Specialists in Asia Pacific and Global Emerging Markets Equity Strategies
We manage US$35.3 billion^ on behalf of clients globally. Operating as an autonomous investment team within First Sentier Investors, we are a team of dedicated investment professionals based in Hong Kong, Singapore, Tokyo and Edinburgh.
We are bottom-up investors, using fundamental research and analysis to construct high-conviction portfolios. We conduct more than a thousand direct company meetings a year, seeking to identify high quality companies that we can invest in for the long term.
As responsible, long-term shareholders, we have integrated ESG analysis into our investment process and engage extensively on environmental, labour and governance issues.
We support social impact initiatives across Asia through the strategic philanthropic work of Manan Trust.
^ As at 31 December 2020.
FSSA Investment Managers was formerly a part of First State Stewart, the Asia Pacific and Global Emerging Markets team of Stewart Ivory & Company Limited. After years of organic growth, in July 2015 the First State Stewart team split in two: one based primarily in Hong Kong (FSSA) and the other based primarily in Edinburgh (Stewart Investors).
Formation of Stewart Ivory
Stewart Fund Managers merged with Ivory & Co to form Stewart Ivory.
Expansion into Asia Pacific
Launch of Stewart Ivory’s Asia Pacific capability and the firm’s first Asia Pacific equity strategy.
Developments in Australia
Stewart Ivory was acquired by the Colonial Group in Australia, which was subsequently acquired by the Commonwealth Bank of Australia. The overseas fund management businesses were merged to form First State Investments (FSI).
China A-Share launch
Launch of the team’s China A-Share equity strategies.
Rebranded to First State Stewart
The team rebranded and became First State Stewart, an autonomous investment management team within FSI.
Launch of the team’s Japan equity strategies, sharing the same investment philosophy and process
In July 2015, First State Stewart split in two, with First State Stewart Asia headquartered in Hong Kong and Stewart Investors headquartered in Edinburgh.
Launch of First State Stewart Asia’s Global Emerging Markets equity strategies
First State Investments rebranded as First Sentier Investors.
First State Investments acquired by MUTB*. First State Stewart Asia renamed as FSSA Investment Managers, continues to operate with investment autonomy under the new ownership.
* Mitsubishi UFJ Trust and Banking Corporation.
At FSSA, we seek to invest in quality companies, as defined by the strength of their management, franchise and financials. We believe that management is by far the most important driver of quality, as the decisions management make affect the quality of the franchise and the attractiveness of a company’s financials over the long term. Simply put, our objective is to invest in a diversified portfolio of quality companies, which have highly competent managers, leading franchises, strong cash flow generation and solid balance sheets. We don’t believe there is a price for everything. Poor quality businesses do not form a part of our investment universe, no matter how attractive the growth opportunity or valuation becomes.
We invest in people and real businesses, not pieces of paper or stock market tickers. The starting point for our portfolios is a blank sheet of paper. We do not, and cannot, forecast market movements and therefore believe the best way to generate superior long-term returns is to identify highly competent management teams and entrust them to grow our clients’ capital, no matter the underlying economic backdrop. To enable us to do so, we carry out well over 1,500 meetings each year where we assess company managements’ capabilities and the underlying strength of the franchises they run.
The fastest growth, some of the highest levels of innovation, and the bulk of human advancement is happening in Asian and Emerging Market economies. With this progress comes a burgeoning middle class with a heightened propensity to consume and levels of company formation that is reminiscent of the United States in the early 20th century. We believe the opportunity to participate in this growth is a fantastic multi-decade opportunity.
We are growth, not value investors. In Asia and Emerging Markets, extracting value is far from easy given that it is normal for companies to have a controlling shareholder. We make investment decisions with at least a three-to-five year view, though our ideal holding period is much longer (10, perhaps 20 years, or more). Once we have identified our preferred companies – those that can grow earnings sustainably – we aim to benefit from the power of long-term compounding. We are, however, sensitive to valuations and strive not to overpay for growth. A great company might not make a good investment if it is overpriced.
Our investment approach focuses on generating absolute returns for our clients. With every investment we make, we look at the potential downside and not just upside. We believe the best way to outperform an index in the long run is to spend little, if any time looking at it. We endeavour to avoid getting carried away during periods of irrational exuberance and are willing to accept underperformance in the short and even medium term when compared to a benchmark index to ensure we protect capital when the tide turns.
