3 Questions: Federated Hermes Global Equity Fund
“3 Questions” delves into the investment approach used by Federated Investors strategists. This installment features Geir Lode, lead manager of the Federated Hermes Global Equity Fund.
Q: What is the Federated Hermes Global Equity Fund’s strategy?
We seek long-term capital appreciation and strong risk-adjusted returns, but a more revealing question is: How do we choose from the many varied companies in the fund’s benchmark, the MSCI All Country World Index, for our actively managed portfolio of 80-100 equities? We do so with a combination of a proprietary stock-selection model and a subjective overlay that considers a company’s fundamental and environmental, social and governance (ESG) attributes. The latter criteria is crucial, but certainly not the only factor when selecting from the benchmark's group of developed and emerging-markets stocks. We consider sentiment, growth, profitability, capital structure, and more, favoring companies with competitive advantages, strong financial statements, sustainable business models and histories of responsible governance. The standards for inclusion are high, but there are more than enough superb companies to allow us to build a diverse, robust portfolio.
Q: Could you elaborate on your incorporation of ESG data?
Many fund managers purport to be ESG investors, but only use data or ratings from third-party, research that typically is backward-looking. While we consider third-party data, we engage directly with companies at the highest levels to identify those with good or improving track records in this criteria. Ours is a forward-looking, dynamic approach that is a key differentiator in the market—capturing changes in ESG performance before they can be captured by external researchers, providing an information advantage.
Importantly, our selection of companies is not exclusionary in nature. We do not rule out countries, sectors or companies (hallmarks of socially responsible investing). Rather, we believe that integrating material ESG factors into the process helps us identify business and operational risks and adds a contextual dimension to the overall evaluation of a stock. We believe that firms with good or improving ESG characteristics should outperform lower-ranked peers, improve shareholder value and strengthen a business’ sustainability. We particularly look for firms that lag in this regard to unlock value. Done the right way, a disciplined investment approach with these concerns at its core does not just provide a “feel-good factor,” but can potentially improve returns.
Q: What is the outlook and positioning for the strategy for the next three to six months?
Seeking capital appreciation for the long term means looking beyond a few quarters to evaluate an investment. The dovish tack by many of the world’s central banks, including the Federal Reserve, may help the current bull run to continue despite slowing global economies (in particular Germany). A trade deal between the U.S. and China, as well as a resolution to the tariffs for immigration President Trump has imposed on Mexico, and a resolution to Brexit likely would be tailwinds for the markets, but volatility can rise unexpectedly as it did in the fourth quarter of 2018.
Political uncertainty continues to increase worldwide, yet we are optimistic about emerging economies and look to select idiosyncratic examples of long-term value in developed markets, particularly the U.S. While rumors of the death of the bull market continue, we remain optimistic.