Fidelity's Dale Nicholls has increased the net gearing on his China Special Situations investment trust from 10% at the end of June 2015 to 25% at the end of January, in a bid to take advantage of long opportunities in the market.
Nicholls (pictured) has run the £656m trust since April 2014 following the departure of veteran fund manager Anthony Bolton, who launched the vehicle in 2010.
The gearing levels have varied considerably during this period, with the manager increasing borrowing during market dips (see graph, below). Its maximum net gearing limit is 30% of NAV.
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Nicholls said: "As things have got cheaper, we have increased our net gearing by closing short positions after big declines and adding to the longs. There are more potential gains from the longs than the shorts.
"This is the time to capitalise on opportunities and it reflects long opportunities in the market."
Valuations of Chinese companies are close to historic lows due to concerns over the currency, turbulent equity markets and slowing growth, with the MSCI China index trading at 8x earnings.
Nicholls said this was skewed by state-owned enterprises such as banks and telecom companies but even if these were excluded, it would still be trading at 11x earnings.
As such, he has been adding to consumer discretionary holdings, which is his top sector at 37% of the portfolio, healthcare and IT names.
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"IT is a big bet for us as it is playing on the fact so many things are moving online and it is happening very fast. E-commerce penetration in China has surpassed the US."
However, Nicholls said it was unlikely China would opt for a further large devaluation of the yuan, despite wider currency fears.
"I struggle to understand a wholesale devaluation and it is hard to picture. It is tough politically and there is a sense among policymakers that it is not needed. A large devaluation would likely cause more panic."
The Fidelity China Special Situations trust has lost 6% over the past year to 16 February, according to FE Trustnet, versus a fall of 13% by the AIC Country Specialists Asia Pacific sector.
