3 Questions: Federated Hermes SDG Engagement Equity Fund
“3 Questions” delves into the investment approach used by Federated Investors strategists. This installment features Hamish Galpin, lead manager of the SDG Engagement Equity Fund at Hermes Investment Management.
Q: What are the UN SDGs and why should investors care? The United Nations Sustainable Development Goals (SDG) are a universal set of 17 goals, 169 targets and 230 indicators for global development. They serve as a blueprint for significantly changing the world—by ending global poverty, safeguarding the planet and aiming for prosperity for all—by 2030.
We believe that by working collaboratively with companies, we can help achieve the SDGs while also capitalizing on new market opportunities. Companies are uniquely positioned to significantly impact lives, given their position within communities, direct relationships with employees and connections with suppliers. This isn’t kumbaya stuff. This is the future, and companies and investors who ignore this mandate may miss out on participating in what may be the most critical driver of economic growth in our lifetimes.
Q: Briefly, what is the Federated Hermes SDG Engagement Equity Fund’s strategy? It may be easier to say what it isn’t. It’s not an activist fund; it’s collaborative. It’s not going to agitate for change via proxy wars and the like. And it’s not a thematic strategy that targets “purposeful” companies whose products are already creating positive change. To the contrary, it is a concentrated strategy that invests in companies with clear potential to improve through engagement. It aims to create positive impact by aligning business practices with the SDGs.
The fund invests primarily in small-cap and mid-cap companies—those with market capitalizations in the $3 billion to $10 billion range represent the sweet spot—either based in or deriving most of their income in the United States as well as foreign countries, in particular emerging markets. We believe such companies offer compelling opportunities to create positive change and long-term value because their operations and supply chains provide rich potential for improvement and the direct access required for successful engagement. What’s more, many small- and mid-cap companies are not typical engagement targets of shareholders or nongovernmental organizations, or NGOs for short.
Both attractive investment fundamentals and the potential for a constructive engagement program are equal pre-requisites during the security selection process. The suitability of each candidate company is assessed in a peer-review process, resulting in a shortlist of viable stocks. We tend to favor what we believe to be mispriced stocks that offer the potential for upside, utilizing a concentrated portfolio of 40 to 60 companies with low turnover. Our preference is to hold stocks for three to five years, which provides sufficient time for the strategic vision and benefits of stewardship to be reflected in stock-price performance.
Q: What is the outlook and positioning for the strategy for the next three to six months? Because we tend to buy a diversified set of securities across industries and countries and hold them for the long periods, our positioning doesn’t really change to reflect market conditions. That said, we would not be surprised to see volatility continue, with markets giving greater weight to fundamentals, such as revenue and profitability relative to macro top-down factors, notably global market conditions. We believe the recent sell-off and ongoing volatility has broadened the potential pool of attractively priced securities.