Virus presents tricky situation for China trust
SHAREHOLDERS in investment trust Fidelity China Special Situations are likely to be in for a rocky ride in the coming weeks as stock markets in China and Hong Kong continue to respond negatively to the outbreak of the deadly coronavirus.
The £1.2billion trust, managed out of Hong Kong by Dale Nicholls, has already seen its share price fall in recent days in response to fears that the coronavirus outbreak could curtail economic growth in China. Its shares now trade at a near 10 per cent discount to the value of their underlying assets, indicating negative sentiment towards the trust and to China as an investment opportunity. Over the past week, its share price has dropped from £2.37 to just above £2.20.
For Nicholls, the spread of the deadly coronavirus came as he was in London to promote the fund to investors. What was intended to be a double celebration of the trust’s long-term performance and of the Chinese New Year turned out to be more an exercise in damage limitation as he assured investors that the long-term investment case for China remained intact.
Speaking at a lunch briefing at Fidelity’s offices opposite St Paul’s Cathedral in London, he said that he would be looking to ‘reduce risk’ in the trust over the coming days. This would be done by cutting back some holdings and using financial instruments such as options to protect the trust if the stock market and specific stocks continue to fall in value.
On the surface, the trust’s portfolio, skewed towards companies dependent upon domestic consumer spending, is vulnerable to any economic downturn as a result of the coronavirus. For example, top ten holding Trip.com – an online travel agency – is likely to see revenues impacted as a result of the travel restrictions imposed post-coronavirus. Yet Nicholls is confident the company’s longterm investment case remains intact as growth in outbound travel (outside China) continues. Hotel operator Shangri-La Asia, another key holding, could also see revenues adversely affected by a drop-off in tourism and travel by Chinese residents to entertainment hotspots such as Macau.
Despite the coronavirus, the simmering protests in Hong Kong and the continued trade talks between China and the United States, Nicholls was keen to emphasise that the trust will continue to provide ‘fertile ground’ for long-term investors. A result, he said, of the sharp growth in China’s middle-classes with money to spend on travel and consumer goods. A lot of that spending, he said, would be done online – hence the trust’s big stakes in internet giants Tencent and Alibaba.
Typically, Nicholls looks to buy companies that have a competitive advantage over rivals, are run by the ‘right stewards’ (strong management teams), and have the ability to grow over the long term (ten years or more). Just under five per cent of the trust’s assets are invested in unquoted companies – a holding Nicholls wants to build upon as unlisted ‘opportunities’ in the technology sector become available.
Over the past five years, the trust has delivered returns in excess of 76 per cent. To put this figure into context, the FTSE All-Share Index has increased by 37 per cent. The trust is not suitable for income seekers and the overall annual charges are on the high side at 1.5 per cent. London Stock Exchange Identification Number: B62Z3C7.