Fidelity China Special Situations (FCSS), the biggest and best performing of three London-listed China funds, combined excellent returns and outperformance in its latest half year.
Interims for the £1.5bn investment trust managed by Fidelity’s Dale Nicholls showed it made a 29.7% total underlying return in the six months to 30 September that translated to a 28.7% gain for shareholders and beat the MSCI China index which advanced 18%.
It was a more impressive result than in the previous year to 31 March when the trust achieved a 31.5% total return on net assets and total share price return of 35.8% but lagged the MSCI index which leaped 37.5%.
Nicholls said Chinese equities had extended their strong rally from last year’s lows after the US and China reached a deal on tariffs and the launch of low-cost artificial intelligence tool DeepSeek at the start of the year renewed investor interest in the country’s innovation sectors.
The fund manager said valuations had normalised with the MSCI China trading at around 13 times 12-month forward earnings, although that was more than 40% below the prospective multiple of the US benchmark, the S&P 500.
Looking ahead, he said the economic and political backdrop “appears increasingly constructive” after Chinese policymakers recently reaffirmed their commitment to steady and sustainable growth, while emphasising technological self-sufficiency and stronger domestic demand.
The government’s “anti-involution” campaign aimed at tackling the deflationary pressure from excessive and inefficient competition in areas such as electric vehicles (EV), solar energy, paper and cement, was positive. “The potential for consolidation may still be underappreciated by the market,” Nicholls said about the increase in mergers and acquisitions it could provoke.
“Meanwhile, the recent meeting between presidents Xi and Trump in Busan produced a positive outcome, with both sides agreeing to extend tariff truces, suspend selected trade levies, and re-establish regular communication channels. Together, these developments point to a more predictable policy and external environment for companies and investors alike,” Nicholls said.
However, consumer confidence, which he views as critical for reviving domestic consumption, was held back by a weak recovery in property prices after a real estate slump.
That said, he added that well-positioned franchises which adapted to shifting consumer preferences continued to show growth, while weak investor sentiment created some of the most attractive opportunities in the market.
Car sensor supplier Hesai Group was Nicholls’ best performing stock after returning to profitability and beating expectations in its second quarter of 2025 and exciting investors with plans for a Hong Kong listing.
Shares in autonomous car developer and robotaxi provider Pony.ai advanced after their listing as the company expanded domestically to Shanghai and overseas to the UAE, while benefiting from a decline in hardware costs that pushed it closer to breaking even on a single-vehicle basis.
“Having first invested in Pony.ai as a private company, we retain conviction in its technology leadership, integrated ecosystem and long-term growth potential as China advances towards next-generation mobility,” said Nicholls.
Cautious about intense competition in e-tailing, the manager’s decision to not hold food delivery giant Meituan and e-commerce platform JD.com paid off as their shares fell, although his underweight position in Alibaba weighed on returns as interest in its AI application saw the shares perform strongly.
Two long-term consumer holdings struggled in the half year. Hisense Home Appliances Group slid after second quarter results missed expectations. LexinFintech Holdings, a leading consumer finance lender, retreated after investors took profits after a period of strong gains and solid earnings results.
Nevertheless, China remained a “fertile ground” for structural growth, Nicholls said, particularly in sectors benefiting from rapid technological innovation, such as automation, electric vehicles, AI and advanced manufacturing.
“Meanwhile, the fruits of strong R&D in healthcare and ongoing import substitution in tech hardware and high-end industrial components further broaden the opportunity set,” he said.
The manager dialled down the gearing, or borrowing, he uses to increase the trust’s market exposure from 20.5% to 19.6%. Over the six months, this added 3% to returns.
According to figures from Fidelity, between April 2010, when Nicholls started as manager, and 31 October, FCSS’ investments generated a total 344.6% return that trounced the MSCI China’s 125%, although shareholders had to make do with a 306% return from shares currently trading 9% below their net asset value.
Recent years have been more volatile. Over five years to the end of October, the shares fell 1.8% with dividends included as the country struggled with Covid and fears of political interference. Over three years returns have recovered, with shareholders enjoying a 95.9% total return. Over both periods the trust has done better than the MSCI China.
Our view
James Carthew, head of investment company research at QuotedData, said: “The Chinese market has shrugged off the rhetoric coming out of the White House and bounced hard this year. Chinese stocks were oversold, and while many parts of the economy are still struggling, there are others that are thriving. A skilled active manager is essential in such an environment and – as a shareholder in Fidelity China – I am grateful for the way that Dale Nicholls has navigated the portfolio through this. The EV story – where China looks to be the dominant player – is a case in point. As EV production soars and production capacity exceeds demand, profitability for the automakers has been impacted, but providers of some components have done well. Choosing not to hold BYD and Xiaomi, but holding Pony.ai (autonomous driving) and Hesai (LiDAR) paid off.”
