HEAD-TO-HEAD: FSSA versus GQG Partners

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Investment approach

The FSSA Global Emerging Markets Focus fund invests in 40-45 large and medium-sized companies in from a universe of 36,000 emerging markets stocks. “Manager Rasmus Nemmoe has an absolute return mindset and looks for quality companies that can demonstrate sustained and predictable growth over the long-term,” said McDermott.

Meeting firms at their premises to get an understanding of their culture is key to the investment process, according to McDermott. As such, the team carries out around 1,500 company meetings a year. The team will also conduct extensive analysis on each company’s financial position.

“The FSSA philosophy is that company management needs integrity and a focus on the long-term. Managers will avoid sectors that cause direct harm to society, such as tobacco, munitions and gambling companies,” said McDermott.

To make the cut, companies will also need a free float of at least $1.5bn and an average daily turnover of $5m. None of FSSA’s funds are labelled “ESG”, but all have a strong ESG ethos.

“Managers believe society will continue to demand more from companies, so want to be on the right side of the debate,” said McDermott.

Rasmus reduces the investable universe further by assessing the quality of a firm’s franchise, management team and culture and then conducting a deep dive into the firm’s financials. Attitude towards minority shareholders and ESG issues will also be considered.

“The best ideas are placed on a watchlist,” said McDermott.

From this, a portfolio of 40-45 names is chosen based on the quality of the company, how much visibility there is in the earnings and the potential for long-term growth. Rasmus will make an investment into a stock based on a five-to-10 year view of the investment case playing out. At this point, Rasmus has a “one-in-one-out” process, according to McDermott.

To ensure the portfolio remains well-diversified and is not exposed to one particular risk, no single country weighting can be more than 30%, and frontier country weights are limited to up to 10%. No sector can be more than 40% of the portfolio, with the exception of consumer products and financials, which can be up to 50% due to the number of opportunities.

Turning to the GQG Partners Emerging Markets Equity Fund, the concentrated portfolio comprises high-quality companies with durable earnings, according to McDermott. The fund currently has 57 holdings with 45.6% of the fund in the ten largest positions, the August factsheet shows.

“The emphasis is on future quality, rather than companies which have simply done well historically,” said McDermott.

Idea generation for GQG strategy begins with a proprietary quantitative screen. This filters an initial global universe of 50,000 stocks to just 300 to 350 for further research. Examples of the attributes screened for include stable financial and solid balance sheets, profitability, efficiency, sustainable businesses and liquidity, according to McDermott.

The team then ranks the pool of names on a 1-10 basis (10 being the best) on each of the screening criteria. The weighted average of these scores gives an overall quality rating. The results of the screen, which is run on a monthly basis, are a source of ideas for further qualitative research.

“Once a potential idea is identified, further research is conducted on its drivers of success, barriers to entry, sustainability of the industry, effectiveness of management, the regulatory environment and customer behaviour,” said McDermott.

Analysts perform financial statement analysis on the names they cover, and model estimated earnings potential over the next five years.

The management team includes an accounting specialist who will examine the accounts in greater detail to find potential yellow and red flags and, in addition, GQG likes to hire some analysts with a background outside finance in a “non-traditional” approach, according to McDermott.

“Hence, the analyst team includes a number of former investigative journalists. This gives it insights outside the traditional Wall Street sell-side model and allows the team to see potential risk others may miss,” he said.

Once a business is deemed high enough quality, it is valued based on earnings estimates for the next five years. A stock is only purchased when it is trading at a significant discount to the intrinsic value estimate.

The fund is concentrated and benchmark agnostic but there are some guidelines: maximum position sizes are limited to 7%, the fund must own at least five different sectors at all times and there is a maximum overweight to any one country of 20%.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 31 August 2021

Regional allocation:

Source: Fund factsheets, 31 August 2021

Top 10 holdings:

Source: Fund factsheets, 31 August 2021

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