When did you join Federated Hermes and what were you doing before?
Initially qualifying as an accountant with PwC, I joined Hermes (from the Rio Tinto pension scheme) to focus on European small- and mid-cap companies in 2005. I transitioned to the US small- and mid-cap team in 2009, taking over as Lead Manager in 2012, where I have been ever since! AUM managed, initially coming in at US$200m now stands at around US$3bn.
What’s your investment philosophy? What makes you tick as an investor?
My investment philosophy can best be described as patient: ‘The tortoise beats the hare’. We typically eschew fashionable stocks preferring to look for below-the-radar, multi-year compounders, often in quite unglamorous parts of the market. This is a conscious approach which discourages new capital (competition) to be drawn in, consequently superior returns can be achieved over an extended period.
We focus on companies with a durable competitive advantage, as defined by barriers to entry, typically with strong balance sheets and good cashflow. A virtuous circle can occur when cashflows are deployed to strengthen existing barriers, which, in turn, generates additional cashflow – this can persist for many years and result in market caps rising substantially.
I was fortunate – if you can call it that – to experience first-hand and at an early stage in my career the downside of investing in businesses of lesser quality: leveraged, low-barriers businesses are cheap for a reason, and many do not last for long! Downside protection is crucial, with the absolute loss of capital the key risk in investing: self-evidently (but a fact often overlooked…) if you lose half your money in a stock, it has to double from there to get back to where it was – and that can really affect your long-term returns. ‘The first rule of compounding: never interrupt it unnecessarily’. Charlie Munger.
It's something of a benefit to be removed from the 'white noise' of Wall Street, making it easier to make better long-term decisions.
What if anything has changed in the past 15 years, either in terms of the Strategy or the investment backdrop? What has stayed consistent and what has evolved?
The investment landscape has changed significantly over the last 15 years, during which we have seen the continued rise of passive investing, the very strong performance of growth stocks, the dominance of mega-cap tech and the narrowing of the large cap market.
More broadly, globalisation has begun to give way to onshoring – and technology, which was historically confined to its own distinct sector, now permeates throughout the index. This includes everything from the challenges of multi-channel retailing to the adoption of Software as a service (SaaS) business models to the current opportunities offered by adoption of artificial intelligence (AI).
AI is rightly a hot topic for the market, and we believe it will yield very significant productivity gains for companies across the market cap spectrum over the next decade and beyond. The consideration of non-financial factors has also become more of a focus – certainly our assessment of the sustainability of a business is additive in our assessment of its quality and likely future success.
Yet certain things remain the same – not least the opportunity offered by the market to generate strong risk-adjusted returns. Cashflow remains king for the optionality it, quite literally, affords. The importance of quality remains a constant – during periods of economic or market turbulence it’s these businesses that can take advantage of more peripheral or highly levered competition: ‘Never let a good crisis go to waste,’ as Churchill once said! As does the importance of patience and resisting the urge to overtrade.
It's unusual to manage a US strategy from outside the US. Have there been any challenges associated with this?
It hasn’t represented any real problems so far, and, as our track record suggests, we have access to enough information to make the right calls about the companies in which we invest. Perhaps, if anything, it’s something of a benefit to be removed from the ‘white noise’ of Wall Street, making it easier to make better long-term decisions.
Another unusual aspect of the Strategy is the longevity of the team, with the PMs having worked together for more than a decade. Over that time, we’ve witnessed so many different markets and economic conditions – think of the changes of president in the White House, for instance, or the impact of a global pandemic – and it’s a credit to the stability of the team that we’re still investing profitably and finding opportunities to create alpha.
15 for 15: A US SMID retrospective
To learn more about our US SMID strategy, please click here.
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