This is a financial promotion for The First Sentier Global Emerging Markets Strategy. This information is for professional clients only in the UK and Switzerland and elsewhere where lawful. Investing involves certain risks including:
- The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
- Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund's investments and could cause the Fund to defer or suspend redemptions of its shares.
- Emerging market risk: Emerging markets tend to be more sensitive to economic and political conditions than developed markets. Other factors include greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities. .
For details of the firms issuing this information and any funds referred to, please see Terms and Conditions and Important Information.
For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund.
If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.
Five principles for investing in emerging markets
As long-term, bottom-up investors, our starting point for finding suitable investments is to seek out companies that benefit from structural tailwinds and have clearly-defined competitive advantages. We look for sustainable business models that are attractive not only from a one to two year perspective, but throughout the business cycle.
In the FSSA Global Emerging Markets Focus strategy we have invested in quality businesses that have proven management teams and leading franchises. We believe they are well positioned to capitalise on the long-term secular trends that make emerging markets an attractive investment choice.
Whether it is the formalisation of the Indian economy, the continued financialisation of the South African population or the growing adoption of enterprise resource planning software by small and medium-sized companies in Brazil, we believe the investment opportunities are plenty.
Yet, these kinds of businesses are often not well represented in broader indices and therefore we believe a bottom-up active investment approach has much value to add. This is especially important when markets are volatile, as they are today.
Our investment philosophy does not require us to follow an arbitrary index, nor does it entail buying poor-quality companies at 50 cents on the dollar. Instead, we focus on these five core principles that we believe will help us deliver attractive returns for our clients over the longer term.
Principle 1: “Time in” the market is more important than “timing” the market
The first principle for investing in emerging markets — particularly for long-term buy-and-hold investors like us — is patience. It is rare to identify companies that have both a quality management team and a franchise that compounds free cash flows (or book value per share) at attractive rates for long periods of time. Where we have managed to find such companies, we believe the most important thing is to hold on and do nothing.
A case in point is a company we have owned since inception of the strategy. It is one of the top contributors to performance over the past five years. As Latin America’s leading e-commerce company, sales have grown nearly eight-fold over the past five years, while free cash flow (FCF) has grown five-fold. This has driven the 28% CAGR1 total shareholder return over this period. Though we kept an eye on valuations and trimmed our position when it looked particularly heady, we have since bought back at lower prices. It remains one of our largest holdings.
1 Compound annual growth rate
Principle 2: Being bottom-up investors doesn’t mean ignoring the macro completely
As bottom-up investors, we look to identify companies with great management teams and strong franchises that are able to grow sustainably over the long term. We don’t pay too much attention to short-term macro forecasts or political events. They are outside of our control and we do not think we have any great ability to predict such events. However, in some rare instances, external macroeconomic issues can completely swamp even the best-run company.
Our investment in an Argentine bank is one such example. During 2017, our meetings with the CEO and several other members of the senior management team pointed to a strong culture and franchise — the bank had averaged 37% return on equity (ROE) for the previous 5-year period, with performance underpinned by a good deposits franchise.
With the election of a new leader, President Mauricio Macri, it seemed as if Argentina would regain its former glory and the issue of hyperinflation would finally be controlled. However, politics in the country took a dramatic U-turn and the economy, which had been improving, was destabilised yet again. Intense currency headwinds meant that we subsequently sold out of our position at a loss.
This was an expensive lesson, with the outcome being that we now systematically check and limit our portfolio exposure to so-called “high-risk” economies (simplistically defined as those with adverse macroeconomic conditions).
Principle 3: Stay disciplined through market mania
When it comes to investment performance, avoiding mistakes is just as important as selecting potential winners. During late 2020 and through 2021, there was a frenzy of initial public offerings (IPOs), most of which had dubious business models and sketchy financials. Meanwhile, valuations lost all relation with fundamentals as companies that were beneficiaries of Covid-induced work-from-home strictures were bid up to stratospheric levels.
Most of the “stars” of this time were businesses that we call “Growth Traps”. They are characterised by a business model wherein a constant supply of capital is needed to fuel growth despite mounting operating losses. There is no evidence yet of such companies being able to capture the profit pool they have destroyed in their quest for scale.
In these phases, it is important to stay disciplined and not be enticed into overpaying for stocks. Our team helps us stay grounded and avoid mistakes in times like these. We have not participated in any IPOs for the GEM strategy over the past few years, most of which are now languishing below the listing price. Nor have we bought into flawed business models that promise a “path to profitability”.
Principle 4: Conviction comes from thinking long term
The Covid-19 pandemic has dominated most aspects of life and business for nearly three years now, with places like China still battling the spread of the virus. Several of our holdings were also significantly challenged during the pandemic as the unprecedented lockdowns took its toll on their businesses.
