The key to success in emerging markets: investing in quality
At FSSA Investment Managers, we take a patient, long-term approach when investing in global emerging markets, with a concentrated portfolio of high-quality companies. We examine why this philosophy has endured for the past quarter-century.
Investing in a concentrated group of high-quality companies and holding them for the long term has been at the heart of our philosophy since our team was established in the 1990s – and it’s been central to our success.
Our primary goal is to deliver positive returns for clients. But investing in emerging markets means not just focusing on the potential upside – we must also consider the risks.
With this in mind, we think about how not to lose our clients’ capital. And we found the most reliable way to build a resilient portfolio was by investing in exceptional companies with high-quality, dependable management.
Our approach may seem obvious – what fund manager would invest in unattractive businesses? But subpar companies can sometimes appear attractive when their valuations have declined.
Swimming against the tide
When investing in great companies, we believe it is essential to do so at a fair price. But we believe it is more important to invest in quality than to focus purely on cheap valuations.
Sometimes, quality businesses fall out of favour with investors – and this often presents an attractive buying opportunity. For example, our team has held Taiwan Semiconductor Manufacturing Company (TSMC)1 for nearly two decades.
In the early 2000s TSMC was considered a cyclical stock to be traded in and out according to the cycle. But we saw that its business model – focusing on the latest technology and partnering with its customers instead of competing with them – could position it as a long-term winner. As higher cost players exited, either through outsourcing or partnerships, TSMC’s business grew stronger.
Today, TSMC is the world’s largest foundry and, in partnership with its customers, produces some of the most advanced semiconductors in the industry. It has been a major beneficiary of AI adoption, and we believe it will likely continue to compound for years to come.
On the other hand, our emphasis on fair value means that we sometimes choose not to invest in companies with otherwise attractive business models. For example, India has long been a favourite market, due to the quality of the companies there.
But over the past two years valuations have become stretched, and some pockets of the market are now expensively valued. We believe there are reasons to be cautious and we have leaned against the market’s euphoria.
This valuation discipline has served us well over the years and has added to our overall performance.
The future looks bright
While our investment approach has remained largely unchanged, the countries we invest in have seen significant developments over the past quarter century. The liberalisation of China’s capital markets and India’s growing prosperity have reshaped the region – and the world.
Equally important has been the development of highly competitive franchises with emerging-market roots. TSMC is of course one example, but we would also highlight MercadoLibre in Latin America – arguably a stronger e-commerce business in this particular market than, say, Amazon is in the US.
As long-term GEM investors, we are excited to find more high-quality businesses that we believe can capitalise on the secular growth drivers and growing domestic demand in emerging markets in the years ahead.
1 TSMC is the largest holding in the FSSA GEM strategy, as at 31 December 2024.
Related articles
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 favours a more patient, long-term approach, only investing in companies where we have high conviction in their prospects.
- Article
- 4 mins
At FSSA Investment Managers, we invest in businesses we expect to be part of our portfolio for decades to come. That’s why we put such a premium on the quality of management teams, choosing leaders who we believe have the skills to build strong franchises and deliver long-term growth.
- Article
- 4 mins
Investors sometimes fixate on short-term economic trends such as inflation paths and interest-rate movements, but this is not the FSSA Investment Managers way. Our strategy is driven by long-term growth trends in emerging markets and the investment opportunities they create.
- Article
- 4 mins
- Article
- 4 mins
Important Information
For institutional investors only
This document has been prepared for general informational purposes only and is only intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.
This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this document.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
Certain statements, estimates, target returns, and projections in this document may be forward-looking statements. These forward-looking statements are based upon First Sentier Investors' current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Actual returns can be affected by many factors, including, but not limited to, inaccurate assumptions, known or unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements to be materially different. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will continue, and First Sentier Investors undertakes no obligation to publicly update any forward-looking statement. You are cautioned not to place undue reliance on the performance objective in making your decision to invest with First Sentier Investors.
Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of FSI.
The comparative benchmarks or indices referred to herein 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.
References to "we" or "us" are references to First Sentier Investors ("FSI"), a member of Mitsubishi UFJ Financial Group, Inc., a global financial group.
In the United States, this document is issued by First Sentier Investors (US) LLC. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 and as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933. It is not to be distributed to the general public, private customers or retail investors in any jurisdiction whatsoever.
For more information please visit www.firstsentierinvestors.com. Telephone calls with FSI may be recorded.