How did the Sustainable Global Equity Strategy come into being?
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.
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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.
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.
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 Federated Hermes Sustainable Global Equity Strategy, please click here.
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. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed.
The strategy has environmental and/or social characteristics and so may perform differently to other strategies, as its exposures reflect its sustainability criteria.
For professional investors only. This is a marketing communication. It does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or financial products. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. Any opinions expressed may change. All figures, unless otherwise indicated, are sourced from Federated Hermes. Whilst Federated Hermes has attempted to ensure the accuracy of the data it is reporting, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on these pages. All performance includes reinvestment of dividends and other earnings. Please consider all strategy characteristics when investing and not just ESG characteristics.
Federated Hermes refers to Federated Hermes Limited ("Federated Hermes"). The main entities operating under Federated Hermes are: Hermes Investment Management Limited ("HIML"); Hermes Fund Managers Ireland Limited ("HFMIL"); Hermes Alternative Investment Management Limited ("HAIML"); Hermes Real Estate Investment Management Limited ("HREIML"); Hermes Equity Ownership Services Limited ("EOS"); Hermes Stewardship North America Inc. ("HSNA"); Hermes GPE LLP ("Hermes GPE"); Hermes GPE (USA) Inc. ("Hermes GPE USA"), Hermes GPE (Singapore) Pte. Ltd ("HGPE Singapore"), Federated Investors Australia Services Pty Ltd. ("FIAS"), Federated Hermes Japan Ltd ("FHJL") and Federated Hermes (UK) LLP ("FHUK"). FHUK, HIML, HAIML and Hermes GPE are each authorised and regulated by the Financial Conduct Authority. HAIML and HIML carry out regulated activities associated with HREIML. FHUK, HIML, Hermes GPE and Hermes GPE USA are each a registered investment adviser with the United States Securities and Exchange Commission ("SEC") and HAIML and HFMIL are each an exempt reporting adviser. HGPE Singapore is regulated by the Monetary Authority of Singapore. FHJL is regulated by Japan Financial Services Agency. FIAS holds an Australian Financial Services Licence. HFMIL is authorised and regulated by the Central Bank of Ireland. HREIML, EOS and HSNA are unregulated and do not engage in regulated activity.
In the European Economic Area ("EAA") this document is distributed by HFMIL. Contracts with potential investors based in the EEA for a segregated account will be contracted with HFMIL.
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