Geir Lode is the lead manager of the Hermes Global Equity fund, which pursues a quant-type strategy. He is assisted on the £145m fund, which was launched in December 2008, by co-manager Lewis Grant.
Mr Lode says: “The Hermes Global Equity fund is an all-weather fund, aiming to generate consistent outperformance relative to its benchmark, the MSCI World [index]. We aim to outperform over any 12-month period, regardless of the market environment.”
There is a four-step process behind the vehicle, which has remained constant since its inception, although Mr Lode has been using models established on similar principles since the early 1990s.
The first step in the process is the ‘alpha model’, which aims to identify attractive stocks. Mr Lode explains: “This model is designed to replicate the thinking of fundamental investors, ensuring that all stocks are assessed in an objective manner and removing any behavioural biases from the analysis.”
The next stage he calls ‘the optimiser’, since it uses an optimisation engine to determine the ‘best’ portfolio. “This system combines estimates of stock-level risk and expected returns to find the portfolio with the highest expected risk-adjusted returns, allowing for all portfolio constraints and taking into account the cost of trading,” he adds.
Mr Lode emphasises that the fund is a stock-picking one and that the portfolio is designed to have minimal exposure to macroeconomic risks. With this in mind, the global equities team created a risk model called MultiFrame that allows the managers to stress test the portfolio.
Finally, there is the subjective overlay stage of the process that questions whether each trade makes sense. “Where the team identifies a stock with exposure to material risks that fall outside the scope of the models – for example, significant environmental, social or governance (ESG) risks – the stock is removed from the trade list,” notes the manager.
Mr Lode reveals that companies with poor corporate governance have historically been excluded at the fourth stage of the process, so to assist its subjective analysis the team developed an ‘ESG Dashboard’. This summarises each stock’s exposure to ESG risks, drawing on data from a wide range of sources, in addition to the Hermes Equity Ownership Services team. The data on the dashboard is used to generate a score, which favours companies that are less exposed to ESG risks than their peers or that are improving their ESG metrics.
Perhaps it is no surprise that a fund with a quant-type strategy is considered higher risk; this fund sits at level six on a risk-reward profile. It also has an ongoing charge of 0.85 per cent.
In the five years to July 7, the Hermes fund has outperformed its benchmark, the MSCI World index, delivering a return of 110.21 per cent against a return of 97.4 per cent, according to FE Analytics. The fund has maintained top-quartile performance over one and three years, too.
Mr Lode insists the diversified nature of the portfolio and the lack of any macro, sector or regional exposure means no single holding is responsible for the fund’s outperformance.
“The outperformance can be attributed to stock selection and the use of the underlying investment factors. The team then assesses how the market rewards these factors,” he observes. “In 2013, for example, the market favoured cheap companies and companies with improving investor sentiment. In such an environment, the team’s models prove highly effective, as demonstrated by the strong outperformance over the year.”
He suggests that many model-driven approaches will underperform in an environment such as the one seen in 2014.
Mr Lode believes the team’s models have identified that value investing has come back into favour. But he points out: “There is a more interesting and perhaps less-well-reported shift occurring at the same time: well-governed stocks have again begun to outperform in recent months. We believe this is likely to continue and suggest that investors who can identify cheap, well-governed companies will be well positioned to outperform during the second half of the year.”
Expert view
Martin Bamford, managing director and chartered financial planner, Informed Choice:
“It remains a reasonably small fund, with UK investors possibly deterred by the US dollar base currency and the Ucits structure. The ongoing charge of 0.67 per cent makes it a very competitively priced fund, and a good, low-cost way for investors to access global equities, with a quantitative fund management strategy. I like the deviation from the benchmark with respect to some of the country allocations, such as France, where the manager is underweight, and Germany, where the manager is overweight. Investors paying for active management, even with a quant management strategy, should take care they are not invested in a closet tracker but paying for the privilege.”
Jon Beckett, UK research lead, Association of Professional Fund Investors:
This particular Dublin-domiciled fund is managed by Geir Lode who joined Hermes Fund Managers as gead of quantitative equities in May 2007. Geir is supported by Lewis Grant and Louise Dudley. At £145m in size it has more than sufficient critical mass for most buyers. The fund is well diversified with almost 200 positions and only 14 per cent of the fund concentrated among the top 10 holdings. Outright performance has been consistent, if not eye-grabbing, with positive returns over the last 5 rolling years except (unsurprisingly) through the European sovereign crisis of 2011-2012. That said on a risk-adjusted basis the fund looks more appealing even if the performance pattern of the fund looks and feels more benchmark than absolute driven and for me lacking that most fashionable of traits ‘asymmetry’, especially during periods of stress. However over the longer time horizon, this fund could make a compelling core position.
