FSSA Japan Focus is a high-conviction fund investing predominantly in large and medium-sized Japanese companies, with a heavy emphasis on quality. It is managed by two experienced members of the highly successful FSSA Investment Managers team.
Previously First State Japan Focus.
Our opinion
This fund pays no attention to the benchmark, instead following the team’s clear philosophy and process that has proven to be so successful in other parts of Asia. This success has now been replicated in Japanese equities and we think it makes a good core option for investors wanting exposure to this part of the world.
Company description
FSSA Investment Managers is an investment management team within First Sentier Investors, managing a range of Asia Pacific and Global Emerging Market equity strategies on behalf of clients globally. FSSA was awarded the Elite Provider for Equities rating in 2021.
First Sentier Investors is a global asset management group focused on providing high-quality, long-term investment capabilities to clients. It brings together autonomous teams of active, specialist investors who share a common commitment to responsible investment principles.
Fund manager
Sophia Li joined FSSA Investment Managers (previously named First State Stewart) as a graduate in 2009. She initially covered Chinese equities but began covering Japanese stocks when the company launched its range of worldwide funds. Sophia has been co-manager of the FSSA Japan Focus fund since inception in 2015. She is based in Hong Kong but spends about a third of her time in Japan.
Martin Lau has more than two decades of experience running Asian equities and he runs a number of other strategies as well as this fund. Martin has also been a co-manager of this fund since its inception and is also based in Hong Kong.
I search for three types of investments: 1) hidden gems; 2) the only fishermen in a blue ocean; 3) companies with a proven ability to invent the future.
Sophia Li Fund manager
Investment process
The team believes that, despite having a large investment universe, the Japanese market is under-researched and ignored by most international investors. This provides a great opportunity. The team’s philosophy is to invest in quality businesses and the managers look for quality of franchise, quality of management and sustainable long-term growth.
This means that underlying companies often have characteristics such as dominant market share, perpetual innovation, zero tolerance for complacency, fast decision making, secular growth opportunities and limited competition. Stocks also tend to be high return, asset light, have good earnings visibility and are conservatively geared.
The team has regular discussions on potential new secular themes and new ideas are generated through more than 300 company meetings a year. Companies which are deemed good enough make it onto the fund’s watchlist, which has around 120 companies. The existing watchlist is regularly monitored and companies facing structural challenges will be removed.
The team then conducts valuation analysis on the watchlist constituents. The entire portfolio is reviewed annually. The managers avoid the use of set price targets and recognise the limitations of models and valuation methodologies. However, this exercise helps encourage discussion and helps them to understand the key upside and downside risks for a stock.
ESG
ESG - Integrated
FSSA takes a different approach to ESG. It believes that “sustainability is not just a label, but a set of values by which we operate”. Its approach places an emphasis on stewardship and the belief that quality managers and good governance should ensure that environmental and social concerns are rightfully addressed. To this end the company places a real emphasis on management engagement and, by asking in-depth questions, and taking a more holistic approach, fund managers build a thorough understanding of the company, its people and its culture. They conduct around 1,500 company meetings per year and also engage with NGOs and organisations such as the WWF. FSSA has an exclusion policy, preventing managers from investing in certain obvious red-flag companies, such as those involved in tobacco, defence and gambling. Other companies that fall outside the exclusion list, but which may still be involved in activities which may not be ESG-compliant, such as a fossil fuel company which is actively transitioning to renewable energy, are heavily debated and scrutinised by the team. Managers also look at third-party ESG ratings but only use them as one part of their research methodology, rather than as a deciding factor, given the nuances of investing in emerging markets.
Risk
When an investment is made it will initially be between 0-1%, but as the company proves itself the managers will gradually add to the position, up to a maximum of around 6%, and the portfolio is therefore highly concentrated, meaning stock selection is key to performance. The team defines risk as the permanent loss of investor capital and tries to control this through diligent fundamental company research.
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