Eight questions for 20 July AGM

In this note, we explore what investors could ask the FCSS board at the forthcoming AGM, and we provide the answers we would give if asked those questions ourselves. We note three key themes: i) COVID-19; ii) regulation; and iii) geopolitical tension. All were explored in detail in our initiation. While China managed the initial stages of COVID-19 well, its recent lockdowns have raised concerns about growth. Understanding why regulations were introduced means investors can identify companies at risk and when the restrictions will end. Geopolitical tension, while hard to assess, is at above normal levels, but this is not a new risk. Marketwide pricing moves create opportunities.

• Risk: The key to understanding risk exposures is to analyse why they are happening but also to anticipate what government responses to them will be. This applies to regulatory risk (where a pause appears to be in sight) but also to what stimulus China may introduce to address any COVID-19 slowdown, as we have seen elsewhere.
• Opportunities: Market dislocations create stock-specific pricing anomalies. Research by a long-established, large, local team is a competitive advantage over global players, while access to Fidelity’s global analysts, and the manager’s regional experience, give a perspective unavailable to domestic peers.
• Valuation: FCSS’s portfolio is largely listed equities. It trades at a 2% discount to NAV. The discount has been falling since 2016, but recently rose on the concerns above. Peer ratings have been volatile (FCSS in the pack), but FCSS’s performance is significantly better. The yield is now 2%, and buybacks have been done recently.
• Risks: Further regulation in China is a risk, but FCSS’s exposure appears limited, and noise around the issue can create investment opportunities. Geopolitics may affect sentiment, but FCSS is domestically focused. Sentiment can go against FCSS’s investment style, and returns are expected to be volatile.
• Investment summary: In general, FCSS invests in the huge opportunities from New China, with growth in the middle classes, and supportive government policies towards domestic demand and innovation, expected to underpin superior GDP growth. Fidelity’s stock-picking, gearing, being able to make illiquid investments, and the compounding benefits from investment outperformance have seen total share returns nearly 2x those of peers over 10 years. There are risks from further regulations, but these may also create opportunities. Investor appetite for FCSS’s style may vary, and investors should expect volatile returns. As noted, the share price is at a 2% discount to NAV.