This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks, for the chance of fantastic rewards from across the continent.
Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Dale Nicholls, Manager of the Fidelity China Special Situations Fund (FCSS).
Hello, Dale.
Dale Nicholls: Hi, Emma.
Wall: So, your trust obviously is closed ended and that's what sets it apart from a lot of Chinese and Asian equity funds. How does that influence your investment decisions, particularly within the special situations sector?
Nicholls: Sure. Well, obviously, I don't have to worry about flows. So, from a liquidity perspective, I can go down the cap curve a little bit further. But what's special about this trust as well is obviously I can gear up and I can short as well as invest in unlisted companies. So, it's the overall flexibility of the trust that I think is really interesting. And when you're dealing in markets that are very volatile like China, a lot of those tools really come into play.
Wall: I mean, this must make it a little bit more tricky as well, but when you put it off, those gains are much greater.
Nicholls: I think so. Yeah, absolutely. You can really capitalise on the opportunities that volatility brings about.
Wall: And the trust has done very well over the medium term, 5-Star status from Morningstar analysts. What do you think has driven that?
Nicholls: I just think it really just comes down the stock picking. It's a market that's very much driven by a lot of macro factors. But there are a lot of companies that are interesting and it's kind of an under-covered market relative to some other markets. So, there's just a lot of really good stock picking opportunities and obviously, we've leveraged that ability to invest in unlisted companies as well which has really driven performance as well.
Wall: Looking then at those stocks, I mean, one of the great sort of unknowns investing in this part of the world is the concept of a state-owned enterprise. We don't really have them so much anymore in the U.K., not since the 80s. But a lot of people in the U.K. assume that they are not the place to be in China because why would you want to be somewhere where the state can meddle. But actually, you and your team have a slightly different view on that, don't you?
Nicholls: Well, I must say, the story in China really is still about the private companies. They are the ones that will get a benefit from so much of the reform in terms of the level playing field and sort of the opening up and liberalization of the economy. So, I do think they are the most interesting area, but you can't ignore the state-owned companies because some of them have really great assets and you've got to think about – if state-owned enterprise reform really does happen, there's good potential to actually improve the returns on those assets.
So, I think about what are my larger holdings, Shanghai Airport, and that's a fantastic asset and it's benefiting from domestic travel but also the significant increase that we're seeing in outbound travel. You got things like Shanghai Disney Land which is opening up next year and again, it's a great asset but you can imagine pretty strong potential to improve the returns on those assets as well given what I think is kind of an undermanaged retail and sort of food and beverage offering that they currently have. So, if there is real reform, there is good potential to actually improve the returns on those assets as well.
Wall: Dale, thank you very much.
Nicholls: This is Emma Wall for Morningstar. Thank you for watching.
