In the long-term, the Fidelity China Special Situations trust has performed strongly, returning 263.9% over the past 10 years and striving 171.3 percentage points ahead of the MSCI China benchmark.
However, radical policy changes dragged down the sector last year and the trust along with it – returns are down 37.2% over 12 months, lower than both the index and IT China/Greater China index.
Below, Dale Nicholls, manager of the trust since 2014, tells Trustnet that despite regulations detracting short-term performance, the Chinese businesses will begin to see the benefits of these changes moving forward.
Total return of trust over the past 10 years
Source: FE Analytics
What’s your investment process?
We try to leverage all the benefits that a trust structure brings. We're able to use the leverage, the ability to short and obviously being closed, we can be less concerned about liquidity.
The basic goal really is to spread the net really wide and capture the best opportunities in China that are out there.
What will be a driving theme for the trust’s future performance?
For the market in general, I think it concerns receding. It's been an interesting year, hugely impacted by regulation and that's impacted a lot of companies. I think the worst of that is behind us, it’s just about the clearing up of uncertainty for markets overall.
I have increased positions in the consumer internet space because things are very cheap, although it is not all about one sector.
Also, consumption in general is part of an exciting story in China. The growth and expansion of the middle class over time is one of the surest bets out there. As that class grows, people are going to want more goods and services.
Regulations should mean more money in the pocket for the so-called man on the street or that middle class, so again I think more spending power for that sector of community should be a positive.
Is the Chinese Communist Party’s zero-Covid stance slowing economic recovery?
Yes, it clearly has already. There's a shift in mindset away from zero tolerance but the lockdowns that we're seeing now will impact growth.
The government set an economic growth goal of 5.5% – that's not going to be an easy target given the challenges, so I think there's going to be more action required.
How has regulation changes impacted the trust?
We’re getting to the point where there’s going to be a lot of government support going forward. There’ll be less regulation, more stimulus, both on the monetary and fiscal side, and that’s very different to many other markets.
In the US, they’re in a tightening cycle so I think that's a pretty big contrast. I think there’s a recognition that the risks are overdone and that will create the opportunity for stocks to outperform.
You think about areas like the anti-monopoly or the competitive regulation and clearly that is going to impact the larger companies relative to the smaller companies.
A lot of these companies will actually benefit from a competitive perspective and yet they've been sold off with the whole sector. I'm obviously focused on looking at everything, but the trust has a has a focus on the smaller end.
Have you adjusted allocations around China’s policy changes?
I don't think there was there was a need for any big changes. The most publicised area around regulation was what happened in the education sector. We got a sense that there was added risk in that sector so luckily we avoided holdings in some of the more prominent names.
I had a company that ran an education platform using foreign teachers to teach kids English called China Online Education but generally, I don't think positioning has changed much.
What do you like to do outside of stock picking?
Anything that really clears the head for me. I'd say exercise is probably the biggest thing, so I love to get out for a run or swim.