Three-year track record: Federated Hermes Global Emerging Markets

27 June 2021

Continuing her series looking at fund approaching or just past their three-year track record, here Juliet Schooling Latter, research director, FundCalibre, considers the Federated Hermes Global Emerging Markets SMID Equity, where ESG is an integral part of the investment process.

Fewer planes in the sky and cars on the road – one of the few benefits of the pandemic-induced global lockdown was the positive effect it was meant to have on the environment – and there were plenty of stories about cleaner air and liberated wildlife.

So, I was surprised to come across a chart recently which showed the global surface temperature in 2020 was unchanged from 2016. In fact, surface air temperatures last year were 1.25 degrees above the 1850-1900 pre-industrial period. I’m beginning to see why the $7trn figure needed to meet climate change objectives is by no means far-fetched*.

While the world has been fearful of the next Covid wave, this month’s manager believes climate change and the collapse of biodiversity are the next big waves set to hit the global economy.

“There are some mind-boggling numbers the likes of the United Nations and others have put in place which show the impact a collapse in biodiversity would have, not just on the global economy and businesses, but also on human life.**”

That’s the view of Federated Hermes Global Emerging Markets SMID Equity lead portfolio manager Kunjal Gala. To put it into context, in a 2019 UN report, scientists warned one million species – out of an estimated total of eight million – are threatened with extinction, many within decades***. Changes in land use, climate change, pollution and hunting all play a key role in this event.

As with all Federated Hermes funds, ESG is an integral part of the investment process, with this fund avoiding stocks involved in the likes of fossil fuels, tobacco or weapons to name a few.

Kunjal became lead manager of the fund in September last year, as part of the transition away from veteran manager Gary Greenberg – however, both have worked together for almost a decade.

The fund targets a high single-digit return per annum over the longer-term of 5-10 years. The managers get ideas from the considerable analyst team at the company and then assess the fundamentals of each individual stock, while also taking into account the wider macroeconomic picture. The fund will aim to hold 75-100 names, depending on the opportunities available, with undervalued quality companies – typically those that can compound their earnings for years to come – preferred. Kunjal sums this up as either “great companies at good prices, or good companies at great prices”.

The long-term approach means the managers will primarily buy and hold stocks, unless they become overvalued or the investment case breaks down, when they will be sold. The portfolio will not hold underweight positions: stocks will either be active weights or not held.

The small and mid-cap moniker allows the managers to buy stocks up to $15bn at initial purchase and hold stocks up to $20-$25bn, though they are likely to sell before this. The fund will usually have about a 50:50 mid and small-cap split.

Information technology (28 per cent) remains the largest sector exposure within the portfolio, although the team are bullish on the opportunities within financials (from a value perspective) and industrials (as a proxy to metals and mining)****. The largest regional positions are in Asia – in the shape of China, Taiwan and India****.

Since launch in October 2018 the fund has returned 46.5 per cent^, compared with a sector average of 35.1 per cent. It has an ongoing charges figure of 1.2 per cent^^.

The small and mid-cap opportunities in emerging markets are enormous, but also carry significant risk. The teams’ detailed approach and long-term positioning makes this a compelling offering tapping into a major growth market.

*Source: Copernicus Climate Change Service, 2021/ Federated Hermes Virtual Briefing on Global Emerging Markets May 2021

**Source: Federated Hermes Virtual Briefing on Global Emerging Markets May 2021

***Source: European Parliament News – October 2020

****Source: fund factsheet, 30 April 2021

^Source: FE fundinfo, total returns in sterling, 8 October 2018 to 28 May 2021, sector: IA Global Emerging markets

^^Source: FE fundinfo

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.

 

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