Fund of the week ‘I beat the pandemic and returned 42pc this year’

Dale Nicholls of Fidelity tells Jessica Beard how being prepared to invest in expensive-looking Chinese tech stocks helped his fund perform

China has been the subject of intense international scrutiny this year as the first country to face the ravaging effects of the pandemic on its population.

Coronavirus then fed through to global stock markets. The Chinese stock market was the first to fall but also the quickest to recover and a lot of its businesses have not only bounced back but have thrived in the new era of working from home.

Dale Nicholls, who runs the £1.6bn Fidelity China Special Situations trust, has homed in on businesses that are benefiting the most from the new lockdown trends. He has made returns of 42pc this year, while the average Asia-Pacific fund has gained only 1pc.

He tells Telegraph Money how he did it and why he is prepared to invest in some of the most expensive stocks in the market.

WHO IS THE FUND FOR? The fund is for all long-term investors. China is growing in importance in the world. It is already the second-biggest economy, so it will play a bigger part in people’s investments.

WHY SHOULD INVESTORS WANT EXPOSURE TO CHINA? China is going to grow faster than most economies in the West.

The middle-class population is expanding, so there is huge potential to invest in the growth of consumption. There are a lot of industries that have not been consolidated and are still fragmented. If China moves more towards the European model, where there are only two or three big players in each industry, investors can get in on the ground floor of the companies that will rise to the top.

WHAT DO YOU LOOK FOR WHEN PICKING A STOCK, AND WHY? There are three factors I always get my head around. One is growth: you need to think about how big a company could be in 10 to 15 years. Second, I look at returns. There are a lot of

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telegraph.co.uk/ markets-hub industries that have a lot of growth but very little by way of returns. It all comes down to competitive advantage.

The third aspect is management. You can have a great business but management needs to be able to deliver on its promises. This factor is the main reason why the majority of the portfolio is invested in private companies and not state-owned companies.

HOW HAS THE PORTFOLIO BEEN AFFECTED BY THE PANDEMIC? Overall, my companies have done fairly well. The sectors that have benefited from the structural changes in the country are often called “new China” and they are areas such as technology, healthcare and consumer goods. These are sectors that are going to occupy bigger parts of the economy, so I have been squarely focused on those.

More than 40pc of the investments in the portfolio have been beneficiaries of the pandemic. They have gained from the shift online and it is not just e-commerce; a lot of services such as education are also shifting. Online gaming has grown and there has been increased data usage. These trends have been accelerated.

YOU INVEST IN EXPENSIVE TECH STOCKS. WHY? These companies are still undervalued. You need to think of them in a “sum of the parts” context.

If you think of Alibaba, the giant tech firm, you have the core e-commerce business that continues to grow, but there is huge potential in other parts of the company that are currently underearning but will generate significant value over time.

For example, Alibaba and Tencent have dominated the payments business in China and they are using that as a platform to sell a whole range of other financial services.

WHAT HAS BEEN YOUR BEST INVESTMENT? Li-Ning, an up-and-coming sportswear brand in China. It has been bringing out new streetwear that is getting a lot of traction and generating high returns.

AND YOUR WORST? China Animal Healthcare to mind. It was an animal vaccine company and it turned out the numbers were not as good as they were reporting.

HOW ARE YOU PAID AND DO YOU INVEST IN THE FUND? Absolutely. I am a big

springs believer in what I have in the portfolio and its potential.

I get a salary and a bonus, but the bonus proportion is much bigger. So my income is driven by how well the

trust performs.

What £1,000 invested at launch would be worth

WHAT WOULD YOU HAVE BEEN IF NOT A FUND MANAGER? As a young lad I played football pretty seriously. I have always wondered whether I had the potential to go further.