Fidelity China Special Situations (FCSS) aims to achieve long-term capital growth from an actively managed portfolio of stocks mainly listed in China and Chinese companies listed abroad. It is the largest UK investment trust focused on China. Manager Dale Nicholls believes that the COVID-19 crisis has accelerated several of the trends driving Chinese growth and he sees many investment opportunities, especially among under-researched, mis-priced small-cap stocks. Nicholls’s unconstrained approach allows him to invest in high-conviction ideas, principally in higher-growth consumer-led sectors, which will benefit from China’s strong growth prospects. The trust has delivered significant outperformance against its MSCI China benchmark since inception.
Companies: Fidelity China Special Situations
Recent years have seen companies opt to remain private for longer; due to their ability to access capital from alternative areas and to remain free of the increasingly burdensome requirements of being listed. The implosion of the Woodford Equity Income Fund as a result of liquidity problems has shone a negative light on open-ended funds holding stakes in private companies. However, the capacity to hold illiquid assets is one of the key characteristics of the investment trust structure. In this article we assess the advantages and disadvantages of holding minority stakes in private companies, and the impact that being re-valued periodically can have in a market characterised by wild swings in sentiment; which is perhaps of most relevance in the current market.
Companies: MERI USA SMT FCSS RCP EWI AUGM
Fidelity China Special Situations (FCSS) aims to deliver long-term capital growth, following a bottom-up approach to investing in companies listed in China, and Chinese companies listed elsewhere. The trust marks its 10th anniversary in April 2020 and, since inception, it has generated an annualised NAV total return of 11%. Chinese equities have been relatively out of favour for some time against a backdrop of the US-China trade dispute, Hong Kong political protests and, more recently, the coronavirus. The manager, Dale Nicholls, is finding exciting opportunities at attractive valuations, and continues to focus primarily on smaller companies that can benefit from long-term secular growth trends.
It is something of a truism to say that emerging markets are not a homogenous blob, but a range of highly differentiated economies and stock markets. Yet as investors, we often categorise them as one and the same, especially from an asset allocation and risk management perspective.
Companies: FCSS BRFI ANII BEE BRLA
Fidelity China Special Situations (FCSS) offers investors direct exposure to China for a portion of their portfolio, aiming to deliver long-term capital growth from investing in companies listed in China, and Chinese companies listed elsewhere. Since the trust’s inception in April 2010, FCSS’s NAV total return has increased by nearly 11% pa. The portfolio has a bias towards mid- and small-cap companies, which tend to be less well researched and potentially mispriced. The manager, Dale Nicholls, is focused on opportunities related to rising domestic consumption, which in his view is unlikely to be disrupted by the ongoing US-China trade dispute.
Fidelity China Special Situations (FCSS) invests in Chinese equities, aiming to identify companies with long-term growth prospects that are underappreciated by the market. The portfolio has a strong bias to small and mid caps and a wide remit. This allows it to invest in domestic and Hong Kong-listed Chinese companies as well as those listed elsewhere which do business with the country and unlisted, private stocks. The portfolio can also take up short positions in companies or indices. The trust has been managed by Dale Nicholls for just over five years, during which time it has handsomely outperformed the MSCI China index [see performance section for more]. Dale invests in companies benefitting from the growth of the middle class in China, which means the portfolio is tilted towards consumer-facing companies, information technology and insurance. The trust has structural gearing worth 10% of NAV and a track record of maintaining borrowings closer to 25%. Along with the SMID exposure this raises the volatility on the trust: over five years the standard deviation of the Fidelity China Special Situations share price has been 23.2% annualised, compared to 19.08% for the MSCI China benchmark. The trust trades on a discount of 9.3%. Since February 2019 the board has targeted a single digit discount, and used its buyback authority to that effect. While the trust aims for capital growth, dividend growth has also been strong, and the trust now yields 1.8%. The trust has an innovative charging structure. There is a base management fee of 0.9%, which can be 0.2% higher or lower depending on whether the trust has outperformed or underperformed the index, a “fulcrum fee”.
