Learn more about the
US SMID Equity strategy
Where are banks on their ESG journey?
The banks are on a journey, and I think you can see how in the future they will continue to be the conduit for policies and for regulatory change within the ESG sector. Just as capital has improved over the last 10 years, driven by regulation, you can see how the sustainability policies that are driven by the regulator will be facilitated into the real economy via the banks.
If we think there is EUR 4.7 trillion of spending needed over the next 10 years to meet the 2030 targets, EUR 3.5 trillion of that will come through the private sector, and the banks will play a huge part in that.
What are the beneficial characteristics of SMID stocks more generally?
The key advantage of investing in SMID-cap stocks is what we would describe as the information inefficiency of that asset class. What we mean by that is that the asset class is much less well covered by the sell side than perhaps their larger-cap counterparts.
As an example, there are around 50 analysts currently covering Apple. What as an individual investor can I add to that debate? Possibly not a great deal. Conversely, in our asset class, there are many companies that have no sell side coverage at all, and the vast majority only have between one and five analysts. Consequently, the ability to add alpha is greater. As an individual stock picker, that's really exciting to us.
Two additional advantages are the asset class is structurally higher growth typically than its larger-cap counterparts, and that it has a higher domestic exposure. So for example, companies in our SMID index have between 70 to 80% domestic exposure, whereas companies in the S&P typically have around 50%. For those of us that are positive on the US economy, that's a really exciting attribute.
The asset class is structurally higher growth
typically than its larger-cap counterparts
What are the prospects for US SMID equities in 2024?
We remain very constructive on the outlook for US SMID-cap stocks, by which we mean those stocks with a market capitalisation of around $15bn or less. The key reason for that is their valuation. Typically, they trade at a 10% premium to their large-cap counterparts. And currently they're trading at a 30-40% discount.
Why is that? Well, part of it is to do with the very strong performance of the so-called “Magnificent Seven”, the mega-cap tech stocks. And the other part is to do with investors’ scepticism about the outlook for the US economy.
Our own economic assessment suggests that the US economy will remain relatively robust based on solid employment data and consequently a solid consumer, which makes up 60%+ of the overall US economy. A backdrop of gently declining rates and a US presidential election year also tends to be a gentle tailwind for our asset class.
You can
watch the interview here
or read his
views below
From solid employment data to an imminent US presidential election, US small and mid-cap (SMID) equities look like they could benefit from several tailwinds this year. In this video, Mark Sherlock, Head of US Equities and Lead Portfolio Manager at Federated Hermes Limited, explains why these stocks are looking attractive and how to maximise your chances of selecting the right ones.
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Three
Minutes
With
The US economy is more robust than investors think, presenting opportunities in small and mid-cap equities, says Mark Sherlock
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1 Source: https://bit.ly/3gKn2ZJ
2 Source: https://bit.ly/3H3OXi1
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Three Minutes With
INTRODUCTION
Video interview
ESG considerations
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Investing in smaller/medium sized companies may carry higher risks than investing in larger companies.
For professional investors only. 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. This is a marketing communication. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
Issued and approved by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).
How do you select the right stocks in this market?
On our strategy, we're focused on companies that are high quality with good cash flows and strong balance sheets. The quality factor has always been important in our asset class, and we believe it's never more so than in these uncertain times.
We believe that technological change over the next few years will create big winners and big losers within sectors, which is very exciting for us as stock pickers.
Typically, we look for companies with a strong structural growth story which may be temporarily cyclically depressed. Over time, we found that these multi-year compounders deliver great risk-adjusted returns for our clients.
Stock selection
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Characteristics
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OUTLOOK FOR THIS YEAR
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Introduction
Three Minutes With
Three
Minutes
With
Michael Dicks on the key contributors that underpinned PGIM Wadhwani Keynes Systematic Absolute Return Fund’s double-digit return in 2022
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Bank retrenchment coupled with regional bank pressures has continued to result in opportunities
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1. thebalancemoney.com
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