Speaking at a roundtable event in London, Sherlock – who runs the firm’s US SMID Equity fund – said the investment environment is changing due to the ending of the Federal Reserve’s quantitative easing programme.
He noted that QE led to excess liquidity, which has contributed to low quality US stocks outperforming high quality stocks. However, Sherlock said that as liquidity drops investors will begin to focus on “core aspects” and quality small and mid-caps can expect to benefit over the next three to five years, as interest rates rise.
Sherlock remains positive about the sector as a result. “Small and mid-cap strategies are far from over,” he said. “The US economy is leading the global economy out of the recession.”
Despite a consensus that US small and mid-caps are expensive, Sherlock said Hermes’ SMID portfolio has become “relatively cheaper”. “Small caps have an 80% exposure to the US market, compared to the 54% of large caps,” he said.
“Reaped the benefits”
Interest rates will rise slowly, and at the end of a three to five year period, quality small and mid-cap will have reaped the benefits, Sherlock added.
In order to best take advantage of the changing investment landscape, Sherlock said his focus is on companies with a durable competitive advantage.
“A lot of people in my space look for the next shiny thing, but people typically overpay for these and the growth often doesn’t materialise,” he said.
“We go for unglamorous companies, such a janitorial supplies, partly because dull businesses can make interesting investments, and also because we have a longer term holding period.”
