asia and joined Fidelity in 1996 as a research analyst in Tokyo. At the time Japan was an established investment market, but across the East Sea, China although rapidly-industrialising, was a frontier territory for investors.

Nicholls started to take an interest in China’s emerging companies, charting their progress from local to regional to national institutions and onto the world stage, by making regular visits to the mainland from his Japanese posting. By 2003 he had created enough interest to be promoted to portfolio manager of unit trust, the Fidelity Pacific Fund, but wanted to drill down further into the China story, and the investment trust was founded.

Boots on the ground

It’s very difficult to analyse a market like China from a spreadsheet in Canary Wharf or Wall Street, and Nicholls and his team spend a lot of their time on the ground, meeting Chinese companies on their own turf, totting up over 100 visits a year.

The fund has, as well as being reasonably unconstrained as to the industry or capitalisation of the Chinese companies it invests in, the mandate to go off-ex and invest in private, pre-IPO companies, but for comparative purposes is benchmarked against the performance of the MSCI China Index.

The manager is very conviction-driven, and will take positions and counter-positions in stocks that are contrarian to the market. For example, in the latest-print from December, Nicholls largest underweight position is Chinese e-retailer, AliBaba [HKG:9988], where the fund is underweight the index by 4.3 percentage points. It’s a similar story for other better-known Chinese firms, such as China Construction Bank and Tencent, both flexing their muscles increasingly on a global stage, but underweight in the Fidelity portfolio.

Nicholls is still positive regarding the Chinese economy despite the things that are happening around the world, he said: “Recent government stimulus measures in China show a strong commitment to tackling economic issues and boosting domestic demand. While consumer confidence remains low, discussions with several companies suggest that the worst of job cuts, especially in technology, may be behind us. Elevated household savings indicate potential buying power that could support recovery. The aim is for supportive policies to drive a turnaround in economic fundamentals, leading to broader earnings growth and improved market sentiment.”

If Chinese companies just sell to Chinese citizens, they will make money, but they have increasingly global outlooks. They are – with Central Government backing – competing with European and American firms in terms of resources, political influence and, if you believe the hyperbole, geographical territory. A recent report claimed that between 2000 and 2021, Chinese financial institutions provided nearly USD57bn in loans to low- and middle-income countries in order to secure control of strategic resources.

Nicholls did note that the Trumpian threats of tariffs was a risk, but: “[…] both investors and companies are aware of these risks, and we continue to monitor what is priced in.”

Historic top performer in sector

Given the fund’s time in the market, it is the top performer in sector over the last 10-years, returning +94.4% (on a share price total return basis to 29th January), beating the sector average by 12.5 percentage points. Over five-years Fidelity China Special Situations, was again top-in-sector with a +10.9% return, the only positive return in sector which averaged +2.96%.

Over the last year Fidelity’s competitors closed the gap, pushing Nicholls’ fund down to second place with a return +18.4% against a sector average of +22.8%.

The fund trades at a discount to premium of -10.6% and is pretty highly geared at 23% for the sector according to the AIC. It has an ongoing charge of 0.98.

Fidelity China Special Situations Fund top five holdings

Investment Sector Weighting
Tencent Holdings Information Technology 13.0%
Ping An Insurance Group Financial Services 4.8%
PDD Holdings Consumer Discretionary 4.0%
AliBaba Consumer Discretionary 3.8%
ByteDance Information Technology 3.4%
Source: Fidelity, 31 December 2024

Fidelity China Special Situations continues to offer investors unique access to the growth potential of the Chinese market, backed by an experienced management team with a strong track record. While geopolitical risks and economic uncertainties remain, the fund’s conviction-driven approach and focus on long-term value creation set it apart.

As China navigates policy shifts and evolving global dynamics, the fund’s ability to identify emerging opportunities could position it well for future growth. For investors willing to embrace the future volatility of the Chinese market, Fidelity China Special Situations presents an intriguing opportunity to gain exposure to one of the world’s most dynamic economies.

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