Fidelity China Special Situations has had a fair amount of bad publicity since its launch in 2010, much of it poorly informed in my view.
My sympathy, then, to Dale Nicholls, who assumed management of the trust in April last year. For he has risen to the challenge admirably and patient investors have been rewarded, with the trust's share price reaching a peak in May this year. Performance was undoubtedly aided by the Chinese stock market rally from mid-2014 to early June 2015, but good stock selection also had a material effect.
In my view, the Chinese market's dramatic take-off had two main drivers. First, unlike other markets, China's is dominated by retail investors. Domestic, high net-worth investors began moving in after losing interest in areas such as property and private equity. The launch of the Shanghai/Hong Kong Connect scheme, giving foreign investors direct access to Chinese shares, drove equity demand higher still.
Second, the authorities let the use of margin finance – borrowing money to buy shares – to spiral out of control. Stereotypical it may be, but the Chinese are prolific gamblers.
The regulators were behind the curve in controlling the level of margin borrowing and their eventual response was heavy-handed. Suspending shares, ordering brokers to buy shares and preventing the shorting of stocks were some of the measures employed when the market began a steep decline in June this year.
However, only two stocks held within Fidelity China Special Situations were suspended, and the trading of one has since resumed. The trust's net asset value (NAV) was therefore broadly unaffected.
Before the sell-off, Mr Nicholls increased his short position in "A" shares listed on the Shanghai and Shenzhen exchanges, which are predominantly for domestic investors. This provided some shelter when the market fell. He subsequently reduced these short positions and began adding to his long positions.
He feels there are huge valuation disparities between different areas of the market and is currently finding value in large-cap "A" shares.
Mass-market consumption remains a key theme in the portfolio. Take-up remains low in consumer products such as cars, and Mr Nicholls is investing here in anticipation of increased demand. The internet is another key theme; only 50 per cent of the Chinese population have access, compared with more than 90 per cent in the West. As internet use rises, he expects businesses such as the video game developer NetEase to benefit.
Many investors appear to view China as very black or white, either loving or hating it. For me, there are simply too many bears forecasting its downfall. I would therefore bet against the consensus and this is one of my favoured vehicles for exposure to China.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.ukReuse content