Fast reading
- Launched three years ago, our Sustainable Global Equity Strategy was designed as a core allocation that employs a sustainability lens to improve long-term financial returns.
- The portfolio comprises a wide range of company types from growth to quality and value, from small/mid-cap through to mega-cap, and across both developed and emerging markets.
- Our deep ESG, impact and engagement expertise has contributed to sound long-term investment decisions, positioning the strategy to thrive in a less accommodative macro environment.
How did the Sustainable Global Equity Strategy come into being?
Martin: The strategy brought together various capabilities we already had in house, so in that sense its roots go back years before launch. We had been running a specific segregated fund for an institutional client, which gave us the opportunity to explore the global equity universe through a sustainability lens. At the same time, we saw inherent value and potential in exploiting Federated Hermes’ longstanding impact investing and engagement expertise. Having run a paper portfolio for 12 months prior to launch, we were convinced of the validity of our approach.
What does the strategy offer?
The strategy offers investors a high-conviction global equity portfolio which can be a core allocation. The portfolio is invested across a wide range of compelling companies, from growth to quality and value, from small/mid-cap all the way through to mega-cap, and across both developed and emerging markets. Above all, we’re looking for attractive companies with the potential to deliver strong financial returns, and whose products, operations and activities contribute towards a more sustainable future.
Fundamentally, the strategy is invested in strong businesses that are making the world a better place. For instance, through companies contributing to a cleaner environment, enterprises enabling us to live longer and better lives, and efficiently run, well governed businesses focused on the long term. Often these characteristics are not yet fully recognised and appreciated by the market, and thus financially material. That provides the opportunity to identify and exploit mispricing by incorporating effective quantitative and qualitative analysis of these factors.
What sets the strategy apart from its peers?
We’re in a very fortunate position working within Federated Hermes. The firm has a long history in environmental, social and governance (ESG) integration, deep expertise across the impact investing spectrum, and a best-in-class engagement capability in the form of EOS, our dedicated stewardship arm. Each of these pillars help to drive a differentiated perspective on the investment opportunity.
From growthy Impact stocks, to quality (ESG) Leaders, and value in Improvers, we’re not constrained to a narrow group of stocks. Instead, given the capabilities in house, we can invest across these categories, and build a more diversified portfolio. Furthermore, given the unique resource we have in EOS, we are able to continue engaging with investee companies over the period of investment, staying close to the company as the investment thesis plays out.
What are the team’s key strengths?
We work closely together as a unit, bringing energy and focus to the things our clients most value. Obviously, performance is at the top of that list, in terms of seeking to deliver strong financial returns through the strategy’s focus on sustainability. Also important to investors is our rigorous approach, built around consistent application of our investment process – a key element of that is the role of critical thinking and questioning every source.
Thirdly, we’re committed to open and thorough reporting on the activities and performance of the strategy. We also offer in-depth views on relevant investment themes and publish case studies of key portfolio holdings.
Finally, I’d flag patience and commitment as team virtues. Our track record as a business and rigorous investment approach give us the confidence to ignore the noise and keep a steady focus on the long-term horizon. At the same time, we’re professionals, so we don’t let emotional attachment lead us to continue holding a stock if a company’s situation has fundamentally changed.
It’s important not to underestimate the role of psychology in today’s markets, which have perhaps never been more impacted by short-termism, greed and fear than they are now. That creates a lot of volatility that can be unsettling, particularly for less experienced investors, but also provides opportunities. We’re happy to ‘wait for the fat pitch’, as they say in baseball.
Our track record as a business and rigorous investment approach give us the confidence to ignore the noise and keep a steady focus on the long-term horizon.
What do individual team members bring to the strategy?
The short answer to that is that they’re good stock-pickers, which has enabled our strong hit-rate in terms of high-performing companies. There are a few important factors that lie behind that. Most importantly, team members come from different cultural and professional backgrounds, ensuring cognitive diversity and a range of interests and opinions.
Also, while team members have specific sector expertise, I believe in allowing them to explore the full range of investment opportunities, rather than being pigeonholed. As individuals they all embrace the freedom that offers to investigate any interesting area to find the best ideas. This helps give healthy context to their investment views. For example, Tej has strong expertise in tech but also covers a Chinese auto supplier within the portfolio.