While many in the industry build detailed financial models and aim to forecast the next quarter’s earnings to the nearest cent, we find it is better to be approximately right in the long term than be exactly wrong in the short term. We do not try to time our entry and exit from companies – we merely wish to buy great companies at reasonable valuations. To do this, we pursue broader insights rather than worry about the minutiae of a company. And we challenge ourselves on what we don’t know, rather than assume we know everything.
As minority investors in businesses, we need to be aligned with management and the controlling shareholder. We find that companies who treat their shareholders as partners rather than as privileged onlookers are more likely to treat all stakeholders well, thereby solidifying their franchise. We also find that having access to management allows us to drive shareholder value by engaging on environmental, social and governance (ESG) issues. Owning shares in a business brings with it responsibilities as well as rights and we take both seriously.
ESG is a core part of our process and not an overlay or add on. We have always believed that sustainability issues are also investment issues and can have an outsized impact on a company’s returns. Poor environmental or social practices could eventually mean losing the licence to operate, while weak governance indicates a lack of the necessary checks and balances on management. We find that the past is often the best guide to the future; therefore, we look at a company and its management’s history and refuse to invest where there have been poor practices in the past. This makes sense from both an investment and an ethical perspective – we believe not every stock has a price. Markets that are too focused on the short term frequently fail to price in negative externalities, which only become significant once they are apparent to all.
We operate in a collegiate working environment with a flat structure. We encourage the kind of culture where the most junior team member can speak up and question the most senior. First and foremost, all members of the FSSA team are analysts. There are no experts – we are all generalists, striving to challenge each other and ourselves. We believe elevating individuals into experts with definitive knowledge leads to the loss of intellectual debate on which we thrive. Only by constantly questioning each other and the investment case for our portfolio holdings can we ensure that we continue to generate strong returns for our clients.
All members of the team have a significant portion of their wealth invested in FSSA’s funds. We invest our clients’ money as if it were our own money, and our co-investments reinforce this belief. Not only do we wish to align with our clients, we cannot think of a better long-term investment for our own money than our own funds. Our business structure, remuneration and investment philosophy all focuses on the long term, which means we have the luxury of making genuine long-term investment decisions without the industry pressure of chasing short-term performance. We are convinced that this mind-set is the best way to achieve both superior long-term returns and team success, and consider it our key competitive advantage.
Our investment approach is centred on identifying quality companies, buying them at a sensible price and holding for the long term. We look for founders and management teams that act with integrity and risk awareness; and dominant franchises that have the ability to deliver sustainable and predictable returns over the long term.
Bottom-up stock selection
We are research-driven, bottom-up investors, carrying out detailed fundamental analysis to identify high quality companies to invest in for the long term. We travel extensively to meet with companies to assess the quality of management and their track record of executing long-term strategies; and supplement this with a qualitative and quantitative analysis of the company’s ability to compound growth in excess of the cost of capital.
We define quality companies as those that have an effective management team, high governance standards, a long-term mind-set, strong competitive advantages and an established track record of surviving previous cycles. In addition, we look for cultural integrity and the alignment of management with shareholders. We also make use of ESG analysis to distinguish quality companies from the rest. We believe that owning quality companies that are able to respond effectively to market uncertainties is the best way to mitigate potential losses in the medium-to-long term.
Strong valuation discipline
We strive to ensure that we pay sensible prices for our investments. We use a range of financial and non-financial metrics to estimate a fair market valuation (FMV) for the companies that we want to own and buy at price levels which provide a sufficient ‘margin of safety’ over the medium-to-long term. We carry out regular FMV reviews to update the potential risk/reward of every stock in our portfolios and on our watch list.
We are responsible, long-term investors and prefer to invest in quality companies that we can buy and hold. Through active engagement, we believe we are able to raise legitimate concerns and persuade management to address the issues at hand, thereby adding to portfolio performance. We believe our approach encourages good ESG practices and is critical in carrying out our stewardship duties.
Absolute return mind-set
We are conservative investors with an absolute return mind-set. Defining risk in terms of the permanent loss of capital, we evaluate the potential downside of an investment decision as much as the upside. We would expect our portfolios to exhibit lower volatility than the peer group and outperform more often in down markets. Conversely, we would expect our performance to lag in highly buoyant or momentum-driven markets.
We do not use benchmark indices in our portfolio construction process as we do not believe that they fully represent the available opportunities within Asia Pacific and Global Emerging Markets. Instead, we rely on our bottom-up stock selection to construct relatively concentrated and high-conviction portfolios. As we are not required to own companies, sectors or countries that we do not favour, our portfolio weightings can look very different to the benchmark.
