Hermes Investment Management’s Mark Sherlock is aiming to take advantage of a shift he claims to have detected in the US stockmarket.
The manager said analysing firms in his small- and mid-cap benchmark – the Russell 2500 index – showed that statistically weaker businesses had seen their share prices rise more than their high-quality counterparts because of loose monetary policy.
He said he had conducted research covering the period from 2009 to the end of last year looking at companies’ level of return on equity – a measure some managers use to estimate what returns they can expect from a business.
Mr Sherlock said those firms in the lower quintile of the index – what he termed “lower-quality” companies – had in fact seen their shares rise 203.8 per cent against 109.7 per cent for the top quintile of “high-quality” companies.
But the manager said this was about to change and expected higher-quality businesses to experience a reversal of fortunes.
As such, he is targeting companies he believes are better quality – those with a “moat” around them or “durable competitive advantage”.
“I think this trend will continue to play out over a multi-year period,” he said. “The investment environment is changing with the excess liquidity that is in system because of quantitative easing.”
Investors had not missed the boat, he added, with periods of rising interest rates historically being more supportive for small and mid caps than large caps.