3 Questions: Federated Hermes Global Small Cap Fund 3 Questions: Federated Hermes Global Small Cap Fund http://www.federatedinvestors.com/static/images/fed-logo-amp.png May 14 2019

3 Questions: Federated Hermes Global Small Cap Fund

The fund searches the world for companies with enduring competitive advantages for its concentrated portfolio.
Published April 25 2019
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“3 Questions” delves into the investment approach used by Federated Investors strategists. This installment features Hamish Galpin, lead manager of the Federated Hermes Global Small Cap Fund.

Q: What is the Federated Hermes Global Small Cap Fund’s strategy?

It’s better to first consider our philosophy, which is that a steadfast focus on a business’ quality leads to outperformance. While the fund invests in smaller companies in developed markets, we do not mandate that a particular country be in the portfolio or do we take significant industry or sector bets. We instead find that searching for companies that fit our high standards is an excellent way to narrow the global small-cap universe (of about 4,200 stocks) using our bottom-up selection process. This allows our experienced professionals in local markets to discover companies we identify as having enduring competitive advantages, a key to generating alpha. The result is a concentrated portfolio of about 50-70 stocks we think will generate above market returns with below market risk.

Our strategy is deliberately long-term, with a typical holding period of three to five years. We aim to capture successful smaller businesses beginning to gain market-share, taking advantage of short-termism.  

Q: How do you determine a quality company?

It is a multi-factor approach. As you know, many fund managers describe their products as such, but we systematically evaluate firms on no less than nine separate criteria. Some are standard, such as stability of returns, strong balance sheets, capital and cash flow discipline, and diversity of earnings. Others draw on our proprietary process that weighs and rates a company’s environmental, social and governance (ESG) factors we view as critical to its sustainable growth and competitive advantage in the long run. We achieve this with our team of analysts who meet with hundreds of firms every year—not waiting for ideas or concerns to present themselves.

It is not necessary for any one investment to satisfy all the criteria, but it must come close. We derive a score to balance the quantitative and qualitative elements of the appraisal process, which helps us construct the portfolio.

Q: What is the outlook and positioning for the strategy for the next three to six months?

While we watch trends as closely as any managers, near-term market conditions rarely affect our investment decisions. With the goal of exceeding the return of the MSCI World Small Cap Index on a 3-year rolling basis, our positioning typically doesn’t change to reflect fluctuations or to react to weekly, monthly or even quarterly anxiety-inducing developments. Also, the very nature of investing in different regions (North America, Europe, Australia, New Zealand, Japan, Hong Kong and Singapore) restricts the impacts of events in any single market. Instead, we tend to view volatility—which may well return this year if a global slowdown leads to investor anxiety—as a time to consider new purchases at reduced prices.

 

Tags Equity International/Global Global Diversification
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Alpha: This measures a fund's risk-adjusted performance. It represents the difference between a fund's actual returns and its expected performance, given its level of risk as measured by beta (see definition of Beta). This difference is expressed as an annualized percentage.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio, in comparison to the market as a whole.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

International small company stocks may be less liquid and subject to greater price volatility than international large company stocks.

Investors should carefully consider the fund’s investment objectives, risks, charges and expenses before investing. To obtain a summary prospectus or prospectus containing this and other information, contact us or visit FederatedInvestors.com. Please carefully read the summary prospectus or the prospectus before investing.

The MSCI World Small Cap Index captures small-cap representation across 23 developed-market countries. Indexes are unmanaged and investments cannot be made in an index.

There is no guarantee that any investment approach will be successful.

Federated Investment Management Company is the advisor of the fund and Hermes Investment Management Limited is the sub advisor.

Federated Securities Corp., Distributor

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