We believe that the Asia Pacific region and Global Emerging Market countries have plenty of quality companies which have the potential to grow over the long term. Spurred by low penetration rates for goods and services, and barriers to entry which protect profits and cash flow, these companies – often consumer, financial and industrial businesses – have a good track record of compounding earnings and creating long-term value for stakeholders.
These are a few of the long-term investment themes that support our bottom-up stock selection.
Dominant consumer franchises
With favourable demographics and populations that are still growing – particularly in Southeast Asia and India – we believe dominant consumer franchises in Asia should offer decent growth over the long term. These businesses command strong margins and pricing power through various elements of brand, distribution and innovation. Minimal capital intensity and strong cash generation promote investment for growth, as well as the potential for rising dividends.
High quality financials
We believe banks and high quality financials should benefit from similar drivers as consumer businesses (demographics, rising incomes and urbanisation). Often, the best banks are supported by a strong deposit franchise or a specific loan niche; and are positioned in markets with low (but growing) financial inclusion. We believe this provides better opportunities to generate high margins and an attractive return on assets, over a market cycle.
Beneficiaries of the rise in healthcare spending
Many Asia Pacific and Global Emerging Market countries are under-invested in healthcare compared to the global average. As these economies become richer, we expect healthcare and health-related spending to rise. This includes government spending on prevention and public health services, as well as consumer spending on personal health care and healthier lifestyle choices.
Beneficiaries of a smarter, more connected world
The ever-present use of technology and the digitalisation of everything has created new industry sectors, as well as professional consultancies and consumer companies around them. As the world becomes smarter and more connected, Asian technology firms should benefit from strong end demand and a growing market. Taiwanese semiconductor foundries and equipment manufacturers, as well as Chinese internet giants, are among the leaders in their fields – not just in Asia, but globally.
Growing trend of automation
The combination of low birth rates and higher life expectancy is transforming the world’s population structure. In Asia, particularly in China and Japan, the proportion of older, retired people to those of working age is growing. As robots become smarter and less costly, manufacturers are more likely to automate their processes to tackle the falling labour participation rate and, at the same time, improve efficiencies in the long run.
HDFC Bank is India’s largest private bank by market capitalisation. With more than half of India’s population still unbanked, we believe the long-term opportunity for HDFC is significant.
The current managing director, Aditya Puri has an impressive track record. Having led the bank since incorporation, he is credited for building HDFC Bank into the high quality franchise it is today. In 2017, when system credit fell to its lowest level in 60 years, the bank managed to grow its customer deposits and loans at over 20% per year, with low credit costs. This led to an incremental loan market share of 24%, compared to its overall share of 7% (based on stock of loans outstanding). We believe this gap should only grow.
Meanwhile, the way customers interact with banks is changing. The vast majority of transactions now take place through digital channels instead of at bank branches. By investing in digital ahead of peers, HDFC has built a formidable market share in digital/mobile banking (its platform enjoys the highest number of mobile banking transactions, compared to peers).
While large state-owned and private banks deal with legacy problems of asset quality and capital adequacy, HDFC’s management can focus on strengthening relationships with clients and improving profitability. With this in mind – and by looking at valuations through a different lens – we believe that HDFC’s high earnings multiple masks an attractive long-term investment case.
Established in 1987, TSMC pioneered the foundry model, which separates semiconductor chip designs (produced by fabless companies) from the fabrication or manufacturing process, (outsourced to a foundry). It became the industry leader due to its ability to deliver more advanced technology, as well as its strategy of partnering with its customers in chip design.
We believe TSMC is one of the best ways to capture the trend of artificial intelligence, smart devices and the Internet of Things (IoT). As consumer electronics become more complex and require increasingly powerful processors, demand for TSMC’s advanced chips should continue to grow. The business has a good long-term track record and is highly cash generative. It is one of the few semiconductor companies globally that held up relatively well during last year’s rout on technology stocks.
Governance standards are high and the board has a good mix of knowledge and experience. Chairman Mark Liu and CEO C.C. Wei are both well-regarded TSMC ‘lifers’ having rotated through various business divisions before being anointed successors to the founder, Morris Chang (whom retired in June 2018).
Valuations remain reasonable, assuming low-single digit industry growth and TSMC continuing to outgrow the overall market.
