Global Small Cap Equity

Reasons to invest

High quality

We believe long-term investment in high-quality companies generates excess returns over market cycles and also provides downside protection in adverse conditions.

Focus on stock-specific risk

Portfolio stocks are analysed using fundamental factors in a systematic process.

Long-term

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.

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.

Quick links

We aim for above-benchmark returns for below-benchmark risk.

Hamish Galpin

Director, Head of Small and Mid Cap, Lead Manager of Global Small Cap

Why Global Small Cap?

Investing in smaller companies in developed markets

Long-term focused

ESG: a core part of our ethos

The Global Small Cap Strategy was launched in July 2011 to invest in smaller companies in developed markets. Our approach – developed over our 30 years – aims to be consistent through the economic/investment cycle, and seeks to deliver good risk-adjusted returns.

We believe a long-term focus is 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.

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 Limited, 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:

Positive risk-adjusted returns are most consistently generated by concentrating risk on stock selection and not seeking to generate returns by taking regional and sector positions.

In investing in high-quality stocks. Having an element of growth alongside quality is important, as this is what can differentiate a good company from a good investment.

A longer holding period (three-to-five-years) allows us to capture the market-share-gain phase of successful small cap businesses and the ‘stronger-for-longer’ returns that high-barrier-to-entry businesses tend to enjoy. It also enables the strategy to take advantage of market short termism.

A long-term holding period facilitates the ‘running of winners’. In our opinion, this approach is the major contributor to long-term value generation in the strategy.

In concentrating the portfolio as much as possible, though not to such an extent that individual stock risk is too great.

Investment process

1. Idea generation and research

2. Fundamental analysis

3. Portfolio construction

The first stage of the process is to reduce the investment universe from c.4,200 stocks to a shortlist of 200-250 names. Management meetings are a particularly important source of ideas. No stock will be included without our having met or spoken with the company’s management. Although we make use of broker research, analyst meetings and industry journals, approximately 80% of our research is proprietary.

We write a detailed report for each stock, outlining the investment case together with the investment risks. The report usually concludes with full valuation analysis and an assessment of intrinsic value. Reports are peer reviewed and valuations are undertaken by the regional managers. The most important part of the valuation process is the construction of a long-term (usually 10-year) discounted cash flow (DCF) model for each company. We assess risks associated with a company’s approach to ESG issues, and we incorporate the implications to the investment case into our decision-making process.

The manager targets a portfolio of 50-70 stocks. This is sufficient to achieve sector and regional neutrality while concentrating risk on stock selection.