Body: 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% CAGR 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.
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.