The investment team consists of 21 investment professionals based in Hong Kong, Singapore and Edinburgh. We have a distinct culture and team structure, which has contributed to the stability of the team. Around half of our analysts joined as graduates; and the majority of our portfolio managers have been with us for most of their careers.
Our team members come from diverse backgrounds and speak 15 local languages and dialects, which contributes to the quality of research and analysis when meeting with companies. All portfolio managers are, first and foremost, also analysts; and the entire team contribute stock ideas to each of our client portfolios.
|Strategy||Portfolio manager||Benchmark||Approximate number of holdings||Typical market cap
|All China Strategy||Winston Ke||MSCI China All Shares||30-50||Nil|
|Asia Focus Strategy||Martin Lau||MSCI AC Asia Pacific ex Japan||50-70||USD1.5 billion free float|
|Asia Pacific Select Strategy*||Alistair Thompson||MSCI AC Asia Pacific ex Japan||45-55||USD5 billion free float|
|Asian Equity Plus Strategy||Martin Lau||MSCI AC Asia Pacific ex Japan||50-70||USD1.5 billion free float|
|Asian Growth Strategy||Richard Jones||MSCI Asia ex Japan||40-50||USD1.5 billion free float|
|China A Shares Strategy||Winston Ke||MSCI China A Onshore||30-50||Nil|
|China Focus Strategy||Helen Chen||MSCI China||30-50||Nil|
|China Growth Strategy||Martin Lau||MSCI China||40-60||Nil|
|Global Emerging Markets Equity Strategy||Rasmus Nemmoe||MSCI Emerging Markets||40-50||Nil|
|Indian Subcontinent Strategy||Vinay Agarwal||MSCI India||30-50||Nil|
|Japan Equity Strategy||Sophia Li||MSCI Japan||40-60||Nil|
* Only available in separate accounts.
Our investment strategies cover regional and single country portfolios across the universe of small-, mid- and large-cap stocks. We offer collective funds and segregated mandates to suit specific client needs.
Asia Pacific ex-Japan
Our range of Asia Pacific equity strategies cover small, mid and large-cap stocks and are invested with a medium-to-long-term time horizon in mind. Our portfolios are invested in quality companies that we believe have long-term, sustainable growth drivers and should benefit from Asia’s structural tailwinds. We are specialists in Asia Pacific equities and have been managing regional Asia Pacific portfolios since 1988**.
Global Emerging Markets
Our Global Emerging Markets (GEM) strategies cover developing and frontier markets and are biased towards mid-cap companies that have the potential to grow much larger over time. Similar to our Asia Pacific strategies, we invest with a medium-to-long-term time horizon, and tend to favour dominant franchises operating in industries with long-term structural tailwinds. We continue to add to our GEM research capabilities, and adopt the same high-conviction, bottom-up approach to investing.
Greater China Region
Our Greater China strategies cover China, Hong Kong and Taiwan. We offer a range of single country and regional portfolios that provide investors with the option of tailoring their investment exposure to these key markets. Though China provides the largest opportunity set in the region, Taiwan, with its large technology sector, and Hong Kong, with its more developed governance and regulatory framework, offer a number of interesting investment opportunities.
Our China A-Share strategy is invested in domestic market leaders as well as globally competitive Chinese companies that are expanding overseas. As China continues to liberalise its financial markets, we have increasingly found attractive investment opportunities to add to our portfolios and now manage more than US$5.6 billion^ of client assets in China A-Shares.
Our Indian Subcontinent strategies cover India, Pakistan, Bangladesh and Sri Lanka. We tend to favour dominant consumer franchises, high quality private banks and infrastructure companies. We believe large populations, supportive demographics and underpenetrated markets in this region should provide a favourable long-term growth environment for these types of companies.
Our Japan equity strategies are focused on secular growth trends which do not rely on broader growth in economy to perform well. These include well-managed Japanese companies that have global brand recognition, domestic leaders that have grown over multiple cycles, and automation companies that have benefitted from structural demand growth.
Scottish Oriental Smaller Companies Trust
FSSA Investment Managers is the investment manager of the Scottish Oriental Smaller Companies Trust, an investment company listed on the London Stock Exchange. The Company invests mainly in smaller listed companies with market capitalisations of US$3 billion (or below) across the Asia region (including the Indian Subcontinent but excluding Japan and Australasia).
** As part of the wider First State Stewart team.
^ FSSA Investment Managers, data as of end of December 2020.