Best In Class  

Best in Class: Hermes US Smid Equity

Best in Class: Hermes US Smid Equity

Millions of people across the globe are going plastic free this month, as they bid to tackle the over-reliance on single-use plastic.

The initiative has had a dramatic rise in prominence since 2011, when it was launched by Rebecca Prince-Ruiz, founder of the Plastic Free Foundation, and a small team in local government in Western Australia.

Last year, it was estimated as many as 120m people took part in the initiative – with 90 per cent of those making permanent changes beyond July.

The problem is clear. In 1950, the world’s population of 2.5bn produced 1.5m tons of plastic, according to marine conservation charity Surfers Against Sewage.

In 2016, a global population of more than 7bn people produced more than 320m tons of plastic, according to the same charity. This is set to double by 2034.

One of the top holdings in this week’s best in class is Aptar, a 21-year position in the Hermes US Smid Equity strategy.

Aptar specialise in packaging closures – effectively the dispensing mechanism of a bottle. Think caps, sprays and lids.

Speaking to me recently, fund manager Mark Sherlock mentioned that 7bn water bottles are opened every day and only 1bn are recycled.

He says: “Think of a typical Coke can, the closure remains with the can, but that is not the case 99 per cent of the time with water bottles – and the most polluting piece of litter found on the beach globally is these plastic water bottle caps.

“Aptar, have come up with what they call a ‘stay-with’ cap, which – as the name suggests – means the cap stays with the bottle. They’re also looking into minimum standards of recycled plastic for inclusion in their bottles and so on.”

Mr Sherlock was originally co-manager on the Hermes US Smid Equity fund when it launched in September 2012 and became lead manager in October 2013.

He joined Hermes in 2005, having previously worked for PwC and Rio Tinto.

The fund invests in US small and medium-sized companies valued between $1bn to $20bn – with the managers favouring the low end of the mid-cap space.

This is a pure bottom-up equity fund.

The team start by looking at the Russell 2500 index and removing any highly indebted or capital-intensive companies.

They look for businesses with products or services that are genuinely differentiated and exhibit a durable competitive advantage.

The businesses themselves will need to have strong balance sheets, demonstrating stable earnings with sustainable growth.

As part of this process, the team will use ‘Piotroski scoring’ and the S&P quality ratings to contrast their analysis against market consensus. This element of highlighting quality is key to risk management.

This all helps them build a watchlist of roughly 250 stocks and they will then start to meet company management.

They will put stock ideas into their in-house valuation model, forecasting future finances as far as 10 years out, to create an intrinsic value of a stock today.