Tej: Prior to joining the team, I was a sell-side equity research analyst for a number of years covering the technology sector. This was valuable because I learned the significance of marrying industry and company fundamental analysis with sentiment, positioning and valuation when analysing stocks.
Davina: Similarly to Tej, I previously worked in sell-side equity research, specialising in Business Services. A diverse sector in and of itself and, encouraged by the team, I’ve had the latitude to explore different types of business model and industry, from environmental services to hospital providers.
Can you give examples of the team’s investment approach?
Tej: Nvidia is a company I cover for the team. Its position at the forefront of accelerated computing and artificial intelligence exposes it to multiple secular growth markets and offers the potential to drive both material productivity gains and environmental efficiencies. The firm’s innovative DNA facilitates future growth in terms of total addressable market, while first mover advantage, network effects and scale provide a deep competitive moat.
With this stock, we are mindful that 50% of trading flow comes from retail investors, making sentiment and price/estimates momentum incrementally important in evaluating risk/reward. Combining thorough fundamental analysis with a microscopic focus on sentiment, positioning and valuation meant we held our long-term conviction when shares struggled in 2022 due to a cyclical data centre slowdown, China export controls and higher interest rates. Our holding has subsequently generated material alpha as the bull narrative has increasingly dominated amid the paradigm shift caused by generative AI.
Davina: I have covered Rentokil for several years, a quintessential business services name with newfound industry leadership in US pest control. Rentokil’s profile is that of a quality compounder with a durable competitive moat and exposure to structurally attractive end-markets.
The acquisition of Terminix – the largest transaction in pest control history – has not impaired the longer-term investment case, but has made for more volatile near-term performance. Our focus on the long-term and assessment of robust industry fundamentals gave us the conviction to initiate a position at an attractive entry point after last year’s profit warning. Looking past the challenging near-term set-up, we continue to see scope for a meaningful rerating as the strategic and financial merits of the acquisition materialise.
How is sustainability integrated into the strategy?
Our approach is always to use sustainability as a lens through which to view the future potential of a company. Positive societal outcomes are a highly desirable benefit of investing sustainably, but the core motivation for incorporating sustainability factors into our investment approach is to seek to deliver better risk-adjusted financial returns over the long term.
Our approach is always to use sustainability as a lens through which to view the future potential of a company.
How important is it that this is an actively managed strategy?
There’s no doubt that the rise of passive investing has been one of the most important dynamics in equity investing over the last decade. Understandably, people see it as a cheap way to achieve diversification, but there are risks attached to assigning capital based on benchmark weight rather than price discovery. For example, the current composition of the major indices leaves passive investors heavily exposed to mega-cap tech stocks.
Ultimately, over the long term, share prices reflect fundamentals. However, a constantly changing market creates disruption that can lead to opportunities for active managers with strong expertise to identify and exploit.
Has the strategy achieved what you set out to do?
I’d emphasise that the strategy is focused on a long-term horizon of five to seven years, and if you speak to our senior management team in Pittsburgh, they will say 10-20 years, so it is still early days. Having said that, we had a number of objectives for the strategy when we launched three years ago.
A key focus for the process we put together was to deliver less-volatile through-cycle financial returns. On that measure, we’re proud of what we’ve delivered – particularly against such a tumultuous backdrop of rising interest rates, violent intra-market rotation, worsening geopolitics and the short-term impact of the energy crisis on share prices.
We foresaw a better risk-reward ratio for the universe of stocks we were interested in buying. In that respect too, we’re happy with what we’ve achieved; our Sharpe ratio looks strong against our peers, indicating that the strategy’s excess returns reflect sound long-term investment decisions that cut through short-term volatility and investor sentiment.
At the same time, we recognised the potential of Federated Hermes’ stewardship and engagement capability to bolster the team’s quantitative and qualitative analysis and provide more comfort around corporate culture. This direct involvement with companies has paid off, providing the opportunity for greater diversification.
How does this set you up for the future?
Above all, it means we feel confident as we anticipate a future where the macroeconomic environment looks very different to the 2010s – in that the cost of capital has returned to normal levels. Our process was developed with this scenario in mind, so we feel well placed to navigate the evolving market environment.
To learn more about our Sustainable Global Equity Strategy, please click here.
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The above does not represent all of the securities held in the portfolio and it should not be assumed that the above securities were or will be profitable. This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
