Hermes’ Sherlock tempers return expectations for 2014

Hermes Fund Managers’ Mark Sherlock has urged investors to temper their expectations for returns from smaller companies following a stellar few years for the sector.

Mr Sherlock, manager of the Hermes US Smid Equity fund, said investors had become accustomed to returns of 20-30 per cent in the period since the financial crisis as the US’s economy has recovered, “but those days are gone and returns are going to be much more modest from here”.

“From a valuation point of view we are towards the higher end of historical averages in terms of forward price-to-earnings ratios,” he said.

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“It traded at that level between 2003 and 2007 – the easy money has been made. Earnings growth will have to drive market growth and there may be some disappointments.”

The manager added that his team had a “below consensus” view on overall earnings growth and return expectations for the US market, but predicted that “optimistic” forecasts from analysts would be eroded during the year.

Mr Sherlock took over as lead manager of the Hermes US Smid Equity fund at the end of October following previous manager Robert Anstey’s departure for Marathon Asset Management.

Since the change of management Mr Sherlock said Hermes had seen outflows equivalent to roughly 6 per cent of assets in the strategy, but strong performance had still meant the fund finished the year with a record asset level of more than $1.5bn (£0.9bn). Clients that had sold out were reconsidering their decisions, the manager added.

Mr Sherlock also moved to reassure investors that the fund’s investment strategy – which involves identifying companies with strong market-leading positions and high ‘barriers to entry’ – would remain unchanged as it has since the strategy was launched by Mr Anstey in 2001 when Hermes managed money solely for the BT pension scheme.

In 2013, the fund gained 34.4 per cent, roughly in line with its Russell 2500 index benchmark, according to data from FE Analytics.