Tap into American growth with Hermes US SMID Equity

The Russell 2500, an index of small- and mid-cap companies that can give greater exposure to domestic consumption in the US, has also performed well. Although it lagged the S&P 500 over the year to the end of August it is not far behind it over three and five years. And over 10 years to the end of August it rose 322.04 per cent in sterling terms while the S&P 500 rose 283.72 per cent. So investors seeking growth over the long term should consider some exposure to US small and mid caps, alongside other sources.

However, difficult times could lie ahead for such businesses if US consumers begin to feel the pressure of Donald Trump’s trade war. A widely monitored gauge of domestic conditions, the University of Michigan’s Consumer Sentiment Index, fell from a reading of 98.4 in July to 89.8 in August – the biggest drop in sentiment since 2012. This was largely because of concerns about the US-China trade dispute. One in three people surveyed as part of the research spontaneously made references to tariffs.

So while various funds have made good returns from small- and mid-cap US shares over the years, a defensive approach may be the best way to access this market going forward.

One such fund that operates more cautiously than its peers but has still managed to perform well is Hermes US SMID Equity (IE00B8JBCY79). The fund is run by Mark Sherlock alongside Michael Russell, Henry Biddle and Alex Knox, who search for companies with stable, growing revenues and cash flow. The team says: “Over time, companies that exhibit these characteristics outperform with less risk. Our investment criteria are based on company fundamentals, not macro driven.”

At the end of July, Hermes US SMID Equity had 61 holdings, with around 23 per cent of its assets in its 10 largest holdings. Its biggest sector exposures were a 29.29 per cent allocation to financial services and a 16.77 per cent allocation to healthcare.

The fund returned 2.17 per cent over the year to the end of August in sterling terms while the Russell 2500 index fell 1.37 per cent, and 95.81 per cent over five years against 87.57 per cent for this index. 

The fund's managers' cautious approach also means that the fund has given its investors a smoother ride than some of its peers: at the end of August it was among the five least volatile funds in the Investment Association (IA) North American Smaller Companies sector over one, three and five years, according to FE Analytics data.

You might be tempted to overlook this fund in favour of better performers within its peer group. Although Hermes US SMID Equity beats the IA North American Smaller Companies sector average return over the year to the end of August, it falls behind it over three and five years, and has also underperformed the Russell 2500 index over three years. 

However, with trade-war concerns hanging over US small and mid caps a defensive fund looks better placed to navigate the challenges ahead. And over the past year it has proved its defensive credentials by making a positive return ahead of its peer group average and when its benchmark index has fallen.

So if you want sensible exposure to a segment of the equity universe that has the potential to deliver strong returns over the long term, but faces some considerable risks and likely volatility along the way, Hermes US SMID Equity looks like a good way to do it. Buy. DB

Hermes US SMID Equity (IE00B8JBCY79)

Source: Morningstar as at 3 September 2019, *Hermes as at 31 July 2019, **Hermes

Performance

Source: FE Analytics as at 31 August 2019

Top 10 holdings

Source: Hermes as at 31 July 2019

Sector breakdown

Source: Hermes as at 31 July 2019