Fund Spotlight: the racy trust riding the China wave

The Chinese equity market has staged a strong rebound in 2025 with the MSCI China index returning 30% in sterling terms.

This has been welcomed following the steep declines seen between 2021 and 2023. Since the lows of September 2024, the market has rallied strongly, supported by a combination of policy and sentiment shifts.

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A renewed focus from Beijing on pro-growth measures and market stability, coupled with growing investor enthusiasm for China’s rapidly advancing technology and artificial intelligence (AI) sectors, has helped restore confidence. Attractive valuations, still at notable discounts to global peers, have further underpinned the recovery.

Looking ahead, the outlook appears more constructive than in recent years, with domestic consumption and structural growth themes such as automation, renewable energy, and AI expected to remain key drivers.

For investors seeking exposure to China’s innovation-led growth, the Fidelity China Special Situations Ord (LSE:FCSS) offers a well-established option. Managed by Dale Nicholls since 2014, the trust aims to deliver long-term capital growth. Nicholls is supported by Fidelity’s extensive analyst network, providing strong on-the-ground research capability across China’s evolving investment landscape.

What does the trust invest in?

Fidelity China Special Situations holds a diversified portfolio of around 180 companies, aiming to capture the breadth of China’s growth potential.

The trust has a flexible mandate, enabling management to invest across the market cap spectrum. From smaller and medium-sized businesses to established industry leaders such as Tencent Holdings Ltd (SEHK:700), which is the largest portfolio holding at around 14% of assets.

Nicholls has the flexibility to invest in companies listed both in mainland China and overseas, provided they are positioned to benefit from the country’s structural growth drivers, including technological innovation and the rising spending power of the Chinese consumer.

A key differentiator of the trust is its ability to invest in unlisted companies, offering access to early stage opportunities not typically available to most investors.

Around 10% of the portfolio is currently held in unlisted assets, the largest being ByteDance, which has achieved impressive revenue growth over the past year. It is best known for developing the popular video-sharing app TikTok and has recently been navigating US regulatory requirements to reduce its ownership stake in the platform.

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To further enhance returns, the trust also makes use of gearing. The current level of 28% is reflective of management’s confidence in the abundant opportunity set.

Compared with its benchmark, the MSCI China Index, FCSS maintains a notable bias towards mid and small-cap companies which account for 50% of the portfolio, where Nicholls believes market inefficiencies create attractive prospects. From a sector perspective, the trust tilts towards China’s domestic growth engine. Consumer exposures make up more than 45% of assets, with meaningful allocations to industrials (22.9%) and healthcare (7.1%).

At the core of the strategy is a focus on undervalued businesses with sustainable competitive advantages, strong management, and potential for long-term capital growth.

Nicholls regularly meets company leaders to assess strategy and execution, using a range of valuation measures to weigh opportunity against risk. On a valuation basis, Chinese equities (MSCI China) currently trade at around 14.6x forward earnings, while FCSS sits below this at 10.5x, which represents a meaningful discount and substantially lower than the US market, which trades at about 22.9x.

How has the trust performed?

Over the past 12 months, the trust has delivered a stellar absolute return of 55%, significantly outperforming the MSCI China Index, which returned 30.8%. Performance has benefited from the wider rebound in Chinese equities and improving investor sentiment. The trust’s tilt towards small and mid-cap companies, as well as its focus on innovative, growth-oriented businesses, has been particularly beneficial in this environment.

Key contributors included holdings in technology and consumer sectors, where select companies saw robust earnings growth and re-ratings amid optimism surrounding China’s AI and automation potential. By contrast, earlier periods of underperformance coincided with broader market weakness, when regulatory tightening, the property sector downturn, and slowing exports weighed on sentiment across the Chinese equity market.

Source: Morningstar Market Returns (GBP) to 31/10/2025. Past performance is not a guide to future performance.

Why do we recommend this trust?

The trust offers investors a proven, long-term strategy, managed by an experienced team with strong on-the-ground research and a disciplined approach to stock selection.

Its mandate enables investment into unlisted and smaller-cap Chinese companies providing investors with access to early stage, high-growth businesses often unavailable in traditional China funds. The portfolio is positioned to benefit from China’s structural growth themes, particularly in domestic consumption, innovation, and technological self-sufficiency, which are areas expected to drive China’s next phase of growth.

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Despite the improving outlook for Chinese equities, the trust’s current discount of 9.8% remains wider than its five-year average and has only approached similar levels during periods of heightened uncertainty, such as the onset of the Covid-19 pandemic.

A key factor weighing on sentiment may be the still-unresolved trade negotiations between the US and China. Should these discussions reach a favourable conclusion, it could act as a catalyst for renewed investor confidence, potentially narrowing the discount and offering an appealing entry point for long-term investors.

FCSS features on ii’s Super 60list of investment ideas as an adventurous Asian equities option. It could take the place of a satellite holding in a diversified global equity portfolio, offering meaningful diversification and growth potential. Investors should be aware of the additional risks associated with small-caps, unlisted holdings, and the use of gearing.

FCSS is available for a yearly ongoing charge of 0.89%.

Please find the latest factsheet here.