Hermes defies tough GEM market with fund launch

Hermes Investment Management’s Gary Greenberg is launching his second emerging markets vehicle, which will focus on small to mid-cap companies, at a time when investors are pulling money out of emerging markets.

The Global Emerging Markets SMID (small and mid-cap) fund will target companies within a market cap range of $100m and $14bn that generate attractive long-term capital appreciation and sustainable long-term shareholder returns.

The fund will be headed up by Greenberg, who runs the Hermes Global Emerging Markets strategy, alongside co-portfolio manager Kunjal Gala.

The fund launch is subject to regulatory approval.

Timing is everything

Nathan Sweeney senior investment manager at Architas said it is a difficult time to be launching this type of strategy particularly in emerging markets where concerns about a higher US interest rates, a stronger dollar and heightened trade tensions abound.

“Normally when people allocate to these regions they will start off with an allocation to large cap and if they are very comfortable within that space, then they will move down the cap spectrum,” Sweeney said.

“With anything timing is probably a huge part of this, so this is a bit of headwind just given what’s happening in markets at the moment.”

But Greenberg has said that by focusing on small and mid-cap companies, the fund will be exposed to the rising middle class and avoid areas that are more vulnerable to a potential global trade war.

“On average, smaller companies generate more revenue domestically making them better positioned to capitalise on the rising middle class in some emerging markets while simultaneously reducing exposure to a potential global trade war, aimed at the exporters,” he said. “Finally, as Bloomberg data shows, emerging market SMID companies are trading at one standard deviation below the 10-year average on price-to-earnings and price-to-book.”

Capacity constraints

Hermes said it decided to launch a second GEM strategy following the success of Greenberg’s main fund.

Greenberg’s $4.3bn GEM vehicle has consistently outperformed peers in the IA Global Emerging Markets sector. It has returned 2.4%, 55.8% and 74.3% over one, three and five years respectively versus the sector’s 0.8%, 38.3% and 38.7% returns.

Ben Yearsley, director at Shore Financial Planning, said the launch wasn’t surprising as he understands Greenberg’s original GEM vehicle is $1bn away from capacity.

“One billion dollars sounds like a lot but with emerging market flows you can easily get $1bn in a very short space of time,” Yearsley said.

The Hermes GEM strategy had $4.3bn in assets under management as at 31 May, according to Trustnet. But Yearsley believes the mandate is more than $6bn after factoring in other money managed by the team.

“No fund group likes closing funds so in one sense it’s not surprising that they are trying to find new capacities by adapting the strategy,” he added.

Track record

Sweeney also said the launch was a logical extension of the main fund, which he notes has roughly 30% invested in small and mid-cap companies.

Architas holds Greenberg’s original fund across the high-risk funds in its multi-manager range.

He added the new strategy’s focus on quality and growth companies was a positive.

“Those style of investments have performed quite well in the mid to small-cap space so that is a positive from our perspective”.

Despite headwinds to the sector, Sweeney said that does not mean Greenberg’s new strategy will not deliver on performance.

But Sweeney said Architas’ multi-manager team has not yet decided if it will invest in the new strategy.

“It is something we’ll take a look at,” he said. “Whether or not we invest, that is a whole different question and that is down to asset allocation and portfolio construction.”

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