Ian Cowie: China U-turn and the investment trust I’ve bought

Will today’s (24 September) talks between the American president, Donald Trump, and the Chinese leader for life, Xi Jinping, improve relations in the same way former president, Richard Nixon, and chairman, Mao Zedong, did more than 50 years ago?

I certainly hope so, for the sake of all of us, and - moving from the macro to the micro - my modest investment portfolio

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Trump and Xi will negotiate at the White House today, before moving on to a state banquet tonight, and more talks tomorrow. Both the world’s biggest economies say they aim to ease tensions and began deal-making positively by extending a tariffs truce until 10 January 2027.

Coming down from the clouds of geopolitics to ground level personal finance, last week I paid 245p per share to invest in Fidelity China Special Situations (LSE: FCSS). Over one year this is the worst-performing of three investment trusts in its sector, having shrunk shareholders’ funds by more than 18%.

That’s quite an about-turn for me, so I had better explain why. First, after a couple of business trips to China more than 30 years ago, this enthusiastic emerging markets investor had gained exposure to that country, after being impressed by its work ethic and industrial power in Shanghai and Shenzhen.

Then, more recently, worries about the way it treated its Muslim minority, the Uyghurs, prompted me to bail out eight years ago. While I would not go so far as to describe myself as an ethical investor, I do prefer to buy shares in businesses I support as a customer and avoid activities I oppose, such as gambling and tobacco.

Sad to say, the world’s second-largest economy, whose population includes almost a sixth of the global total, did not care a jot about opposition from the likes of little me. To be candid, my prancing around on the moral high ground didn’t do the Uyghurs any good. It started to seem a bit silly, like one of those actors or musicians who criticise the governments of countries they might never have visited.

Most recently, and urgently, I became concerned about potentially excessive exposure to America in general and artificial intelligence (AI) in particular. So I turned paper profits into real ones by selling a five-figure parcel of the software giant, Microsoft Corp (NASDAQ:MSFT), shares I had bought for $241 and $233 in January 2023, as reported elsewhere at that time, for $497 last week.

It’s worth mentioning that the iPhone-maker, Apple Inc (NASDAQ:AAPL), which is much less exposed to AI; the agricultural engineer, Deere & Co (NYSE:DE), and the oil giant, ExxonMobil Holdings Corp (NYSE:XOM) remain among six American shares in my top 10 holdings by value. That’s in line with the fact US stocks represent two thirds of the global total by stock market capitalisation.

More positively, my recent asset allocation rejig should diminish risk by increasing geographic diversification. However, it doesn’t represent bailing out of the technology theme because two of Fidelity China Special Situation's top holdings, are Alibaba Group Holding Ltd ADR (NYSE:BABA), the e-commerce giant, and Tencent Holdings Ltd (SEHK:700), the online platforms conglomerate.

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Drilling further down, Alibaba and Tencent are among the biggest investors in Moonshot AI, the maker of a potential challenger to Microsoft’s stake in OpenAI in the form of Beijing-based Kimi. So I now have something of an each-way bet on two cutting-edge AI rivals, Microsoft and Moonshot.

This would be a good point to emphasise that Fidelity China Special Situations is totally unsuitable for anyone who might lose sleep when the share price falls. Its total returns over the last decade, five years and - as mentioned earlier - one year, are plus 79%, minus 7% and minus 18%, respectively.

Less risky options include both of Fidelity China Special Situation’s rivals; Baillie Gifford China Growth Trust Ord (LSE:BGCG) and JPMorgan China Growth & Income Ord (LSE:JCGI). JPMorgan leads this sector over the last decade with returns over the usual three periods of plus 80%, minus 32% and minus 3%. Meanwhile, Baillie Gifford leads over the last year, with returns over the same three periods of plus 21%, minus 15% and plus 0.5%.

All the above numbers demonstrate just how volatile and out-of-favour China currently is. However, this old boy with one eye on retirement draws some comfort from the fact that Fidelity China yields 3.5% income, which has risen by an annual average of 14% over the last five years.

Better still, it has increased shareholders’ income every year, without fail, for 15 years; which gains it a place in the Association of Investment Companies’ next generation of dividend heroes (those that have increased their dividends for 10 or more consecutive years, but fewer than 20 years). Neither of its rivals can match that. Baillie Gifford China yields less than 1% and, although JPMorgan China currently yields 5%, both have cut payouts during the last five years.

Even so, it is important to emphasise just how risky Fidelity China Special Situations is. This fund has 24% gearing, via contracts for difference or financial derivatives, which is more than either of its rivals, and will tend to increase gains or losses.

However, all the above appeal to this contrarian investor who, having done well in America over the last decade and more, thinks it might be time for a change of tack. Sometimes the best opportunities to consider emerging markets occur when they are unfashionable and cheap.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), Deere (DE), ExxonMobil (XOM), Fidelity China Special Situations (FCSS) and Microsoft (MSFT) as part of a globally-diversified portfolio of investment trusts and other shares. To read more see iancowie.co.uk