Fund Review: Hermes US Small & Mid Cap fund

In spite of a track record dating back 12 years, the $1.4bn (£939m) Hermes US Small and Mid Cap fund has only been available in a Ucits form to retail investors since September last year.

Co-manager Mark Sherlock, who has been part of the team at the helm of this fund for the past five years, says: “It is an unusual situation because we have been basically locked up in the basement for the majority of the fund’s history and only in the past year have we been allowed out into the third-party area of the business.”

With the aim of delivering capital appreciation in the long term, the fund targets what Mr Sherlock refers to as “high quality” stocks, but is eager to point out that this doesn’t mean he is seeking out “high growth” companies.

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“A lot of fund managers mean high growth when they say high quality – they are looking for the next Apple or Google at the small cap end of the market and following it all the way up, essentially the shooting stars that will make their portfolio,” he explains.

“That’s not what we are looking for. What we mean by quality is sustainable competitive advantage, the thing that allows a company to do what it does better than the competition and sustain it in the long term.”


Mr Sherlock and co-manager Robert Anstey invest from the bottom up with a focus on company fundamentals such as cash flow, higher margins and stable income streams.

“We are looking, in many instances, for stealth companies that are below the radar,” Mr Sherlock explains. “We are firm believers that the tortoise beats the hare.”

As a result of its ability to invest in both small and mid cap stocks, the fund is benchmarked against the Russell 2500 index, which according to the manager “includes anything that isn’t in the S&P 500”.

“Valuations are fair, slightly above long-term trends at 16-17 times. This is a couple of points higher than the large-cap index, but that is typical of this [small and mid cap] market because it is higher growth and benefits from merger and acquisition activity. Compared with other asset classes, the [small and mid cap] market itself looks inexpensive.”

Mr Sherlock cites building materials company Eagle Materials as one stock that performed particularly well for the fund in 2012. “The past couple of years have been a tough environment for construction-related stocks because no-one was building houses. We set out to find undervalued stocks in this space,” he explains.

The firm produces wallboards, the product used for building internal walls in houses, and has benefited from having what Mr Sherlock describes as “low-cost production”.


The fund’s latest factsheet, which details the performance history of the fund dating back for the full 12 years, shows the vehicle returning an annualised 12.29 per cent, compared with an index return of 10.08 per cent, since inception.