Has the strategy achieved what you set out to achieve in 2021?
We set out to deliver through-cycle returns for our investors, and we recognised at the outset that we had come through a decade plus of zero interest rates and easy money, and that narrowly defined investment approaches may not work in an environment if that backdrop were to change. We also recognised that we had a full spectrum of sustainable investment strategies here at Federated Hermes, and that we could bring together the best of those capabilities to offer a more diversified core strategy. In the three years since launch, we have delivered ahead of the benchmark and against what has been a really volatile, quite tumultuous market backdrop.1
It has been a very choppy three-year period. Can you talk about how the portfolio has been flexed to capture opportunities as they have presented themselves?
We have the ability to tilt the portfolio, and that is driven by how we designed it to have access to several types of businesses – be that the ‘growth-impact’ type businesses, quality ESG leaders, or value opportunities within the improving names. So, that has given us an ability to invest in different types of businesses as we have seen the market environment change.
I think that has provided defence in a rotating market – like the one we saw at the end of 2021 and going into 2022, when clearly growth sold off and value outperformed, and we were able to invest in some of those more improver-type names that had cheaper valuations, perhaps slightly more cyclical. And then, more recently, the strategy invested or benefited from its exposure to some of the accelerating structural trends that we have seen around artificial intelligence (AI) and around the drugs that are helping to combat obesity. So, hopefully, the ability to look through a broader lens on the market means that we have been able to provide some defence in that rotating market, but also capture the exciting opportunities as you see these structural growth trends accelerate.
What has changed over the three years since launch, whether within the strategy or in the market opportunity?
In essence, the strategy, the approach, and the process hasn’t changed markedly. It was designed over a long period of time, and it was done so to wear different market environments. With that said, we are always looking to improve our investment process and decisions. I would say in particular we have looked at our selling and getting better at that, and I think there’s evidence over the last couple of years that we have improved our sell discipline. We have revamped our investment discussions, which I think has helped to improve productivity and has accelerated the cadence of ideas that are being generated by the team. The market environment, however, has changed, and I think the last three years with Covid-19 and liquidity and then inflation and a rate cycle, we have seen a variety of different market environments. But what remains true through that period is businesses that generate free cash flow growth, consistently over time will be rewarded in the long term, and we can take advantage of the short-term noise in the market to buy those businesses. It has created a lot of opportunities for us to take advantage of.
What do you think sets our strategy apart?
We are very fortunate at Federated Hermes in that we are able to develop the strategy
with market-leading capabilities, whether it is the decade plus of ESG integration work across the investment teams, whether it is the market leading engagement capability in Federated Hermes, EOS, and the full spectrum of sustainable investment approaches we have across both equities and other asset classes. I think those building blocks have allowed us to develop and implement a differentiated process that captures distinct parts of the market opportunity.
From growth to quality to value, from developed markets to emerging markets, and from small-and mid-cap through to mega-cap — our differentiated approach with thorough risk control has enabled us to demonstrate through the performance that we can capture these opportunities. So, that is what really sets us apart: the capabilities we have and the differentiated process. We can see the output of that in the attractive financial returns that we are delivering for our clients.
What drove you to want to launch a sustainable global equity strategy?
The launch of the Strategy in June 2021 was really the culmination of years of work and development. I began focusing on sustainable investing in early 2017 and recognising the broad capabilities that we had from impact investing in quite ‘growthy’ solution-providing companies, through to the work in the engagement strategy. The SDG Engagement Equity Strategy focused more on improvers, the more value-cyclical companies, and the different opportunities those provided, alongside the ESG integration backbone that we have within the investment processes that helps identify those high-quality leader stocks. And it was recognising that, brought together, this capability could offer a more through-cycle core investment strategy for clients. That combined with the recognition that we had been through a decade plus of zero rates, easy money, leading to quite a narrow, growth-focused equity market that could very well change and a more through cycle product could therefore be attractive for investors. It is a culmination of those factors that led us to develop the strategy, which we launched in June of 2021.
To find out more about our Sustainable Global Equity Strategy, please click here.
