Reasons to invest
We are looking for quality companies underneath Wall Street’s radar, rather than shooting stars. We focus on compounders.
Why US SMID Equity?
The strategy was launched in September 2012 to invest in small- and mid-cap US companies. Our approach – developed over our 30 years – is consistent through the economic/investment cycle, and has, in the past, delivered good risk-adjusted returns.
The strategy is deliberately long-term focused, with a three- to five-year average holding period. We believe this is an important factor in generating alpha from small- and mid-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
- Quality should be at the heart of the investment process. Ownership of companies with a durable competitive advantage can provide better downside protection and generate higher compound returns over time.
- In holding a stock long enough for the company to achieve its potential. Capital appreciation occurs not only from the elimination of a discount to intrinsic value, but also from intrinsic-value growth itself.
- That positive risk-adjusted returns are best and most consistently generated by concentrating risk on stock selection and not seeking to generate returns by taking regional and sector positions.
The strategy uses three principal methodologies to identify value:
- Meeting with management,
- Our watchlist
We are looking for companies that meet our definition of quality. We conduct fundamental research through meetings with approximately 250 companies annually. Investment ideas are also generated from the watchlist – a list of c.250 companies that fulfil the strategy’s quality criteria. This is the strategy’s intellectual property, built up over years of management meetings. Short-term market movements can provide entry points into these businesses.
The criteria used to define quality are:
- Durable competitive advantage
- Sustainable growth
- Management integrity, talent and vision
- Strong balance sheet
- Cash generation
- Capital discipline
Research is generated internally and supplemented with information from sell-side brokers. When a potential investment has been identified, we will write a detailed report on the company, outlining the investment case together with the risks. The report analyses a company’s competitive advantages, the industry structure, the management and the company’s corporate and social responsibility record. We also perform our own ESG research at the stock level, actively incorporating ESG factors in their assessment.
The portfolio is constructed with between 40-70 holdings. Position sizes are determined with reference to fundamental risk, quantitative risk, upside to target price, contribution to tracking error and liquidity.
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