Fidelity China Special Situations (FCSS) invests in Chinese equities, aiming to identify companies with long-term growth prospects that are underappreciated by the market. The portfolio has a strong bias to small and mid caps and a wide remit. This allows it to invest in domestic and Hong Kong-listed Chinese companies as well as those listed elsewhere which do business with the country and unlisted, private stocks. The portfolio can also take up short positions in companies or indices.
The trust has been managed by Dale Nicholls for just over five years, during which time it has handsomely outperformed the MSCI China index [see performance section for more]. Dale invests in companies benefitting from the growth of the middle class in China, which means the portfolio is tilted towards consumer-facing companies, information technology and insurance.
The trust has structural gearing worth 10% of NAV and a track record of maintaining borrowings closer to 25%. Along with the SMID exposure this raises the volatility on the trust: over five years the standard deviation of the Fidelity China Special Situations share price has been 23.2% annualised, compared to 19.08% for the MSCI China benchmark.
The trust trades on a discount of 9.3%. Since February 2019 the board has targeted a single digit discount, and used its buyback authority to that effect.
While the trust aims for capital growth, dividend growth has also been strong, and the trust now yields 1.8%.
The trust has an innovative charging structure. There is a base management fee of 0.9%, which can be 0.2% higher or lower depending on whether the trust has outperformed or underperformed the index, a “fulcrum fee”.