Fidelity China Special Situations (FCSS) has had a challenging period over the last 12 months, with its performance affected by a significant sell-off in Chinese equities. However, the longer-term performance remains strong in absolute and relative terms, with a 16.9% pa NAV total return over five years clearly ahead of the 14.1% pa return of the MSCI China index. The manager continues to find attractive new investment ideas, such as recent portfolio addition, luxury e-commerce platform Secoo Holding, and points to the opportunities for long-term focused stock pickers that can be created by market volatility. FCSS’s discount has recently narrowed below 10% and the board has introduced a formal single-digit discount control policy, which should help reduce future discount volatility.
Fidelity China Special Situations (FCSS) had a challenging year in 2018, heavily influenced by the correction in Chinese equities that was longer and deeper than in other major stock markets. However, the trust’s longer-term returns have been strong, with an impressive 14.0% annualised NAV total return over five years, which is well ahead of its benchmark MSCI China index, as well as the MSCI World and FTSE All-Share indices. The market fall created compelling opportunities for manager Dale Nicholls, who added to holdings in high-quality companies that were trading at historically low valuations. The manager is optimistic about the long-term outlook, but he anticipates that volatility may persist and cut net market gearing from c 23% to c 18% in December 2018, mainly via index hedges.
Fidelity China Special Situations (FCSS) aims to provide an attractive way for investors to gain exposure to the faster-growing areas of the Chinese economy, with China’s growing economic influence raising its importance within a balanced portfolio. FCSS’s longer-term performance has been strong – its NAV total return is ahead of the MSCI China index over five years and since its launch in 2010 – but returns are negative over one year, reflecting the Chinese stock market downturn. While market sentiment has suffered due to the US-China trade dispute, earnings forecasts have been largely unaffected, and the manager has used the correction to add to holdings with strong long-term prospects at historically low valuations.
Fidelity China Special Situations (FCSS) provides exposure to a diversified, actively managed portfolio of Chinese equities. The manager takes a bottom-up approach to stock selection, focusing on the faster-growing consumer-orientated sectors of China’s economy. FCSS’s NAV returns have been strong over the last two years, although modestly lagging its MSCI China index benchmark. This is attributed to FCSS’s tilt to small- and mid-cap stocks, which underperformed large-caps, partly due to passive capital flows into index funds. Over five years, FCSS has significantly outperformed the benchmark, as well as its open- and closed-ended peers. A new variable management fee structure, with a lower base level and no performance fee, will take effect from July 2018.
Fidelity China Special Situations is a £1.5bn portfolio of Chinese equities, structurally tilted to the domestic Chinese economy, in particular small and mid caps in the consumer and technology industries. It has some exposure to A-Shares, stocks listed in China which are being slowly incorporated within mainstream MSCI indices. The trust has structural gearing worth 10% of NAV and a track record of maintaining borrowings closer to 25%. It holds some private companies in its portfolio. The trust has outperformed over the medium term and managed to keep pace with the 2017 rally despite being underweight the large stocks that led the charge. A yield of 1% is not high but has been growing at a significant pace. The trust has traded on a double-digit discount since late 2012, when the emerging markets region fell out of favour. The board has been targeting closing the discount through buybacks.
Being a huge but emerging economy, China is a much larger part of global stockmarkets and GDP than is reflected in the main global indices. As a result, many investors are structurally underexposed to one of the fastest growing parts of the world. The inclusion of A-Shares into the main MSCI indices in May allows investors outside China to invest in Chinese equities easily for the first time, which may have consequences for this trend. The opening up of Chinese markets to foreign capital may lead to an increase in liquidity and interest in the stockmarket.
