With its shares trading at a 12% discount to net asset value (NAV), Fidelity China Special Situations (FCSS) looks a potentially attractive investment.

Offering professionally-managed exposure to the Asian powerhouse economy’s domestic growth opportunity, we believe the discount should narrow as the investment trust benefits from quality stock picking and builds on its impressive long-term performance record.

With a single country mandate and a small and mid-cap bias, the trust is managed by Hong Kong-based Dale Nicholls, who celebrates his fourth anniversary managing the fund in April.

Financial services group Winterflood notes that Fidelity China Special Situations has delivered an NAV total return of 156% since Nicholls took over its management in 2014, well ahead of the 112% return from the MSCI China benchmark.

An underweight allocation to cyclical stocks meant the NAV performance lagged the benchmark over the last 12 months.

SEEKING OPPORTNITIES

Nicholls looks for undervalued companies with good long-term growth prospects. ‘I’m thinking about the size of the opportunity. How big can they be in five or ten years?’ he says, also desiring companies which are cash generative and controlled by strong management teams.

The fund manager tends to find mispriced stocks in the smaller companies universe, as they will typically be less well researched.

Nicholls also places lots of emphasis on risk management; meeting companies is essential in order to understand their business and monitor progress.

DOMESTIC POTENTIAL

The trust has a particular focus on China’s compelling consumption theme and rising levels of internet penetration.

China’s middle class is expanding and has rising disposable income which is not only being spent on consumer goods, but increasingly on experiences including domestic and outbound travel.

To play the theme, the portfolio holds names such as online travel booking company Ctrip.com and budget hotel operator China Lodging.

Leading portfolio positions include tech giants Tencent and Alibaba. Nicholls insists there are still exciting areas of growth for these two Chinese national champions, which are seeing surging levels of operating free cash flow.

Up to 10% of Fidelity China Special Situations, which owned Jack Ma’s Alibaba before it floated, can be invested in unlisted holdings. The private equity portion of the portfolio gives investors exposure to additional high growth businesses of the future, many of which may list on the stock market in time.

They include Didi, ‘the clear leader in ride-sharing in China’; e-commerce services business Meituan; Yiguo, ‘a leader in online grocery that has aligned itself heavily’ with major shareholder Alibaba; and Jiguang, which helps app developers with marketing and could be the first to float. (JC)

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