Fidelity’s Nicholls takes SoE exposure to 25%

Fidelity’s Nicholls takes SoE exposure to 25%
How SoEs in Dale Nicholls’ fund have performed

Fidelity’s Dale Nicholls has extended his unconventional approach to Chinese stockpicking by further increasing his fund’s exposure to state-owned enterprises (SoEs).

Mr Nicholls said he has increased exposure in his £1bn China Special Situations investment trust to 25 per cent, focusing on those businesses involved in the infrastructure space with “good assets”.

“We have allocated 25 per cent of the portfolio to SoEs with good assets such as airports, including Shanghai,” Mr Nicholls said.

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The airport forms part of the vehicle’s top-10 holdings with a 2 per cent allocation. While the building has become an access hub for the country’s financial industry, Mr Nicholls said it was still suffering from growing pains and had much room to improve.

Chinese energy giant Sinopec is another top-10 SoE holding at 3.1 per cent, alongside telephone network concern China Unicom.

Government-run firms listed in China have been the bane of active managers for many years, but their dominance in vital services – such as banking, property and infrastructure – ensures they take up large parts of any index. This can skew relative returns for stockpickers in the region. 

As a result fund managers tend to avoid the companies entirely, given management often bends to the will of the government and sometimes against the interests of shareholders.

Mr Nicholls acknowledged the move into SoEs remained unconventional for an active manager, but said there was a potential for upside given their relatively beaten-up valuations and a changing political environment. However, he remains cautious on the country’s state-owned, debt-laden banks.

“Valuation was a big factor [in the increase in SoE holdings]. There is also a growing potential for change and a better regulatory environment to operate in,” he added.

Mr Nicholls is approaching his three-year anniversary since taking over from former Fidelity stalwart Anthony Bolton, who retired from fund management after an ill-fated period running the trust. Since then the vehicle has returned 90 per cent, comfortably beating its MSCI China benchmark.

Under Mr Nicholls the strategy introduced a small-cap bias and increased its number of holdings to 150. This includes three unlisted positions, a growing area for the trust. The company sought shareholder approval last year to double its private equity cap to 10 per cent.

The three unlisted plays – which currently account for 4 per cent of the trust – focus on the main theme in the portfolio: the consumer. The manager said this was harnessed by looking at potential growth areas such as e-commerce and insurance.




Fidelity China Special Situations trust’s allocation to state-owned enterprises


 The vehicle’s current allocation to consumer-focused stocks