ers in 2006. The MDT team has remained in Cambridge. In 2018, Federated began a multi-stage process to acquire the U. K. company that operated as Hermes Investment Management. In 2020, the firms rebranded to become Federated Hermes.
MDT uses the same systematic approach across its entire suite of 12 investment strategies used in mutual funds, exchange-traded funds, institutional accounts and other managed portfolios. In the case of the Mid Cap Fund, its investment universe is its benchmark Russell Midcap Growth Index.
“ We look at every stock in the mid-cap growth universe every day,” says Damien Zhang, one of the fund’ s portfolio managers.“ We update our forecast regarding if that stock will outperform or underperform, and we update our portfolio based on these forecasts.
“ One of the great things about having a systematic process is that it’ s really scalable,” he continues.“ It’ s no trouble at all to be able to look at every single stock in the investable universe every single day and come to a new conclusion about whether it makes sense to add, keep or sell a stock.”
Regression Tree
A central component of the Federated Hermes MDT investment team’ s process is the use of regression trees, also known as decision trees. These are a series of yes / no questions about company characteristics or factors. MDT uses 16 factors as part of its decision modeling.
As described by MDT, asking a series of sequenced questions in the regressiontree format allows it to focus on the most important characteristics for a particular stock, and downplay those characteristics that are less important.“ What’ s powerful about using this mechanism in a stock-picking context is that it’ s a more flexible approach than other quantitative approaches that are more like a formula to score or evaluate companies,” Mahr explains.
“ That helps us find more differentiated companies to build a portfolio around,” he adds.“ They have differentiated characteristics that we think will enable them to outperform.”
Even though this is a growth-oriented fund, one aspect that grabs the managers’ attention is an oversold company whose share price is down 50 % to 70 % during the past year.“ But we’ re particular in that we don’ t buy every company whose share price is down,” Mahr says, adding that they ask additional questions to find which of those companies that have had a bad outcome are most likely to rebound in price.
An important question pertains to a company’ s use of financing.“ If you have a company that’ s very reliant on equity sales or debt issuance to fund its business and then its stock price drops by a very
Manager Daniel Mahr Age 44
large amount, that type of company can be in a lot of trouble and will have a hard time rebounding,” Mahr says.
The tariff turmoil that led to the selloff in equities this spring provided the MDT Mid Cap Growth Fund with a number of potential portfolio candidates. One such candidate is Teradyne, whose product line includes test equipment for semiconductors and electronics. Its stock plunged more than 50 % in early April from where it was in early January.
“ It was hit on two fronts in March and April due to tariff concerns and uncertainty about export controls involving computer chips,” Mahr says.“ But we see some good characteristics where we expect the price to bounce to the upside.”
125 Holdings
The fund’ s portfolio holds 125 equity positions, which is intentional.“ There are operation costs associated with a larger portfolio, so we constrain the portfolio to be 125 holdings,” Zhang explains.“ When we add new names, we trade that off by exiting names with lower opportunity for outperformance.”
He notes that turnover in the Mid Cap Growth Fund can vary depending on
Professional Background He is senior vice president and head of MDT Group at MDT Advisers, a Federated Advisory Company. He began his career at MDT Advisers / Federated Hermes in 2002. Beyond his current position, his duties have included those of equity analyst and research director.
Outside Interests He enjoys hiking the trails of the National Seashore in Cape Cod, running, home-brewing beer, and coaching Little League baseball.
Portfolio Statistics
Number Of Stocks 125 Wtd Median Mkt. Cap
$ 20.4 billion Wtd Median P / E Ratio * 23.2x Std. Dev Fund / Benchmark 22.43 / 20.31 Turnover Ratio 75 % Net Expense Ratio 0.85 %
* Next 12 months. Portfolio stats as of 4 / 30 / 25. Standard deviation( three-year period) versus the Morningstar US Mid Cap Broad Growth TR USD Index. Expense ratio figures are for the institutional share class. Sources: Federated Hermes and Morningstar.
Manager Damien Zhang Age 38
Professional Background He is senior vice president and head of MDT Research. He began his career at MDT Advisers / Federated Hermes in 2009 as an equity analyst.
Outside Interests He enjoys traveling with his family and learning about the history of different places and cultures. He also likes reading biographies of influential historical figures and building things in his spare time.
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