Hermes Global Equity
Objective: aiming to achieve long-term capital appreciation by investing primarily in equity securities which are components of the MSCI World Index, or companies listed in countries referenced in this index.
Why Hermes Global Equity?
- Consistency: aiming to beat the benchmark each quarter and by 2-3% every year, this product has outperformed in nearly all market environments since its 2008 inception1.
- Customisability: our investment approach can be easily tailored to meet your specific risk, reward and ESG requirements.
- ESG integration: companies with a good or improving ESG track record are favoured. Hermes EOS provides best-of-breed ESG intelligence.
- Fundamental focus, systematic execution: companies are systematically analysed to identify those with the best time-tested fundamental characteristics, overlaid with a bottom-up sense check.
- Style agnostic: analysing companies from a broad range of perspectives helps to generate positive returns in various market environments and defend against large swings in style.
- Risk management: proprietary risk management tools enable the team to monitor and neutralise the impact of macroeconomic risks. Portfolio stress tests provide forward-looking views of the potential impacts.
We like stocks with robust financial statements, competitive strength and a proven ability to consistently beat revenue and earnings expectations. Ideally, these companies should also be guided by impressive management teams, mitigate ESG risks and appear cheap relative to peers. But very few stocks embody such an ideal investment. So we identify those with the most attractive combinations of characteristics in every market environment.
A systematic model, capturing the same data as a fundamental investment analyst, assesses the attractiveness of every stock in the investment universe each day. The metrics used to select stocks are justified by both economic reasoning and statistical effectiveness, and have a long-term focus that leads to low portfolio turnover. They are grouped by valuation, sentiment, growth, profitability, corporate behaviour and capital structure. This model creates an optimised portfolio that aims to maximise risk-adjusted returns.
The portfolio is subjected to two levels of risk analysis. First, MultiFRAME, our proprietary risk-management system, assesses top-down market risk. It has the flexibility to stress-test the portfolio, interpret how it would respond to different market environments and measure its exposure to any quantifiable risk. Second, we perform a bottom-up ‘sense check’ to ensure that the model has accurately assessed the nuances of each potential investment. At this stage, the ESG Dashboard, another proprietary tool, alerts us to stock-specific environmental, social and governance risks not typically covered in fundamental analysis of companies.
Hermes Global Equity ESG
Combining stock fundamentals and ESG change
Objective: aiming to achieve capital appreciation by investing in worldwide equity securities with favourable ESG
Why Hermes Global Equity ESG?
- Strong foundation: the team’s Global Equity strategy, which provides the core investment process of the fund, has consistently outperformed the global developed markets since 2007 2.
- Disciplined approach, fundamental oversight: portfolio stocks are analysed using time-tested fundamental factors in a systematic process and are reviewed in depth by the team.
- ESG makes money: our research shows that the worst-governed companies persistently underperform, proving that ESG investing does more than make you feel good: it can make you money3.
- Positive change identified: companies with a good or improving ESG track record are favoured. Hermes EOS provides best-of-breed ESG intelligence.
- Risk management: proprietary risk management tools enable the team to monitor and neutralise macroeconomic exposures before they impact returns.
We are not biased towards value, growth or quality: each stock is systematically analysed across all of these dimensions, factoring in market sentiment towards the company, to identify those with the most attractive combinations of attributes.
Our proprietary stock-selection model is designed to replicate the thinking of an investment analyst. The factors used to assess companies are justified by both economic reasoning and statistical effectiveness. We have a long-term focus and aim to generate consistent outperformance over many years.
Stocks with the most attractive combinations of fundamental characteristics and ESG characteristics are selected for a portfolio that aims to maximise expected risk-adjusted return. The ESG characteristics of companies are reflected in our proprietary assessment of ESG performance, the QESG Score. This score reflects the current behaviour of companies and, crucially, how they are improving. Those ranked higher than their peers are favoured.
Next, MultiFRAME, our proprietary risk-management system, assesses top-down market risk. It has the flexibility to stress test the portfolio and interpret how it would respond to different market environments. We then perform a “sense check” to ensure that the model has accurately assessed the nuances of each potential investment, and that ESG risks are priced in.
Objective: aiming to achieve long-term capital appreciation by investing primarily in equity securities which are components of the MSCI World Index, or companies listed in the countries referenced in this Index. The portfolio will not invest in companies engaged in unethical or unsustainable activities, as defined by the proprietary exclusion list which is updated on a quarterly basis.
The exclusion list includes companies:
- Identified by EOS as involved in controversial weapons
- On EOS’s Controversial Companies Report with a High Severity rating for environmental and social risks and where engagement is deemed unfeasible
- Generating >10% of revenue from gambling, tobacco, logging, nuclear energy or armaments
Hermes Global Small Cap
Objective: aiming to exceed the return of the benchmark on a three-year rolling basis. It will invest in smaller companies in developed markets (North America, Europe, Australia, New Zealand, Japan, Hong Kong and Singapore). The strategy is benchmarked against the MSCI World Small Cap Index.
Why Hermes Global Small Cap?
- High quality: we believe that long-term investment in high-quality stocks generates excess returns over market cycles and also provides downside protection in adverse conditions.
- Focus on stock-specific risk: we aim to outperform through stock picking rather than sector and geographical exposures.
- Long-term investment: our usual holding period of three to five years allows us to participate in the secular growth characteristics exhibited by many small-cap stocks, and to exploit typical market short-termism.
- Extensive experience in the asset class: Hermes has managed regional small-cap strategies since 1987 and this experience determines the approach now applied by the global fund.
Focusing on the quality of companies is a core element of our philosophy. We employ a multi-factor appraisal methodology which looks for and evaluates characteristics such as a durable competitive advantage and
sustainable growth. As a result, the strategy aims to generate a high return on equity and high stability of returns compared to the benchmark. Our strategy is deliberately long-term focused. This is, we believe, 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.
Stock ideas are sourced from Hermes’ regional small-cap portfolios. This effectively narrows the universe from more than 4,200 stocks to about 250. We undertake a large number of company meetings and overseas trips each year to find new ideas and monitor existing holdings. Each potential investment is peer-reviewed, with the lead manager ultimately determining stock selection and portfolio construction. The fund consists of 50-70 stocks, which helps to ensure that we focus on the best companies and generate a high active share.
We aim to concentrate as much risk as possible in stock selection – our core competence – while maintaining low exposure to sector and geographical risk as this, we believe, generates superior risk-adjusted returns.
The search for quality
We evaluate each company for evidence that they meet the criteria of quality, and their individual merits are discussed at regular stock review meetings. It is not necessary for any one investment to fully satisfy all of the criteria, but they must be perceived to be sufficiently strong on an overall basis. A quality score derived from this assessment contributes to our portfolio construction process.
1. Since inception on 01 December 2007 the Hermes Global Equity Strategy has outperformed the MSCI World Net index by 1.43% on an annualised basis as at 31 December 2015. Performance shown is in USD and is gross of fees. A full GIPS disclosure report is available on the latest strategy factsheet.
2. Since inception on 01 May 2013 the Hermes Global Equity ESG Strategy has outperformed the MSCI World Net index by 4.86% on an annualised basis as at 31 December 2015. Performance shown is in USD and is gross of fees. A full GIPS disclosure report is available on the latest strategy factsheet.
3. ESG investing: Does it just make you feel good, or is it actually good for your portfolio?, by Hermes Global Equities, published January 2014.
Past performance is not a reliable indicator of future results and targets are not guaranteed.