6th Jun 2014 10:17
LONDON (Alliance News) - Fidelity China Special Situations PLC Friday said it outperformed its benchmark in its recent financial year but lamented that its share price remains close to its launch price due to investors turning away from emerging markets.
In a statement, Fidelity China Special Situations said its net asset value increased by 19.5% on a total return basis in the year ended March 31, boosted by stock selection and the use of borrowed funds to magnify performance.
Meanwhile, the MSCI China Benchmark Index fell by 6.9%.
Several internet companies in which the fund is invested performed strongly, including Alibaba, which is set for what is expected to be one of the largest ever initial public offerings for a Chinese company in the US. Healthcare companies also helped its outperformance.
The company's shares provided a total return of 14.1% over the course of the recent year, due to a 0.15 pence increase in dividend and 13% rise in the share price. However, the shares have dropped back since and remain close to the GBP1.00 launch price of the company, which Chairman John Owen called disappointing.
Fidelity China Special Situations shares were Friday morning quoted at 100.52 pence, down 0.3%.
"This is as a result of poor investor sentiment toward emerging markets, particularly China, and the fact that many UK investors are turning their attention back to western economies, especially in the US and UK, where there are more positive signs of growth than previously," the Owen said in a statement.
However, the chairman said that there are signs that the government in China is looking to move away from an economic model driven by state-directed investment spending, towards one more reliant on increasingly wealthy Chinese consumers. He said that reforms introduced at the government's Third Plenary in November, which included a relaxing of the country's one-child policy, highlighted that desire and has brought about interesting investment opportunities. The reforms also include measures to give the market a bigger role in pricing resources, setting interest rates and converting currency.
Anthony Bolton, who is handing over the reins to Dale Nicholls after four years of managing the company's portfolio, said the changes pave the way for private banks and more bond financing and promise to level the playing field between state-owned enterprises and private companies.
Nicholls, who has been at Fidelity for 18 years and managed money in Asia since 1999, said that macro concerns about China have created a number of investment opportunities for bottom-up stock pickers. He noted, however, that although the "new China" is where he wants to be positioned, the "general disregard" for state-owned enterprises is creating opportunities to buy some good companies with high barriers to entry which can benefit from reforms. The new portfolio manager gave the example of Guangshen Railway, which hasn't been able to raise passenger prices since the mid-1990s.
"I share Anthony's view that China's economic model will shift more towards private consumption and services, offering many opportunities within this space. Similarly to Anthony, I also have a small and mid-cap bias as these tend to be less researched, which means more opportunities for mis-pricing. I try to let the stock picking drive portfolio construction," Nicholls said.
Meanwhile, Bolton said that concerns about the sustainability of high gross domestic product growth in China, as well as the country's high debt are too often evaluated from a Western perspective, which "does not necessarily take into account the unique features of a centrally-run economy like China's". While agreeing that China is faced with financial challenges, the portfolio manger said that the idea that they will result in some imminent major financial crisis in China is very far off the mark.
Nevertheless, Nicholls noted the company has no shares in Chinese banks. Although he agreed that a "Lehman-style" financial crisis is highly unlikely, he said that China's borrowing in the last five years has been rapid.
"History teaches us that such expansions usually end in significant non-performing assets, particularly in areas where the mal-investment has been most severe. I expect the same in China and this is the main reason why the company does not hold shares in Chinese banks. We are already seeing some well publicised defaults, and I believe the sooner authorities start dealing with the problem the better," Nicholls said.
However, Bolton said that many of the issues he raised involve government-owned entities, meaning that the authorities are therefore likely to use "all means at their disposal" to address them.
"It is true that the overall level of debt in China is high although, unlike in some countries in the West, the greater part of the borrowings is corporate rather than government or personal debt," the outgoing portfolio manager said. "Partly this is due to corporates having to rely on debt because they are unable to source funds from capital markets as they would in the West. Although debt levels are high, so is the savings rate (much higher than in the West). A high savings rate makes higher debt levels less concerning. Also, nearly all the debt is borrowed internally so it is not exposed to changes in foreign lenders' views about China."
"In the past, China's current account surplus has been very healthy, putting the country in a strong financial position relative to its peers. Finally, most of the debt has been taken on to finance investment rather than consumption, which again differentiates China from other countries like the US," Bolton added.
By Samuel Agini; [email protected]; @samuelagini
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