Fidelity China Special Situations: a 2025 bestseller

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

One of the best-selling investment trusts this year is Fidelity China Special Situations, which has benefitted from the resurgence of interest in the local stock market since the announcement of stimulus measures late last year. There was then another major boost from the emergence of the Chinese Artificial Intelligence (AI) platform DeepSeek at the end of January.

The more favourable macro-economic backdrop has enabled the £1.4 billion trust to enjoy a remarkable six months of share price performance. It can be a volatile area though, especially given the uncertainty around the trade war with the US.

Objective and approach

Fidelity China Special Situations aims to achieve long-term capital growth from an actively managed portfolio of securities issued by companies in China, both public and private, as well as Chinese companies listed elsewhere. It can also invest in businesses with significant interests in China.

Longstanding Manager Dale Nicholls targets stocks that trade at significant discounts to their intrinsic value. In order to make this assessment he looks at: how big a business can grow, given the state of the industry and how it is positioned; its competitive advantages; and the management.

Of the three, he says that it is the quality of the business that drives the long-term results the most. “A key part of meeting with companies is understanding the competitive moats, how they are changing and why. We are always going into meetings trying to understand the structure of an industry and the competitive edges. That's probably the most important thing.”

The process is based on a bottom-up approach and is mainly focused on individual stocks, with smaller companies playing an important role. This is because there is less available information about them, which means that they are more likely to be susceptible to mispricing.

The underlying portfolio

It is a diversified portfolio with more than 50 stocks at the end of January, of which the 10 largest positions accounted for 42.6% of the assets. These included well-known names such as Tencent, Alibaba and Bytedance, although only the latter was significantly overweight relative to the benchmark.¹

The four dominant sector weightings were: Consumer Discretionary 41.5%, Industrials 22.3%, Communication Services 20.7% and Financials 14.5%. It is also worth noting that it was heavily tilted in favour of smaller stocks worth less than £1 billion relative to the MSCI China index and that 29.1% of the assets were invested in Chinese stocks listed in the US.²

What are the managers’ latest views?

Nicholls believes that the stimulus measures in China show a strong commitment to tackling economic issues and boosting domestic demand. The aim is for supportive policies to drive a turnaround in economic fundamentals, leading to broader earnings growth and improved market sentiment.

Speaking in February, he said that China scores at a high-teen percentage of global gross domestic product (GDP) and continues to outgrow the world, yet it's less than 3% of global portfolios. “It is extremely out of favour. By our numbers, it is close to the widest discount it has ever traded to the US market, approaching a 60% discount for comparable levels of growth.”

Performance and outlook 

Over the last five years the trust has delivered an annualised return of 9.4% compared to 1.3% from the MSCI China NR GBP benchmark and 5.7% from its peer group. Most of these gains have come in the last six months following the economic stimulus. Please remember past performance is not a reliable indicator of future returns.³

The broker Numis believes that Fidelity China is an attractive way to access the market, should investors be comfortable with the risk profile of a leveraged fund with a focus on mid/small caps in a single Emerging Market.⁴

“We regard Dale Nicholls highly and point to his long-term track record, with net asset value (NAV) total returns of 9.0% per year. vs 5.6% per year for the MSCI China in sterling terms, since taking over the portfolio in April 2014.⁵”

Discount, buybacks and gearing

The shares are currently trading at a 7% discount to NAV, which is tighter than the 12-month average of 11%, with the Board pursuing an active programme of buybacks. There is also significant net gearing of 22% that has the potential to boost the returns in a rising market.⁶

How do the costs stack up?

The ongoing charges figure is 0.98%, which seems reasonable for an actively managed single country fund.

More on Fidelity China Special Situations

Past performance is not a reliable indicator of future returns

Source: FE, share price returns from 21.3.20 to 21.3.25. Excludes initial charge. 

Source:

^1,2,3 Fidelity International, 25 March 2025
^4,5,6 Numis, research note dated 9 December 2024