US SMID Equity

Investing in a diverse portfolio of high-quality US smaller companies

Reasons to invest

High quality

We believe long-term investment in high-quality companies generates excess returns over market cycles.


Our usual holding period of three-to-five years allows us to participate in the secular-growth characteristics of many small-cap stocks, and exploit typical market short-termism.

Lower risk

Our focus on quality and cash-flow generation offers a degree of downside protection that we believe provides a relatively low-risk way to access this asset class.

Responsible owner

We are an active owner and partner. In practice, this means we maintain a regular dialogue with the companies we own and encourage strong ESG practices.

Extensive experience in the asset class

Federated Hermes Limited has managed regional small-cap strategies since 1987.


Mark Sherlock

We are looking for quality companies underneath Wall Street’s radar, rather than shooting stars. We focus on compounders.

Mark Sherlock
- Fund Manager

Why US SMID Equity?

The strategy was launched in September 2012 to invest in small- and mid-cap US companies. Our approach – developed over our 30 years – is consistent through the economic/investment cycle, and has, in the past, delivered good risk-adjusted returns.

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The strategy is deliberately long-term focused, with a three- to five-year average holding period. We believe this is an important factor in generating alpha from small- and mid-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.

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As a founding member of the UN PRI, ESG has always been at the heart of our ethos. Today we continue to be a key proponent of stewardship and, through our dedicated business, EOS at Federated Hermes, we have one of the largest stewardship teams of any asset manager globally.


How we invest

Focusing on quality
Concentration of risk on stock selection
Acting on ESG

Investment philosophy

We believe:

  • Quality should be at the heart of the investment process. Ownership of companies with a durable competitive advantage can provide better downside protection and generate higher compound returns over time.
  • In holding a stock long enough for the company to achieve its potential. Capital appreciation occurs not only from the elimination of a discount to intrinsic value, but also from intrinsic-value growth itself.
  • That positive risk-adjusted returns are best and most consistently generated by concentrating risk on stock selection and not seeking to generate returns by taking regional and sector positions.

Investment process

The strategy uses three principal methodologies to identify value:

  • Meeting with management,
  • Our watchlist
  • Screening.

We are looking for companies that meet our definition of quality. We conduct fundamental research through meetings with approximately 250 companies annually. Investment ideas are also generated from the watchlist – a list of c.250 companies that fulfil the strategy’s quality criteria. This is the strategy’s intellectual property, built up over years of management meetings. Short-term market movements can provide entry points into these businesses.

The criteria used to define quality are:

  • Durable competitive advantage
  • Sustainable growth
  • Management integrity, talent and vision
  • Strong balance sheet
  • Cash generation
  • Capital discipline

Research is generated internally and supplemented with information from sell-side brokers. When a potential investment has been identified, we will write a detailed report on the company, outlining the investment case together with the risks. The report analyses a company’s competitive advantages, the industry structure, the management and the company’s corporate and social responsibility record. We also perform our own ESG research at the stock level, actively incorporating ESG factors in their assessment.

The portfolio is constructed with between 40-70 holdings. Position sizes are determined with reference to fundamental risk, quantitative risk, upside to target price, contribution to tracking error and liquidity.

Infographic investment philosophy


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Mark Sherlock

Mark Sherlock, CFA, FCA

Head of US Equities, Lead Portfolio Manager, Federated Hermes Limited

Henry Biddle

Henry Biddle, CFA, ACA

Portfolio Manager, US SMID, Federated Hermes Limited

Michael Russell

Michael Russell, CFA

Director, Co-Portfolio Manager, US SMID, Federated Hermes Limited

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