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Ian Cowie: why Fidelity China is the emerging trust for me

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Ian Cowie: why Fidelity China is the emerging trust for me

What do you mean, you weren’t invited? Me neither. But even those of us unable to attend the 19th National Congress of the Communist Party of China, which began this week in Beijing, should sit up and pay attention to money-making prospects in the world’s second-largest economy and most populous nation.

Fidelity China Special Situations (FCSS), the £1.8 billion investment trust that ended Anthony Bolton’s career on a bit of a bum note but has since recovered strongly, delivered total returns of 26% during the last year. JP Morgan Chinese (JMC), a longer-established trust but a relative tiddler with assets of less than £270 million, shot the lights out with total returns of 39% over the same period.

Cynics might say this is a flash in the pan but five-year returns from these investment trusts of 227% and 137% respectively suggest there is more to China than a mere financial fad. Sceptical souls might fear that by the time the media notice an emerging market it is always too late but, while both these trusts’ shares continue to trade around 12% discounts to their net asset values, there is room for further gains.

Closed-end funds are the ideal way to get into this formerly closed-economy because their structure means long-term investors will not be forced to subsidise short-term speculators when they dash for cash, as will happen in highly volatile markets from time to time. By contrast, open-ended vehicles – such as unit trusts and exchange traded funds (ETFs) – may be forced to sell their most liquid and perhaps best underlying assets to meet redemptions.

Never mind the technical details, though, what about the big picture? While the world has been looking in the other direction, mesmerised by Donald Trump’s antics in America, another president, Xi Jinping, has quietly consolidated political power and enabled economic progress on a scale rarely seen.

Xi is said to see himself continuing the work done by Deng Xiaoping, who became leader in 1982 and introduced a ‘socialist market economy’ to repair the damage done by Mao Zedong’s communist policies that caused millions to starve to death. Little red book fan, John McDonnell, please take note.

Now the International Monetary Fund and PriceWaterhouse Coopers are among those who predict China will overtake America as the world’s biggest economy within a decade. The collision of new technology and the same old authoritarian politics is accelerating the rate of change. With a repressive regime that routinely imprisons journalists and anyone else who criticises the government, China could never allow American internet giants free access to its population that comprises a quarter of all humanity.

So home-grown rivals – such as Alibaba, Baidu and Tencent – were always guaranteed a clear run at the home market and have clearly taken up this opportunity to the full. This is a bit of a painful topic for me because I invested in what was then Fleming Chinese Investment Trust more than 20 years ago, after visiting Shenzhen and Shanghai.

What followed was an exciting ride, with the share price doubling in the run-up to the handover of Hong Kong in 1997 but halving not long afterwards. Things picked up in the noughties, despite a painful spike lower in 2008, before a terrific bounce in 2009 when I took profits to pay for a classic sailing boat and sold the last of my direct interests in that country.

Since then, with the benefit of hindsight, I can see that I have taken my eye off the ball. If only I had hung on to those red chips but am now thinking of investing there again.

Fidelity’s trust looks marginally more attractive to me because, according to Edison Investment Research, it has shunned banks and property where a nasty surprise might be lurking in the ‘shadow economy’. Instead, Fidelity holds Hutchison China MediTech (HCM) - which has exciting prospects of a cure for some cancers - along with bigger stakes in Tencent and Alibaba.

There is also a modest yield of 1.1%, which has risen by 20% over the last five years and is more than double the dividends paid by JP Morgan’s rival trust, where there has been no progress in payouts at all, according to Association of Investment Companies statistics.

Fidelity’s ongoing charges are also slightly lower at 1.2% per annum. So I have initiated a modest new position, buying just below 237p share yesterday. You don’t need to be a communist or be invited to the congress jamboree to see money-making opportunities in China.

Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.

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