Reasons to invest
We aim for above-benchmark returns for below-benchmark risk.
Why Global Small Cap?
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 – is consistent through the economic/investment cycle, and has, in the past, delivered 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, we have one of the largest stewardship teams of any asset manager globally.
How we invest
- 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.
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.
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