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.

China is playing an increasingly important part in a globally diversified portfolios of holdings. The sheer size of China’s economy, the second largest in the world, and the rate of its growth means there are an abundance of investment opportunities here yet to be unearthed.

The Fidelity China Special Situations investment trust is the largest London-listed fund investing in Chinese equities. Since inception in 2010, the trust has looked to invest in companies able to benefit from China’s growth and its changing economy. Over the past five months, it’s been the second best-selling investment trust on our platform behind the ever-popular Scottish Mortgage, which you can find out more about here.

Portfolio Manager, Dale Nicholls, has broad experience investing in the region, having joined Fidelity in 1996 and becoming manager of the Fidelity Pacific Fund in 2003 (which he still manages today).

Nicholls feels the best way to invest in China is through on the ground research. He’s very much a bottom-up manager, which means he wants to understand a company’s individual attributes before zooming out to look at the macroeconomic backdrop. He’s looking to find undervalued companies whose long-term growth prospects have been overlooked by the market.

The manager feels China is a perfect hunting ground for stocks of this kind. The country’s market is broad yet still rapidly growing - a hotbed for hidden gems which fly under many analysts’ radars, especially when compared with more developed markets elsewhere.

That means, according to the manager, Chinese stocks offer great value. He points out that China has five of the biggest stock markets in the world yet shares still trade at a significant discount versus the US market.

It also means there’s significant opportunity to be found in the regions’ swathes of unlisted companies. The trust can hold up to 10% of its portfolio in China’s “vibrant and varied” unlisted stocks - a luxury afforded by its closed-ended investment trust structure.

The unlisted market is an area that suits Nicholls’ approach of looking for companies with high future growth potential.  Such companies tend to be smaller and less widely analysed by the wider market, potentially leading to mispricing opportunities.

The strategy has paid dividends in the past. Fidelity China Special Situations invested early in Alibaba, three years before it listed publicly in a record breaking $25 billion IPO in 2014. Alibaba is now one of the trust’s primary holdings, and one of the largest companies in China.

Nicholls has always focused on ‘New’ China - the sectors with good growth prospects over time, such as consumption-related, technology and healthcare. Those have seen significant potential for growth over the pandemic, and thrown up new investment opportunities for Nicholls to explore.

Two themes in particular are hot on his radar right now. The first is the way in which the pandemic has accelerated the shift of our daily workings online. For many of us, that has meant greater reliance on e-commerce; others, finding our working patterns migrate away from the office and back home.

The fund’s two largest holdings, Alibaba and Tencent, are obvious beneficiaries here. Fundamentally an e-commerce company, Alibaba is often referred to as the “Chinese Amazon” and has capitalised on new consumer habits in similar ways to its US counterpart, while Nicholls is particularly impressed with Tencent’s strategy of linking with offline retailers and offering ways to reach potential customers.

Another theme that Nicholls is looking to capitalise on is China’s growing middle class. It’s a mega-trend that has been driving domestic demand for goods and services. The auto-industry is one beneficiary, and auto-dealer China MeiDong Auto Holdings is the third largest holding in the trust’s portfolio.

For investors who are unfamiliar with investment trusts, one peculiarity to note is that, unlike open ended funds, investment trusts trade on the stock market, which means their price is determined by investor sentiment rather than the Net Asset Value (NAV) of its holdings.

Fidelity China Special Situations has traded around a 10% discount to its NAV over the past two years, but recent performance and improving investor sentiment toward China has seen the price claw in on the NAV, recently rising to a small premium above it. Now, it trades at a discount of around 2.3%.

More on Fidelity China Special Situations PLC

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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