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Positive performance and lower costs from Fidelity China Special Situations

12
2018
June

Positive performance and lower costs from Fidelity China Special Situations – The NAV of Fidelity China Special Situations (FCSS) returned +22.2% (total return) over the year ended 31 March 2018.  The company’s benchmark Index, the MSCI China index returned 23.8%. Therefore, the NAV of company underperfoprmed its benchmark by 1.6%. The share price delivered a total return of +23.6%, a marginal underperformance of 0.2%.

The company also increased its dividend by 40% to 3.5p pence per share. The discount narrowed from 13.2% to 12.3% over the period.

Performance

As with many funds that invest in the Far East and China in particular, the company noted that the year was characterised by very strong performance by two large internet stocks, Tencent Holdings and Alibaba Group.  Fidelity China Special Situations is not the only investment trust investing in China that had this issue regarding performance. These two companies have had a disproportionately large weighting in the MSCI China index. contributing to the underperformance of the NAV of Fidelity China Special Situations. The weightings in the index of these two large companies are currently being amended to be more representative of the universe of Chinese stocks.

The fund has a significant weighting to medium and smaller companies in China and this section of the market underperformed. However, the manager reported that the portfolio benefited from holdings such as Yihai (a hot pot seasonings and sauce producer), Kingdee International Software (an enterprise management and e-commerce software company) and Noah Holdings (a wealth and asset management company). The manager also reported that the following holdings detracted from performance: Tarena (professional education services), Clear Media (a media company) and CT Environmental (an environmental protection company).

Administration costs and management fee

It is notable that the annual administration fee of £600,000 reduced to £100,000 with effect from 1 April 2018.

The company has agreed with the investment manager,  FIL Investment Services (UK) Limited, a variable management fee structure.

  • The new arrangement will replace the current annual fee of 1.00% of the company’s net assets per annum and will remove the existing performance fee of up to 1.00%.
  • The new fee will reduce the headline annual fee of 1.00% of net assets to 0.90% of net assets per annum plus a +/- 0.20% variation fee based on the company’s NAV per share performance relative to the MSCI China index.
  • The maximum fee is 1.10% of net assets,
  • However, if the company underperforms against the MSCI China index, then the overall fee could fall as low as 0.70% of net assets.
  • This new fee arrangement will be effective from 1 July 2018.

Investment manager’s outlook for the next 12 months

Dale Nichols, Portfolio Manager

I remain highly encouraged by the long-term prospects for the Chinese equity market. The secular drivers of growing consumption, rising wealth and technological change remain as compelling as ever.

Challenges remain with the debt growth still outpacing overall growth in the economy. While the Chinese government increasingly appears to be taking steps to tackle this situation it is essential that it continues to make progress, implementing an effective package of reforms in areas such as shadow banking. I expect the pace of economic growth to slow due to the impact of reform and efforts to slow credit growth.

However, this is less of an issue for companies benefiting from the structural growth trends discussed above. In both the public and private markets, I continue to see activity with companies displaying creativity, innovation and entrepreneurship to capitalise on these shifts. I remain confident in the very rich opportunity the Chinese market continues to afford me as a stock picker and continue to be personally invested in the Company.

FCSS: Positive performance and lower costs from Fidelity China Special Situations

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