Companies: JCGI PHI FCSS ATR
It is incredibly difficult to recognise entry points for markets or stocks: there is always a good reason for something to seem cheap but at the same time, a plausible cause for it to get cheaper. With threats of a trade war echoing in our ears and investors smarting from an unexpectedly tough first quarter, media attention has focused on the potential ‘buying opportunity’ in Asian equities, and against that backdrop we consider the outlook. As we show in the graph below, global stocks with the highest exposure to China have significantly underperformed since the start of March. Last month Trump announced tariffs on Chinese steel and aluminium and followed it up with wider tariffs in response to claimed Chinese intellectual property theft. After China announced its own tariffs in response, senior members of the Trump administration suggested the US might walk back their threats: commerce secretary Wilbur Ross said he expected the spat to end in negotiations, and newly-appointed director of the national economic council Larry Kudlow said that agreement may come before the tariffs are due to come into force in May. A weakening of the US position and an invitation to the negotiating table would be entirely in keeping with the past behaviour of the Trump administration. In January Trump was threatening to nuke North Korea on Twitter, yet now he is preparing to sit down and talk to its leader. It is a strategy he has followed in numerous areas: throw around threats, talk tough, and then negotiate back to a more reasonable mid-ground. However, there’s no guarantee that this time he won’t stick to his guns, and until a clear outcome emerges – volatility is likely to remain extreme.
Companies: SOI SDP AAIF IAT FCSS SST
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Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd.
To achieve YoY revenue growth over H1/20A despite the challenges of Covid-19 and its impact on the travel sector is testament to Equals' resilience and increasing focus on B2B and International payments services. While weaker gross profit and EBITDA margins have impacted profitability in H1/20, we see potential for an earnings recovery in H2/20 given cost reduction measures currently being undertaken. This should lead Equals to cash breakeven in Q4/20 and FCF positive by early FY21.
Companies: Equals Group Plc
FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
Interim results demonstrate YoY growth and a resilient outcome that has exceeded management's expectations from the start of the Covid-19 pandemic. This is testament to the degree of recurring revenue generated across the business. FY21 trading looks to be more challenging, as notably lower new insurance sales post-lockdown will translate into lower premium income. A number of organic opportunities are being worked on to fill the shortfall. Rising UK redundancies and their impact on policyholder retentions creates great uncertainty, hence our forecasts remain withdrawn and recommendation remains Under Review.
Companies: Personal Group Holdings Plc
Sigma Capital (“Sigma”) has partnered with global alternatives manager EQT to deliver and manage a £1bn GDV private-rented sector (“PRS”) housing fund focused on Greater London. EQT will invest £300m equity, complemented by debt (including a Homes England facility), to build 3,000 homes in 5 years. Sigma will generate fee income as development manager, a recurring fee income stream from managing completed assets, as well as participation in returns via a minority co-investment (£16m) and a profit share. We estimate that the fee income alone is worth £45m to Sigma in the first five years: 50% of the current market cap. Crucially, this is a step up in AuM bringing a high quality long-term recurring earnings stream. We will reforecast following interim results (expected tomorrow) to provide full context.
Companies: Sigma Capital Group Plc
In June, faced with the task of replacing its longstanding portfolio manager, Alistair Mundy, Temple Bar Investment Trust’s (TMPL’s) board reiterated its commitment to a value style of investing. The board has now opted to hand the management contract to Nick Purves and Ian Lance of RWC Partners, two managers with considerable experience of managing income portfolios using a value-style approach. Value investing, where managers buy stocks that are valued more cheaply than market averages – based on measures such as price/earnings, price/book and yield – is deeply out of favour. The RWC team says that value stocks have never looked more unloved in the 30- odd years that they have been managing money. In their view, this makes it imperative that TMPL investors keep faith with the strategy and it also means this is an attractive entry point for new investors. One important change, however, is a cut to TMPL’s dividend to a level that the RWC team believes will be more sustainable.
Companies: Temple Bar Investment Trust
In line interim results to 30 June 2020 show the strength of this business amid a difficult environment. This is the first step in what should be an exciting growth trajectory toward a larger, scaled up business with high recurring revenues and ownership of the full supply chain in the personal injury and clinical negligence market for clients requiring long-term, risk-adjusted returns. We reiterate our TP of 50p, noting further upside potential as acquisitions are completed.
