Objective: aiming to exceed the return of the benchmark on a three-year rolling basis. It will invest in smaller companies in developed markets (North America, Europe, Australia, New Zealand, Japan, Hong Kong and Singapore). The strategy is benchmarked against the MSCI World Small Cap Index.
"We aim for above-benchmark returns for below-benchmark risk"
Why Hermes Global Small Cap?
- High quality: we believe that long-term investment in high-quality stocks generates excess returns over market cycles and also provides downside protection in adverse conditions.
- Focus on stock-specific risk: we aim to outperform through stock picking rather than sector and geographical exposures.
- Long-term investment: our usual holding period of three to five years allows us to participate in the secular growth characteristics exhibited by many small-cap stocks, and to exploit typical market short-termism.
- Extensive experience in the asset class: Hermes has managed regional small-cap strategies since 1987 and this experience determines the approach now applied by the global fund.
Focusing on the quality of companies is a core element of our philosophy. We employ a multi-factor appraisal methodology which looks for and evaluates characteristics such as a durable competitive advantage and
sustainable growth. As a result, the strategy aims to generate a high return on equity and high stability of returns compared to the benchmark. Our strategy is deliberately long-term focused. This is, we believe, an important factor in generating alpha from small caps: such an approach is necessary to capture the market-share-gain phase of successful smaller businesses, and to take advantage of market short-termism.
Stock ideas are sourced from Hermes’ regional small-cap portfolios. This effectively narrows the universe from more than 4,200 stocks to about 250. We undertake a large number of company meetings and overseas trips each year to find new ideas and monitor existing holdings. Each potential investment is peer-reviewed, with the lead manager ultimately determining stock selection and portfolio construction. The fund consists of 50-70 stocks, which helps to ensure that we focus on the best companies and generate a high active share.
We aim to concentrate as much risk as possible in stock selection – our core competence – while maintaining low exposure to sector and geographical risk as this, we believe, generates superior risk-adjusted returns.
The search for quality
We evaluate each company for evidence that they meet the criteria of quality, and their individual merits are discussed at regular stock review meetings. It is not necessary for any one investment to fully satisfy all of the criteria, but they must be perceived to be sufficiently strong on an overall basis. A quality score derived from this assessment contributes to our portfolio construction process.
Past performance is not a reliable indicator of future results and targets are not guaranteed.