2nd Jun 2016 11:05
LONDON (Alliance News) - Fidelity China Special Situations PLC, the FTSE 250 investment trust that puts money into Chinese equities on behalf of its shareholders, on Thursday said its emphasis on investing in smaller and mid-cap companies with a market value of below GBP5.0 billion shielded it from broader stock market turmoil in China over the trust's last financial year.
As negative investor sentiment towards China saw the MSCI China Index fall by 16.17%, the investment trust's total return, which takes into account both income and capital returns, on net asset value - the difference between its assets and liabilities - amounted to 0.02% in the year ended March 31. The trust, which saw its share price total return decrease by 4.53% in the year, increased its dividend to 1.80 pence from 1.30p.
Taking a three-year view, the trust's NAV rose 73.70% and its share price by 52.34% against the MSCI China Index return of 8.67%, with all figures on a total return basis.
"It is undeniable that some investor concerns are valid," Dale Nicholls, the manager of the trust's investments, said in a statement. "For instance, some of China's old growth drivers are struggling and headline growth is undoubtedly moderating as China's economy matures. Debt levels also
continue to expand at a significant pace and, in my view, banks are probably understating the true extent of their non-performing loans."
The long-term risks to the economy stand to become larger with a continuation of the "rapid" growth in debt, Nicholls said.
Negative investor sentiment to China came from concerns about the country's slowing economy, according to Nicholls, who pointed also to confusing policy messaging and depreciation of the yuan in the second half of 2015.
Chairman John Owen said it is "unrealistic" to expect such a large economy to continue to grow as fast as it has been, calling on investors to focus on investments that will drive China's "next stage" of development and "play into" structural changes brought about by the rise of the country's middle class and more advanced manufacturing and services sectors.
Nicholls said the long-term investment potential offered by China's growing middle class is "often lost among the dramatic headlines". "Indeed, consumption continues to expand at a robust pace and the economy is rebalancing towards a higher quality and more sustainable growth model. This has been reflected in the strength of the so-called "new economy" in areas such as online sales and travel," the portfolio manager said.
"I am convinced that the Chinese middle class continues to grow both in wealth and in number and much of the company is invested in businesses providing goods and services to the rising Chinese consumer market. However, I also look for undervalued opportunities whether in the SOE sector or in oversold parts of the market. Given the investment opportunities in China, I remain confident in our ability to grow the NAV of the company over the medium-term," Nicholls said.
Fidelity China Special Situations also wants to amend its investment policy, with shareholders to vote on whether the trust should be able to increase a limit on the percentage of gross assets that can be held in unlisted securities. The allowance would rise to 10% from 5%.
The proposed change comes in the wake of the initial public offering of Alibaba, the Chinese e-commerce giant Alibaba, in September 2014. The IPO valued Alibaba at USD168.0 billion. Fidelity China Special Situations, which invested in Alibaba at an early stage, said there has been a trend for companies to raise capital in private markets rather than by listing on a stock exchange.
That echoed the view put forward in November 2015 by Scottish Mortgage Investment Trust PLC, managed by Edinburgh-based Baillie Gifford, which said there had been an acceleration of the trend for companies to delay listing on a public stock exchange until much later in their development.
At the end of 2015, Fidelity China Special Situations bought its first unlisted position since Alibaba's IPO: Didi Chuxing, the ride-hailing app and competitor to taxi app Technologies Inc in China. In May, tech giant Apple Inc invested USD1.0 billion in Didi Chuxing. Both Alibaba and Tencent are strategic investors in Didi Chuxing.
"There is a huge unmet demand in China for more efficient commuting and Didi Kuaizhi aims to position itself as a transportation solution provider," Nicholls said. "This position was initiated as part of a round of financing by the company in the third quarter of 2015, which valued the company at around USD16 billion. In a recent new round of financing, Didi's valuation was increased to USD20 billion, which has already been reflected in [Fidelity China Special Situations] NAV."
Shares in Fidelity China Special Situations were flat at 137.96 pence on Thursday just after midday in London.
By Samuel Agini; [email protected]; @samuelagini
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