Companies: Frenkel Topping Group Plc
HSBC’s future should be clarified as soon as the US and China come back to the negotiation table. This will not happen before the US elections are over. In the meantime, HSBC will continue to be instrumentalised and its share price will remain under pressure.
Companies: HSBC Holdings Plc
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
The impressive full year 2019 results included some eye-catching numbers, including a record PBT of £40.1m (nearly 3x FY18 @ £14.3m), £620m of reserves acquired over 16 legacy deals, and $842m of (estimated) Contracted Premium in the Program business – on track to breach $1bn in FY20 as previously guided and $1.5bn-$2bn in 2022-2023.
Companies: Randall & Quilter Investment Holdings Ltd.
As anticipated, Record has confirmed a material uplift in AUME following the rebound in financial markets from April. We upgrade FY21E forecast EPS by +18%, with higher staff costs offsetting some of the benefit. We expect AUME growth to be more modest from herein. While no performance fees have been recognised over Q1/21 and will be harder to achieve due to Covid-19, any future recognition would have a materially positive impact on earnings. Covid has temporarily paused new client wins, but we expect further additions to come as conditions improve.
Companies: Record Plc
Mercia’s FY20 results reflect continued progress, delivering on management’s three-year strategy. AUM climbed 58% to £0.8bn, while FUM rose 73% to £658m. Following the acquisition of the NVM VCT fund management business, the company is operationally profitable on a monthly basis, with annual revenues exceeding operating costs for the first time in FY20. Net assets rose 12% to £141.5m, with the direct investment portfolio stalled at £87.5m reflecting the impact of COVID-19 fair value adjustments and a £15.7m net investment. The group remains well-placed for a downturn with £30m of unrestricted balance sheet cash and £320m of group cash. Post period end the group exited The Native Antigen Company, with £5.2m in cash (8.4x return, 65% IRR) expected. Despite the group’s progress, Mercia’s shares continue to trade at a material discount to NAV (0.60x), even before considering the embedded value of the third-party fund management business (> 4.5p at 3% of AUM).
Companies: Mercia Asset Management Plc
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
Companies: Legal & General Group Plc
COVID-19 and a further cut to power price assumptions saw NAV per share fall to 309p in H120 (FY19: 337p). However, PPP performed well, bidding momentum has picked up recently and John Laing Group (JLG) expects ‘modest’ NAV growth in H2. New CEO Ben Loomes highlighted digital connectivity and energy transitions as potential future investment themes, and will set out further details in November. We cut our FY20 NAV per share forecast by 14% to 308p. The share price stands at an 8% discount to FY20e NAV per share.
Companies: John Laing Group Plc
Trident Royalties Plc (AIM: TRR) has, this morning, announced the acquisition of a 1.5% Net Smelter Royalty (NSR) over the resourcestage Lake Rebecca Gold Project located in the highly prospective Eastern Goldfields province in Western Australia. The royalty package is being acquired from a private seller for a total consideration of A$8.0 million (c. US$5.63 million), comprising of A$7.0 million in cash and A$1.0 million in new ordinary shares in Trident. The acquisition is Trident’s fifth overall and its third gold deal. As per strategic guidance the company is moving fast assembling a diversified portfolio with a paying cashflow stream from iron ore and copper production and several strategic gold royalties with the potential for near term revenues. The market is paying attention with TRR shares up 49.8% since its IPO on AIM in June this year. There is clearly more to come with c. US$7.5 million of uncommitted cash as well as the potential for debt funding and the ability to use equity as acquisition consideration. The Lake Rebecca Gold Project operated and wholly owned by Apollo Consolidated (ASX: AOP), is located 150km ENE of Kalgoorlie in the Eastern Goldfields Province of the Yilgarn Craton. The Project, envisaged as a simple open pit operation, is close to existing gold infrastructure namely Saracen Mineral Holdings Limited’s (ASX: SAR) Carosue Dam Operation whose processing plant is in the process of being upgraded to increase throughput to 3.2 Mtpa.
Companies: Trident Royalties Plc