Active management of high-conviction investments within the UK
Hermes UK Small and Mid Cap Companies
Risk managers in a high-return potential asset class
Objective: aiming to provide long-term capital appreciation by investing primarily in equity securities of small and mid-cap companies (excluding investment companies), which the Investment Manager has identified as undervalued.
Why Hermes Small & Mid Cap Companies?
- Risk management is at the core of the investment process: investment risks are considered constantly throughout stock
appraisal, portfolio construction and monitoring with the aim to deliver high returns with lower risk to capital. - Analysing stocks, not the market: the managers focus on stock selection and do not attempt to time the market. The overwhelming majority of active risk is intentionally derived from stock selection.
- Active management with conviction: David and John run a concentrated portfolio of no more than 70 stocks, with a high active share. Each stock has earned its place – they only hold stocks they have thoroughly researched and believe can outperform over the long term.
- Capitalising on pricing anomalies: the managers identify companies capable of delivering sustainable, growing cash flows, which has not been reflected in share prices.
- Investing like owners, not traders: the managers are long-term investors. Companies are typically held for more than three years, to benefit from re-pricing.
Philosophy and process
The Hermes UK Small Cap Team seeks to invest in companies that are able to deliver long-term, sustainable and growing cash flows, as they believe these characteristics are essential to creating value for
shareholders.
The managers are looking for evidence of durable competitive advantage, reinforced by capital discipline, and management teams that have the skills required to strengthen and defend their business models amid changes in the competitive environment.
Risk management is integral to the investment process and is considered in investment analysis and the construction and regular monitoring of the portfolio. Returns and risks are the results of stock selection rather than market beta, sector tilts or macro positioning. Capital is preserved through buying stocks at prices below the managers estimate of their intrinsic value.