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US SMID EQUITY

Aiming to provide long-term capital appreciation by investing primarily in equity or equity-related securities of small and mid-capitalisation companies domiciled in the US or deriving a large proportion of their income from US activities.

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We are looking for companies underneath Wall Street's radar, not shooting stars. We firmly believe the tortoise beats the hare.

Mark Sherlock

Fund Manager

High quality

We define quality as durable competitive advantage. Companies that have this often exhibit high market share, industry-leading margins and good cash-flow generation.

Long-term investment

The average holding period is three to five years. This longer-term focus allows the team to take advantage of short-term swings in investor sentiment to identify attractive entry points for investment.

Lower risk

The focus on quality and cash-flow generation gives a degree of downside protection. We believe this provides a relatively low-risk way of accessing this asset class.

Stable returns

Investments in high-quality businesses tend to preserve capital in down markets, thereby lowering risk.

Investment approach

We invest in high-quality companies that we believe possess a durable competitive advantage. We value consistency and stable, growing revenues and cash flow. Over time, we believe that companies that exhibit these characteristics outperform with less risk. Our investment criteria are based on company fundamentals, not macro driven.

US Small and Mid-Cap

We have a watchlist of about 200 companies that meet our quality criteria, which has been built up over the past 10 years and supports timely investment when valuations are appropriate. A detailed company report and cash flow model is produced for each potential investment. We then perform a composition review, an optimisation tool which is run monthly, incorporating quantitative and qualitative data on each of our companies to effectively manage position sizes.

A track record of performance

Small and Mid-Cap stocks have historically provided better returns over time. The Hermes US SMID Strategy, upon which this product is based, has a long track record of outperformance.1

Risk management

The majority of risk in our portfolio comes from stock selection – the team’s core competency – and we regularly test for unintended factor risks. Hermes EOS provides us with proprietary data about environmental, social and governance risks that may influence the performance of companies.

US SMID Equity - Strategy introduction
US SMID Equity - Strategy introduction
  1. 1Since inception on 31 October 1987 the Hermes US Small & Mid Cap Companies Strategy has outperformed the Russell 2500 index by 1.09% on an annualised basis as at 30 September 2018. Performance shown is in USD and is gross of fees. A full GIPS disclosure report is available on the latest strategy factsheet.

Past performance is not a reliable indicator of future results and targets are not guaranteed.

Team

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Mark Sherlock

CFA, FCA, Lead Portfolio Manager, US SMID

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Mark joined the Hermes US SMID team in February 2009 as co-manager of the Hermes US SMID Cap strategy and became lead manager in October 2013. He was appointed as Head of US Equities in October 2017. Mark initially joined Hermes in 2005 as an analyst and fund manager on the UK Focus Fund. Prior to this, he was an investment analyst at Rio Tinto Pension Fund, where he had responsibility for the small- and mid-cap portion of the portfolio. Mark qualified as a Chartered Accountant with PricewaterhouseCoopers in 2002. He has a degree in Politics from Durham University, is a CFA charterholder and a Fellow of ICAEW.

Michael Russell

CFA, Director, Co-Portfolio Manager, US SMID

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Michael joined Hermes in March 2014 as the co-manager of the US SMID Cap strategy. Michael was most recently senior portfolio manager of the Global Developed Markets Equity funds at Nomura Asset Management, where he worked for eight years. During this time he also acted as portfolio manager of the firm’s US equity funds for five years from 2005. Earlier in his career Michael held senior roles managing US equity funds at Merrill Lynch Investment Managers and Mercury Asset Management. He is a CFA charterholder and has an MA in Economics from Cambridge University.

Alex Knox

Portfolio Manager, US SMID

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Alex joined Hermes in August 2009 as senior investment analyst for the US SMID Cap strategy. Alex's investment experience has been focused on smaller companies, starting in 1995 at Morgan Grenfell Asset Management and subsequently at JPMorgan, but most recently as an analyst and portfolio manager for UK SMID at Aviva. She is a qualified Chartered Accountant and worked as a strategy consultant at Arthur Andersen. Alex has a Mathematics degree from Durham University.

Henry Biddle

CFA, ACA, Portfolio Manager, US SMID

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Henry joined Hermes in March 2012 as investment analyst for the US SMID Cap strategy from UK brokerage firm Peel Hunt, where he was a diversified financials analyst from December 2010 until February 2012. Prior to that he worked at Deloitte in the banking and capital markets group and in corporate finance from October 2006 until November 2010. Henry has an MA in Classics from Trinity College, Oxford, is a qualified Chartered Accountant and a CFA charterholder.

