Federated Hermes Global Emerging Markets SMID Equity
Federated Hermes Global Emerging Markets SMID Equity is a concentrated fund focusing on small and medium-sized companies across global emerging markets. It can also invest in frontier markets should opportunities arise. The fund was originally launched in 2018 under veteran fund manager Gary Greenberg. Co-manager Kunjal Gala took on sole responsibility for the fund in 2022 when Gary retired. The investment approach the fund employs remains unchanged.
Our opinion
The small and mid-cap opportunities in emerging markets are enormous, but also carry significant risk. The comprehensive process of the Federated Hermes Global Emerging Markets SMID Equity fund helps to manage the potential pitfalls. Whilst the management of the fund may have changed relatively recently, the team approach, lengthy handover, and Kunjal’s longer-term involvement in the fund means it is still a very compelling option.
Company description
Federated Hermes is the amalgamation of Federated Investors and Hermes Investment Management. The joint entity today manages around $575 billion on behalf of investors around the world.
Having joined forces in 2018, when Federated acquired a majority interest in Hermes Investment Management, the two companies have worked closely together and the subsequent name change reflected the commitment to offering a broad range of investment strategies and solutions to clients globally. The existing teams, structures, philosophies and processes are all unchanged.
Hermes was awarded the Elite Equities Provider rating in every year from 2017 to 2020.
Fund manager
Kunjal Gala took on sole management of the fund in 2022, after a well-planned transition period from veteran founding manager Gary Greenberg. Kunjal has 14 years industry experience and joined Hermes in 2012 to work in the Asia ex Japan team. He has held previous roles at government level, working on portfolio management and corporate finance projects. Prior to this, he worked as a senior financial analyst for Morgan Stanley, working on business development and merger and acquisitions. He holds a degree from Mumbai University and is a qualified chartered accountant.
Kunjal GalaFund manager
Investment process
Federated Hermes Global Emerging Markets SMID Equity fund targets a high single-digit return per annum over the longer-term of 5-10 years. To achieve this, the manager looks for quality companies that are exhibiting compound growth and that earn more than their cost of capital over the long-term. These factors will need to be under-appreciated by the market. They will either be great companies at good prices, or good companies at great prices. Alongside this, Kunjal will want talented management teams, who act responsibly towards clients, stakeholders and minority shareholders.
To find these companies, the manager starts with some initial screens - one value-orientated and one quality-orientated. This helps with idea generation, alongside interaction with existing holdings, a broker network, and the considerable analyst resource at his disposal. Analysts will create a full investment case for each idea, which includes a ‘pre-mortum’ as to why a stock may not work. The team has found this is much more comprehensive than a ‘bear case scenario’ and helps frame the downside potential of a stock.
Once this analysis is complete, the stock is presented during a group meeting. The investment case is introduced, before an intense Q&A takes place. There is then a poll taken in the room, before Kunjal makes the final decision for inclusion. Alongside the company analysis, there is a country and sector analysis. The final portfolio will consist of 75-100 names.
Kunjal has identified certain themes that will drive growth in the region, including 5G, the digitalisation of the economy and improving financial requirements for the burgeoning lower middle class. Other themes the fund will be tilted toward will include healthcare, premiumisation and logistics/infrastructure.
ESG
ESG - Integrated
Federated Hermes regards ESG factors as integral to the investment process and each factor is considered equally important when performing stock analysis. Managers use the proprietary ESG Dashboard tool, which incorporates data from leading providers (Sustainalytics, Trucost, MSCI, FactSet, Bloomberg, ISS and CDP), alongside voting information and engagement insights from EOS, the in-house stewardship team of leading governance and engagement experts. The Dashboard ensures that companies can be compared against their peers on a sector, region or global basis with respect to a range of ESG considerations. The Dashboard’s QESG score captures how well a company manages its ESG risks and, importantly, whether this is improving or not. The change in score can provide an early warning signal or suggest that management is successfully grappling with an issue. This stock-specific analysis is a valuable input to the team’s investment decisions and ongoing monitoring of and engagement with companies. Managers will never invest in a stock which is involved in a controversial industry or practice.
Risk
For risk management purposes, the fund will tend not to hold stocks involved in fossil fuels, tobacco or weapons. The small and mid-cap space is often more volatile than the wider market but, over the longer-term, has shown to outperform. These companies are also more domestically-focused meaning performance will be linked to consumer and business confidence in regional economies.
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