Fidelity China Special Situations: June 2026 investment trust update

• Dale Nicholls is a veteran portfolio manager with 30 years of industry experience

• Fidelity has a large team of analysts across the region for the manager to utilise

• The trust takes advantage of its ability to borrow and invest in private companies

How it fits in a portfolio

Fidelity China Special Situations aims to grow capital over the long term by investing in a diverse range of Chinese companies. The trust’s manager invests in companies of all sizes, including higher-risk smaller companies. The trust may also invest in private companies which aren't currently listed on a stock exchange. This increases risk as these companies are less liquid (more difficult to buy and sell) than ones traded publicly.

A focus on a single emerging market means performance can be volatile, so it’s a higher risk investment. The trust should only form a small part of a diversified investment portfolio.

When investing in investment trusts, investors should be aware trusts can trade at a discount or premium to net asset value (NAV).

Manager

The trust has been managed by veteran investor Dale Nicholls since April 2014. Nicholls has spent almost his whole career at Fidelity, joining the company in 1996, and has focused on Asia for most of that time. He became manager of the Fidelity Pacific fund in 2003, which invests in China as well as other Pacific countries such as Japan and Australia. Nicholls previously managed a fund investing in smaller companies across Asia, giving him experience of investing in companies of all sizes.

Nicholls has the support of a wide range of resources at Fidelity, including a number of analysts based in the region and focused on researching Chinese companies. He draws on the research and insights from these analysts, including regular support and challenge. The team also has great access to company management to enhance their research.

Process

Nicholls’ focuses on companies he believes are undervalued and investing in them for the long term. The emphasis is on well-managed companies with strong growth potential. He dedicates a significant amount of time to meeting with companies and their competitors to gain a thorough understanding of industry dynamics.

Nicholls uses Fidelity’s team of analysts to generate investment ideas for the trust. He uses their analysis of companies’ financial health and value, considering the risk and reward offered by each company. He usually starts by investing a small amount in a company and adding more as his understanding and confidence in the company grows.

This results in a trust that can be different from the broader Chinese market. For instance, the trust has more invested in smaller companies. These are often less researched, providing Nicholls and his team with opportunities to invest before their potential is realised by other investors.

China is the world’s second largest economy. Nicholls believes the growth of China's middle class and an increasing focus on domestic consumption will be key drivers of growth in the coming years. He focuses on sectors that could benefit from this trend, such as consumer-focused companies, healthcare, and industrials. The largest investments in the trust include e-commerce platforms Alibaba and PDD, TikTok’s parent company ByteDance, and battery manufacturer CATL.

Closed-ended investments like this investment trust offer managers greater flexibility than open-ended funds. The trust makes use of gearing (borrowing to invest). This can boost returns in a rising market but also amplify losses in a falling market, so it’s a higher-risk approach. At the end of March 2026 net gearing stood at 19.3%, a decrease from 20.9% a year earlier. The trust also uses derivatives, which increases risk.

Nicholls has the flexibility to invest up to 15% of the trust’s assets in private companies that aren't currently listed on a stock exchange. At the end of May 2026, 10.8% of the trust invested in unlisted companies.

Culture

Fidelity was founded in 1969 and is a global investment manager. The company remains privately owned, meaning its managers can focus on the long-term interests of investors rather than short-term shareholder demands. That's helped the firm develop an investment-focused culture, where investment ideas are openly discussed and debated, and information is shared amongst the firm's various teams.

The company's scale means investment teams are well resourced and fund managers are well incentivised. We think it's positive that all Fidelity fund managers are incentivised based on the longer-term performance of their funds and investment trusts. We think this aligns their interests with those of investors.

ESG Integration

Fidelity implements a structured engagement program which allows it to be systematic in its engagement on environmental and social issues. The firm votes where it’s possible to do so and quarterly voting reports are posted online, complete with rationales for votes against management and abstentions.

All fund managers and analysts have access to Fidelity’s proprietary ESG ratings tool. It scores thousands of companies based on their ESG credentials on a forward-looking basis, with investment analysts tasked with the job of ensuring the ratings are up to date. Fidelity also developed a climate rating which assesses each company’s alignment with the Paris Agreement (which aims to limit global average temperature rises to well below 2°C).

While Fidelity has made strides forward at the firm level, we don’t think this has fully fed through to the fund level. Although there is plenty of ESG information available to all Fidelity fund managers, we’re not convinced they all put it to full use.

Nicholls believes ESG factors can play a role in a company’s long-term performance. While each company’s ESG risk is considered, he doesn’t manage the trust to a sustainable mandate.

Cost

The ongoing charge over the trust’s last financial year, to 31 March 2026, was 1.09%. This is an increase from 0.74% in the previous year, when the trust waived some management fees following its merger with the abrdn China Investment Company. Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.

The annual charge to hold investment trusts in the HL ISA, SIPP, or Fund & Share Account is 0.35% (capped at £150 p.a. in each account) and 0.25% in the HL Lifetime ISA (capped at £45 p.a.). There are no charges from HL to hold investment trusts within the HL Junior ISA. As investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

The trust has delivered strong returns for investors since Nicholls became manager in 2014. Over his tenure, the trust’s share price return of 238.98%* is ahead of the MSCI China benchmark, which rose 117.32%. The trust’s NAV grew 230.71% over the same period. Past performance isn’t a guide to the future.

While returns have been strong, Nicholls’ adventurous style means they’ve also been volatile. There have been periods where the trust hasn’t performed as well as the broader market, so it’s important to invest for the long term.

In the trust’s last financial year, to the end of March 2026, the net asset value of the trust grew 7.54% and the share price returned 6.09%. Both were ahead of the 1.82% rise of the MSCI China benchmark.

A number of industrials companies contributed to performance in the past year, including Impro Precision Industries and Ningo Deye Technology. Both companies manufacture components used in energy storage and saw strong demand for their products. Technology company Zhongji Innolight also performed well due to an increase in companies investing in data infrastructure, fuelled by demand for AI solutions.

Investments that detracted from performance include financial companies Lexin Fintech and Hashkey Holdings. Both were affected by regulatory concerns over their services. Nicholls has since sold the trust’s investment in Lexi Fintech. Hashkey is Hong Kong’s leading exchange for digital assets, with a growing presence across other parts of Asia. Nicholls believes the company will perform well in future but acknowledges it’s likely to be a more volatile investment.

Whilst the trust mainly focuses on growing capital, it also has a history of paying dividends. The board has declared a final dividend for the year to the end of March 2026 of 9.00p per share, which is an increase of 12.5% on the previous year. At the time of writing the trust has a dividend yield of 3.45%, although yields are variable and any future income isn’t guaranteed.