Fidelity China Special Situations plc (LON:FCSS) offers investors a one-stop shop, providing their portfolios with a diverse Chinese exposure across stocks, sectors, market capitalisations and unlisted companies, all based on the underlying value of each investment. China offers superior GDP growth, a growing middle class and modernisation. FCSS has a flexible mandate, and the closed-ended structure can make high-return, illiquid investments. It has scale, and the shares are liquid. Fidelity’s stock-picking and gearing have led to total returns ca.3x the market since launch. Regulation is a risk and an opportunity. Other risks include sentiment to FCSS’s style and volatility.
- Investment approach: Fidelity’s local and global teams are an advantage over many competitors in identifying growth businesses at reasonable valuations. The portfolio is actively managed, and positioned for opportunities from domestic-demand-driven growth and tech-enablement. It has a small-cap bias, and can invest up to 15% of net assets, plus borrowings in unlisted companies.
- Regulation risk: Our analysis reviews i) the Chinese government’s objectives, and why this should see targeted measures, ii) why the market reaction was so dramatic, iii) the risk of new regulation and the secondary costs, iv) international and historical perspectives, and v) the range of opportunities it creates for Fidelity China Special Situations.
- Valuation: FCSS’s portfolio is largely listed equities, but it still trades at a 7% discount to NAV. The discount has been falling since 2016 but recently rose slightly, on market regulation concerns. The rating is in the middle of the peer range. The dividend has increased every year since 2011, and the yield is 1.4%.
- Risks: Further regulation in China is something to monitor, but FCSS’s exposure appears limited, and noise around the issue can create investment opportunities. Trade wars may affect sentiment, but FCSS is domestically focused. Sentiment can go against FCSS’s investment style. Returns are expected to be volatile.
- Investment summary: In general, Fidelity China Special Situations invests in the huge opportunities from New China, with growth in the middle classes, and supportive government policies towards domestic demand and innovation expected to underpin superior GDP growth. Fidelity’s stock-picking, gearing and being able to make illiquid investments, together with the compounding benefits from investment outperformance, have seen total share returns ca.3x the market since launch. There are risks from further regulations, but these may also create opportunities. Investor appetite for FCSS’s style may vary, and investors should expect volatile returns. The share price is at a 7% discount to NAV.