Fidelity China Special Situations is the top-performing UK investment trust after a 13% advance last month extended its impressive 12-month gain that has defied concerns over the trade war with the US.

Fidelity China Special Situations (FCSS), the most highly-geared of the three London-listed China funds, saw its shares jump 13% in July. With the stock adding to its gains this month, the £1.5bn investment trust is now not only the top performer in its sector in all periods up to 10 years (see table below), it also ranks as the best returning UK closed-end fund over one year with a 64.8% total shareholder return.

While this outpaces rivals Baillie Gifford China Growth (BGCG), up 53% in the 12 months to 25 August, and JPMorgan China Growth & Income (JGCI), up 40.6%, they still rank as second and fourth best investment trusts over one year, such has been the strength of the recovery in China.

China trust total shareholder returns

It’s all a far cry from last year when protracted economic weakness after the Covid pandemic saw China’s stock market notch up a third consecutive year of flat or negative returns. However, investor sentiment improved from September after the government launched a bumper stimulus package to tackle deflation, revive the property market and shore up consumer confidence.

While all three China trusts have suffered a slump in three and five-years’ performance, FCSS and its consumer and domestic focused portfolio is the only one to have made positive returns.

Although economic progress has been uneven since the turnaround nearly a year ago, improving data and further support from the government last month combined with growing confidence that the US and China would reach a trade deal saw the 15-year-old Fidelity China generate an underlying return of 11.1% in July, beating the 8.5% rally in the MSCI China index.

Despite the uncertainty over US president Trump’s trade policy, the trust’s latest fact sheet shows China’s stock market rallied 12.7% in the three months to 31 July.

FCSS nearly doubled that return with net asset value advancing 22.1%, helped by fund manager Dale Nicholls’ stock picks doing well, including top 13.9% position Tencent.

Bold gearing

The trust’s bold use of gearing also contributed with Fidelity China deploying slightly more than 18% extra into Chinese investments than it held in shareholder funds. That gearing was pared back a bit from the 21% level in March that the trust’s board said was at its upper limit, but still meant the trust was well positioned to benefit as share prices rose.

Gearing can worth both ways, of course. If the market had fallen, the trust would have underperformed and lost more money. However, the board believes running higher gearing than its rivals in a range of 10%-25% is acceptable given Nicholls’ conviction that China’s equity market remains attractively valued.

By comparison, Baillie Gifford China Growth had far more modest 4% net gearing at 31 July. JPMorgan China Growth & Income was 12.2% geared.

In June Fidelity China reported strong annual results with a 31.5% underlying total return in the 12 months to 31 March, which nevertheless trailed the MSCI China’s 37.5%.

Beating the benchmark

In contrast with then, FCSS is now well ahead of its benchmark. At 31 July, the trust’s NAV was up 51.5% over one year, underpinning a 53.9% total return to shareholders compared to the MSCI China’s 37.9% advance.

Jump forward three weeks to yesterday, 25 August, and the latest one-year figures had improved again, with net asset value up 61.8% and the shares – as already highlighted – up nearly 65%.

The recent increase reflects dividend payments at the end of July. Not only did shareholders see a 25% rise in the ordinary annual dividend of 8p per share (up from 6.4p last year), they also received a special 1p dividend to mop up income from a large exceptional dividend from Lufax Holding, an online financial market place.

Last month Nicholls urged investors to maintain “perspective” on the trade war, pointing out that companies listed on the MSCI China generated only around 3% of their revenues in the US.

“The broader Chinese market is significantly less reliant on US demand than during the previous trade war cycle, with exports to the US accounting for a much smaller share of China’s GDP today,” he said.

Meanwhile, as AI developer DeepSeek demonstrated earlier in the year, China has shown an ability to innovate in the consumer internet space, electric cars and healthcare and biotechnology.

Shares still on a discount

China’s stock market may not be quite as cheap as it was a month ago but at the time Nicholls said the MSCI China was trading at around 11-12 times forecast earnings for next year. That valuation multiple was well below historical averages and was more than 40% less than the expensively valued US stock market, he said.

Inevitably, Fidelity China’s shares are not as cheap as they were either. The trust has seen its discount – or gap to NAV – narrow to under 8% from a one-year average of 11%, but that arguably still offers some value. Baillie Gifford China Growth stands on a 9.4% discount and JPMorgan China 9.7% below asset value, according to data from Deutsche Numis.