Five years of investing in China A-shares
Chinese A-shares – shares that trade in mainland China on domestic exchanges and which are priced in...
FSSA All China
Unlike many Chinese equity funds, FSSA All China invests across the whole market including the vast A-share market, which is often ignored by many international investors. The managers invest in long-term, sustainable growth opportunities, with a heavy emphasis on finding high-quality businesses and management teams.
Our opinion
The team behind the FSSA All China fund is based on the ground in Hong Kong and has an incredible track record of investing in Chinese equities. The fund is flexible and more dynamic than most existing Chinese equity funds and we believe its ability to invest in A-shares and across the market gives it an advantage over its competitors. This belief is backed-up by performance, which has been excellent since this fund launched. The managers also have a solid and proven process with an emphasis on quality businesses and management which has consistently worked in the past.
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
Winston Ke joined FSSA in 2015 and has more than 15 years investment experience. Winston is the lead manager of this fund and graduated from Nanjing University with a BA and an MA in Economics. He is a CFA charterholder.
Helen Chen joined FSSA in 2012 and is a specialist in the Greater China equity markets. In addition to being co-manager on this fund, Helen is lead manager of two other Chinese equity portfolios. She holds a bachelor’s degree in finance from Peking university and she is a CFA charterholder.
You need to be curious – really, persistently, doggedly curious. Most people can access most information, but the buzz is delving deeper and getting an insight nobody else has discovered.
Winston KeFund manager
Investment process
FSSA is its own autonomous unit within First Sentier and has its own unique style and culture. All portfolio managers are also analysts. The team naturally prefers asset-light, cash-generative businesses, with strong balance sheets. The emphasis is on investing in long-term sustainable growth, which can compound over many years.
The team also places a heavy emphasis on responsible investment. The managers engage with their businesses and potential investments must have sustainable business models. They must also have a social licence to operate. Stewardship and voting are also important. FSSA meets with around 1,600 companies a year.
The stock-picking process begins with a qualitative (management reputation, dominant franchise etc) and quantitative (track record, financial strength) screen. At this stage, the focus is all about finding businesses which are good enough to own and not on valuation. This narrows the enormous Chinese universe of 5,000 down to about 500 stocks.
Around 100-150 will make it on to the watchlist where detailed research is undertaken,
including company reports, cross-checks with industry experts and analysis of key issues. The stocks on the watch list are continuously and rigorously debated to challenge the status quo.
Valuation is more important when selecting the final stocks to go into the fund. The team determines a fair market value and an expected return based on the managers’ expectations for the next three to five years. Potential upside and downside risks are also considered. The final portfolio is made up of just 30-50 stocks. Initial positions begin at 0-1% and are gradually built to 2-3% as they are proven over time. The top holdings are between 4-10% and generally the top ten makes up the large bulk of the portfolio. This is a high-conviction, active fund. Positions are sold when the investment case changes, the valuation gets too high or there is a better alternative.
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. With over 50% of companies in China being owned by the government, policy change and regulation risk may have a greater impact on the portfolio.
Risk
Risk is considered as permanent loss of capital rather than temporary share price fluctuations. The team adopts a margin of safety approach and will move on from promising potential investments if they are too complex or difficult to understand. A number of different risks are considered: business risk – the competitive dynamics; the threat of disruption and new entrants; and the demand and supply cycle, governance risk – the threat that actions are taken against minority shareholder interests, financial risks – leverage and opaque accounting and environmental and social risks – labour issues, illegal activities and reputational damage.
Read more about this fund
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