Take your chances in China with these two investment trusts

These two China-focused, London-listed investment trusts are excellent long-term bets, says Max King.

Shoppers in China © VCG/VCG via Getty Images

China is shifting towards a consumer-driven economy

Shoppers in China © VCG/VCG via Getty Images

According to City folklore, the Chinese word for crisis is made up of two characters, one signalling danger, the other opportunity. With the media fearing an imminent Chinese crackdown on the protesters in Hong Kong, the danger for investors is clear.

But if those fears are misguided, the current uncertainty may present an opportunity. The latter seems much the most likely, with the Chinese authorities exercising some restraint and anxious not to destabilise carefully cultivated relations with other emerging economies.

Stocks are hard to ignore

A major disruption to the Chinese economy and stockmarket looks unlikely. As Dale Nicholls, the manager of Fidelity China Special Situations Trust (FCSS), explains, "the Chinese economy may have slowed, but it is still... growing at over 6% per annum. Over time, the consequent growth in corporate earnings must be reflected in the value of investments." What's more, "though China has a mid-teens share of global GDP, until very recently it represented less than 3% of global markets, so that share will continue to grow. China is becoming much more difficult to ignore and should, in time, represent 40% of the global emerging markets index."

With £1.7bn of assets, the Fidelity China Special Situations fund (LSE: FCSS) is the larger of two UK-listed trusts focused on China. It was launched in 2010 with Anthony Bolton at the helm. Bolton handed over to Nicholls in 2014.

In the last five years, the investment return has been 115%, beating both its rival JP Morgan Chinese (LSE: JMC), with £300m of assets, and every other emerging-markets trust. But over one and three years, JMC is well ahead, returning 4% and 64% respectively, compared with -6% and 37% for FCSS. Both trusts have large holdings in the two Chinese technology giants Alibaba and Tencent; a combined 20% for JMC and 24% for FCSS, and both have borrowings to boost investment returns of about 20% of net assets.

But just 25% of FCSS's portfolio is in firms with a market capitalisation above £10bn, compared with 73% for JMC, and 28% is in small companies with a market value below £1bn, compared with JMC's 2.4%. As Nicholls points out, small caps have underperformed the MSCI China index over the last two and a half years by a cumulative 50%. Should this reverse, FCSS can be expected to catch up.

Moving up the value chain

Despite FCSS's policy of share buybacks, its shares trade on a 10% discount to net asset value, compared with an even higher 13% for JMC, reflecting, perhaps, lingering distrust of China and the profit motive of its companies, many of which are state-controlled.

If so, this is not justified as JMC explicitly states that it focuses on "New China; companies... capitalising on the transition of the country to a more consumer-driven economy". As for FCSS, "New China opportunities remain incredibly exciting", says Catherine Yeung, investment director at Fidelity. "When we visit companies we see... automation, heaps of research and development and a lot of innovation. The government is encouraging companies to climb up the value chain rather than just be... manufacturers."

Encouraged by the success of investing in Alibaba before its flotation, Nicholls has invested 6% of the portfolio in unlisted companies with "exactly the same process" as for listed ones. This is risky, but it could pay off, as the punt on Alibaba did. Choosing between the two excellent trusts is tough. FCSS's mostly small and mid-cap strategy should succeed, as it has before, but there are also opportunities for JMC's big caps. The long-term confidence of both looks justified.

Recommended

How to profit from rising food prices: which stocks should you invest in?
Share tips

How to profit from rising food prices: which stocks should you invest in?

Food prices are rising – we look at the stocks to avoid and the one to invest in this sector.
28 Nov 2022
4 cheap investment trusts to buy and 3 to avoid
Investment trusts

4 cheap investment trusts to buy and 3 to avoid

Valuing funds that hold unlisted assets can be tricky, but some discounts look excessive.
25 Nov 2022
Share tips of the week – 25 November
Share tips

Share tips of the week – 25 November

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
25 Nov 2022
2 investment trusts with growing dividends: which one should you invest in?
Investment trusts

2 investment trusts with growing dividends: which one should you invest in?

They might not have spectacular yields but these two trusts have increased their dividend every year for 55 years.
24 Nov 2022

Most Popular

Wood-burning stove vs central heating ‒ which is cheapest?
Personal finance

Wood-burning stove vs central heating ‒ which is cheapest?

Demand for wood-burning stoves has surged as households try to reduce their heating costs this winter. But how does a wood burner compare with central…
21 Nov 2022
Fan heater vs oil heater – which is cheaper?
Personal finance

Fan heater vs oil heater – which is cheaper?

Sales of portable heaters have soared, as households look to cut their energy costs. But which is better: a fan heater or an oil heater? We put them t…
21 Nov 2022
Best savings accounts – November 2022
Savings

Best savings accounts – November 2022

Interest rates on cash savings are making a comeback. We look at the best savings accounts on the market now
28 Nov 2022