Related Insights

Video: US SMID Equity - Strategy introduction
An introduction to the US SMID Equity Strategy.
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Five reasons to keep faith in the US
Amid fears of an overheated market and uncertainty around Trump’s presidency, Mark Sherlock, Lead Portfolio Manager of the Hermes US SMID Equity Fund, believes there are still great investment opportunities to be found in the US small and midcap space. A market driven by fundamentals Year-to-date the Russell 2500 has returned circa 5.0% (compared with c9% for the S&P 500 Index). At a sector level, there has been a rotation out of some of the beneficiaries of the so-called “Trump trade” (banks, industrials) into parts of the market (healthcare, technology) which relatively underperformed in the post-election euphoria of Trump’s pro-growth policies. This rotation reflected the weaker economic data coming through in February and March and acknowledged a realisation that many of Trump’s policies are controversial and will likely require compromise. At the same time an improving European economy and Macron’s victory in the French Presidential election have seen investor interest switching from the US. These factors make for a better set up for the asset class- a market driven by fundamentals rather than one based on the expectation of political stimulus.
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US raises rates: Fund Manager reaction
By raising the benchmark US interest rate by 25bps to 1.25%, the Federal Reserve has shown its confidence in the domestic economy and financial conditions. The fourth hike since the financial crisis, and the third in seven months, follows the US unemployment rate hitting a 16-year low of 4.3% last month but also soft growth in the first quarter, from which the Fed believes the economy will rebound quickly. With rates edging closer to normalisation, the market is focused on whether the Fed will begin unwinding its balance sheet, which could begin as early as September.
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Manhattan Associates - strong fundamentals before and after the Trump trade
As Donald Trump approaches 100 days in office, it appears that more time is required for his administration to implement the stimulative policies he has promised. Irrespective of any policy changes, Mark Sherlock, Lead Portfolio Manager, Hermes US SMID Equity Fund and Alex Knox, Senior Investment Analyst, believe the underlying strength of the US economy and its wealth of high-quality small- and mid-cap businesses will continue to provide attractive investment opportunities. Software developer Manhattan Associates is one of them. Baby or bathwater? Every January, despite efforts to stoke post-Christmas consumption with hefty discounts, many retailers experience cash flow problems and some go out of business. This year, the shift towards online from bricks-and-mortar stores accelerated faster than anticipated. Given that plenty of shops are struggling in an already tough competitive environment, media and stock research reports about the performance of retailers have been alarmist.
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Manhattan Associates: strong fundamentals before and after the Trump trade
As Donald Trump approaches 100 days in office, it appears that more time is required for his administration to implement the stimulative policies he has promised. Irrespective of any policy changes, we believe the underlying strength of the US economy and its wealth of high-quality small- and mid-cap businesses will continue to provide attractive investment opportunities. Software developer Manhattan Associates is one of them. Baby or bathwater? Every January, despite efforts to stoke post-Christmas consumption with hefty discounts, many retailers experience cash flow problems and some go out of business. This year, the shift towards online from bricks-and-mortar stores accelerated faster than anticipated. Given that plenty of shops are struggling in an already tough competitive environment, media and stock-research reports about the performance of retailers have been alarmist.
Read more
Gildan: on top of its game
Improved working conditions and energy efficiency have helped create a virtuous circle for the Canadian manufacturer of active wear. Our concern Textile and clothing manufacturers need to be conscious of working conditions including the physical state of factories and their treatment of employees – particularly in emerging markets – to maintain the integrity of their reputations in the industry that originated the ‘sweatshop’ tag. Between 2002 and 2004, serious allegations about exploitative labour practices were levelled at Montreal-based apparel maker Gildan. Following these claims, the company underwent an externally verified remediation process to improve practices at its production sites in Honduras, Nicaragua and Haiti. The result was the Gildan Code of Conduct, and this marked the start of the company’s development of best-in-class environmental, social and governance (ESG) practices within its industry. This discipline has helped the company improve productivity, lower costs and generate stronger returns for shareholders.
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Trumps pro-growth policies to power opportunities
In this video, Mark Sherlock, Lead Portfolio Manager for the Hermes US SMID Equity Fund, speaks to Terri-Ann Williams, reporter for Citywire Selector, about the opportunities for the US small and mid cap companies under the pro-growth policies to be implemented by the Trump administration.
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Fed rate hike strengthens US SMID opportunities
The data simply proved too strong: as expected, the Federal Reserve has increased the base US interest rate to 75bps amid strengthening economic indicators. These include: •Growth: GDP increased at an annualised rate of 3.2% in Q3, and was followed by a recent surge in services activity last month •Unemployment: the jobless rate fell to 4.6% in November, its lowest level in more than nine years •Inflation: the Consumer Price Index rose 1.5% in the year to September, suggesting that inflationary pressures are rising The central bank’s willingness to hike was evident in the Federal Open Market Committee’s minutes from its November meeting, which stated: “Members generally agreed that the case for an increase in the policy rate had continued to strengthen”. Our view is that US interest rates will likely continue to chart an upward trajectory as the extraordinary monetary policies of the post-financial crisis era give way to pro-growth fiscal stimulus and deregulation. We believe that this environment favours small- and mid-cap (SMID) stocks.
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America: land of opportunity for SMID investors
The dramatic shift in US leadership has fundamentally changed the outlook for domestic small- and mid-cap (SMID) stocks. The consensus view that the economy was locked in a low-growth, low-inflation mode should be revisited. Markets have responded positively to pro-growth policies put forward by Trump, such as spending $1tn on infrastructure and slashing the corporate tax rate from 35% to 15%.
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Sales Contacts

Clive Selman,
Head of UK Sales
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[email protected]
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+44 (0)20 7680 2189