Since its December 2008 inception, a period beginning with the tumult of the financial crisis and ending with the bullish US ‘Trump trade’, the Hermes Global Equity Fund has achieved its objective: to generate 2%-3% net annualised outperformance of its benchmark, the MSCI World Index, over rolling three-year periods (see figure 1).
This 2.4% net annualised outperformance is reinforced by other evidence that the Fund offers a robust proposition: strong risk-adjusted returns, skilful active management, prudent diversification and low turnover.
Figure 1. Eight years in numbers: key metrics for the Hermes Global Equity Fund
| Relative outperformance | 2.4% net, annualised |
| Sharpe ratio | 0.8 |
| Information ratio | 1.1 |
| Active share | 76% |
| Tracking error | 1.9 |
| Concentration | 125-200 stocks |
| Turnover | 21.2% annualised |
Source: Hermes. Performance metrics cover the period from the inception of the Fund, 5 December 2008, to 31 October 2016, with the exception of turnover, which covers the five years to 31 October 2016. Currency is USD. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Targets cannot be guaranteed.
In seeking to achieve our long-term objective, we aim to regularly outperform our benchmark by a small margin so that gains compound over time. In the 31 quarters since its launch, the Fund beat the MSCI World in 23 of them1. This consistency has been achieved in both rising and falling markets, with the Fund generating an average monthly gain of 0.19% that compounded over time to deliver substantial outperformance (see figures 2 and 3). Providing consistent, positive relative and risk-adjusted returns throughout all investment environments is a characteristic benefit that we aim to deliver to investors.
Figure 2. Hermes Global Equity Fund: net rolling returns since inception
Source: Hermes as at 31 October 2016.
Figure 3. Consistent excess returns through up and down markets
| Number of months | Months with excess returns | Excess return | Average outperformance | Average underperformance | Average excess return | |
| Up markets | 59 | 40 | 68.80% | 0.52% | -0.43% | 0.22% |
| Down markets | 37 | 25 | 67.57% | 0.44% | -0.43% | 0.15% |
| Number of months | 96 | 65 | 67.71% | 0.49% | -0.43% | 0.19% |
Source: Hermes as at 31 October 2016.
The Fund was launched in the depths of crisis, as the Federal Reserve and other major central banks initiated immense quantitative-easing programmes to revive markets and economies. Amid such volatility, our diversified exposure enabled the Fund to adapt to multiple investment styles and cope with dramatic rotations in equity markets.
This all-weather approach was also tested by further extreme events: the euro crisis, taper tantrum, commodity-price collapse, Brexit vote, emerging-market resurgence and the rise of US President-elect Donald Trump. Our awareness of top-down risk also contributed. For instance, our proprietary risk-management system MultiFRAME revealed the Fund’s sensitivity to yen appreciation ahead of Japan Prime Minister Shinzo Abe’s stimulus programme. This led to our profitable exposure to Japanese exporters as Abenomics took effect.
Throughout these turbulent eight years, we remained focused on our key investment principles:
We believe that the environmental, social and governance characteristics of companies are fundamentally important to stock performance. This is based on our research, which shows that avoiding the most poorly governed companies can add up to 30bps each month to returns2, and our experience as investors.
We integrate ESG considerations into our investment decisions by combining best-of-breed specialist research and proprietary data, including research and engagement insights from stewardship specialist Hermes EOS, to provide a comprehensive view of companies’ ESG risk exposures – both in the present and in the future.
We perceive the trend in a company’s ESG exposure to be equally as important as the current level. For this reason, we take a forward-looking view to consider whether companies’ ESG practices are improving or worsening, and factor this into our analysis.
The importance of ESG risk encouraged us to systematically embed governance analysis into our stock-selection process alongside traditional financial measures of a company’s performance. ESG considerations are also assessed in each ‘sense check’ of a holding or potential investment, and in portfolio-level analyses of the Fund’s aggregate ESG risk exposure.
To keep consistently outperforming, we must gain new and valuable insights into companies while ensuring that our current approach remains robust.
For this purpose, we have developed an analytical tool that shows where companies generate revenues around the world. We believe this is a better way of understanding the business risks that a stock is exposed to as opposed to considering its country of listing. This clear view of where companies do business also helps us ensure that we are diversified.
To better understand companies’ resilience to downside risk, we are seeking further ways to assess quality. For example, we are collaborating with the fixed-income team at Hermes to understand how a company’s credit quality indicates its ability to weather a downturn. Once this work is complete, we will consider further ways to analyse companies’ growth potential.
Such efforts ensure that we stay focused on consistently outperforming for investors. No matter what market risks or opportunities materialise in 2017 and beyond, we will firmly apply our all-weather strategy – while continuously seeking ways to improve it.
