Focusing on quality: the key to our 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 favours 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 fund’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 considerably lower than that of other emerging-markets managers.

At FSSA, we have consistently demonstrated that our considered, patient approach to investing can produce real results. This has allowed us to build enduring relationships with clients, who understand our process and are happy to take a similarly long-term view.

We are clear with clients that taking a long-term view means keeping calm during periods of short-term noise.

If our performance falls below the benchmark for a short period, we’ll discuss the reasons why this may have happened. But more often than not, market gyrations have little impact on the long-term investment case for our portfolio holdings – which is what really matters. 

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 underlying emerging markets’ development and understand the structural growth drivers 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. 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 time.