Focusing on quality: the key to FSSA Investment Managers’ approach in global emerging markets

Many fund managers see high trading volumes and rapid portfolio turnover as evidence of constant re-evaluation and attention to detail. But the FSSA Global Emerging Markets (GEM) strategy favors a more patient, long-term approach, only investing in companies where we have high conviction in their prospects.

Emphasis on short-term performance targets does not necessarily lead to better long-term investment outcomes. Constant pressure to deliver positive quarterly, or even monthly results, may prompt fund managers to continually engage in trading activity to stem losses or seek new sources of investment gains.

The FSSA GEM strategy takes a different approach. Since the strategy’s inception in 2017, long-termism and high conviction have been the cornerstones of our portfolio-construction strategy. We only invest in businesses we believe have the potential to deliver sustainable growth over many years.

A small, highly concentrated portfolio, where we believe in every company, is the natural result of this philosophy. We typically hold no more than 45 companies and turnover is low due to our long-term investment approach.

We don’t chase the latest trends or follow whichever investment theme happens to be flavour of the month. We would be foolish to dismiss developments out of hand, but our instinct is to be more cautious.

We prefer to examine the secular trends (Secular trends are contrasted with cyclical trends, which are affected by the boom and bust swings of the market) underlying emerging markets’ development and understand the structural growth drivers (factors that cause long-term, fundamental changes in an economy or market) that underpin the success of the companies involved. This naturally keeps the FSSA GEM portfolio highly concentrated.

For example, one of our holdings, Taiwan Semiconductor Manufacturing Company (TSMC), has recently been in the spotlight due to the popularity of the artificial intelligence theme.

In fact, TSMC has been in our portfolio for more than 20 years – we have long admired the management team and the company’s ability to stand at the forefront of cutting-edge semiconductor technology.

More than that, the underlying investment case is founded on its position as a pure-play foundry (manufactures chips for other companies rather than itself). Rather than competing with its customers, it partners with them. This has enabled the business to establish a high level of trust and consistently benefit from the continual advances in technology.

When we decide to invest in a business, we aim to hold on to it for as long as possible. However, we are careful to stay aware of a company’s potential vulnerabilities and constantly test the investment case for each company we own. We also meet with management teams regularly to understand its current challenges and developments.

The low turnover of companies in our portfolio represents not complacency but commitment. Our highest-conviction positions represent a sizeable proportion of the portfolio. Partnering with businesses that we believe are capable of generating superior returns enables the FSSA GEM strategy to deliver sustained outperformance over time¹

¹ Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of a FSSA Investment Managers portfolio at a certain point in time, and the holdings may change over time.