For instance, a Mexican coffee shop operator had never experienced same-store sales declines of more than 4% prior to the pandemic, but during the second quarter of 2020, sales declined by 60-70%! For some of our travel-related companies, like a Mexican airport operator, or Latin America’s leading online travel agent, the year-on-year sales decline was even greater, at 95%.
At this point, we took a step back and conducted a deep-dive review of our holdings. We had calls with management teams and re-evaluated their businesses. This gave us greater conviction in the longer-term trajectory of our holdings. The majority of them are market leaders and we realised that if they were struggling, their competitors would be even worse off. It became increasingly clear that when the lockdowns eventually ended, our holdings should have even higher market share and face less competition.
As such, even though the early stages of the pandemic were particularly challenging, we tried to look beyond the immediate situation — and we found some very attractive bargains.
Principle 5: Stick to the process
In seeking companies to invest in, we apply our competitive advantage framework on prospective holdings, looking for those with good governance, strong business models, solid long-term prospects, clearly-defined competitive advantages and high cash generation. Our fundamental company analysis incorporates both qualitative and quantitative research that is designed to assess a company’s ability to compound cash flows sustainably and at high rates over the medium to long term.
As a team, we are all generalists with a focus on certain countries/regions. We travel together and conduct company meetings in small groups with people from different offices and nationalities. This means that several team members will analyse the same company over time, which provides different perspectives on the investment case.
Our process is designed to identify portfolio opportunities and reduce risk. The idea is to draw upon the experience of the whole team so that we can achieve our goal of preserving our clients’ capital and growing it sustainably. Over the more-than-30 years since the establishment of the FSSA team, the investment process has been honed continually, learning from (sometimes painful) lessons along the way.
To sum up, investing can be deeply frustrating in the short term, but highly rewarding over the years. It takes patience, a strong team culture and process, a focus on evaluating great management teams, and investing in companies with clearly-defined competitive advantages and sustainable and predictable growth.
We believe these core principles remain as relevant today as they did 30 years ago with the founding of the FSSA team, and we strive to apply them systematically on a daily basis. The result is a portfolio of high-quality companies from across emerging markets that offers attractive growth compounding opportunities. Our analysis suggests that our group of companies can grow earnings at 13-15% CAGR2 on a weighted average basis over the medium term, while aggregate valuations, at around 5% FCF yield3 and a PER4 of around 21x prospective earnings, seem reasonable (and sustainable) to us.
2 Compound annual growth rate
3 Free cash flow yield
4 Price-to-earnings ratio
- 10 mins
- 10 mins
- 3 mins
Source: Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at 30 November 2022 or otherwise noted.
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should conduct your own due diligence and consider your individual investment needs, objectives and financial situation and read the relevant offering documents for details including the risk factors disclosure. Any person who acts upon, or changes their investment position in reliance on, the information contained in these materials does so entirely at their own risk.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication but the information contained in the material may be subject to change thereafter without notice. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
Past performance is not indicative of future performance. All investment involves risks and the value of investments and the income from them may go down as well as up and you may not get back your original investment. Actual outcomes or results may differ materially from those discussed. Readers must not place undue reliance on forward-looking statements as there is no certainty that conditions current at the time of publication will continue.
References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced may or may not form part of the holdings of First Sentier Investors' portfolios at a certain point in time, and the holdings may change over time.
References to comparative benchmarks or indices (if any) are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.
Not all First Sentier Investors products are available in all jurisdictions. This material is neither directed at nor intended to be accessed by persons resident in, or citizens of any country, or types or categories of individual where to allow such access would be unlawful or where it would require any registration, filing, application for any licence or approval orother steps to be taken by First Sentier Investors in order to comply with local laws or regulatory requirements in such country.
This material is intended for ‘professional clients’ (as defined by the UK Financial Conduct Authority, or under MiFID II), ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) or Financial Markets Conduct Act 2013 (New Zealand) and ‘professional’ and ‘institutional’ investors as may be defined in the jurisdiction in which the material is received, including Hong Kong, Singapore and the United States, and should not be relied upon by or be passed to other persons.
The First Sentier Investors funds referenced in these materials are not registered for sale in the United States and this document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First Sentier Investors’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group (MUFG). Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors and Realindex Investments, all of which are part of the First Sentier Investors group.
This material may not be copied or reproduced in whole or in part, and in any form or by any means circulated without the prior written consent of First Sentier Investors.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
• European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI reg no. C182306; reg office 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; reg company no. 629188)
• United Kingdom and Switzerland by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (reg. no. 2294743; reg office Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB)
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
© First Sentier Investors Group
 If the materials will be made available in other locations, seek advice from Regulatory Compliance.