Artemis US Extended Alpha Fund
Q1 2026 update

Review of the quarter to 31 March 2026

A dramatic widening of the conflict in the Middle East was the first quarter's defining event. A sequence of air strikes on Iran by the US and Israel, and the Islamic Republic's decision to retaliate by closing the Strait of Hormuz, saw oil prices moving sharply higher, bond yields rising and equity markets weakening. 

Encouragingly, the US economy has, up to this point, remained more resilient than markets initially feared. Readings from recent ISM sentiment surveys have held up reasonably well, as have retail sales. The US labour market continues to look stable, with jobless claims remaining subdued. We are, however, conscious that it will take time for the full impact of higher oil prices to be felt. The question is therefore less about current activity and more about the second-order effects that higher energy prices will have on inflation, mortgage rates and consumer spending.

Before the Iran war broke out, however, the market's main preoccupation was with AI. The hyperscalers continued to signal that they would increase their already vast capital expenditure on data centres. At the same time, the launch of new AI models seemed to threaten the revenues of a range of software, data and professional services companies. 

At a portfolio level, we continued to reduce our exposure to the AI hyperscalers. These businesses are becoming increasingly capital intensive, with lower free cashflows and increasing uncertainty around their competitive positioning. We still think the best approach to AI is to own selected semiconductor and power-generation companies, who are supplying the 'picks and shovels' of the AI build out. 

With regards to disruption, there have been two impacts on the fund. Twenty-four companies in which the fund had short positions – mainly in software, information services or private credit – saw their share prices falling by more than 10% in February. Yet while this was meaningfully positive for fund returns, it was partly offset by sharp falls for three stocks in the long book that were caught up in the selling: S&P Global, Jones Lang LaSalle and IQVIA.

Performance

The fund fell by 4.9% during the quarter, versus a decline of 2.4% in the benchmark S&P 500 index and an average fall of 4.7% in the IA North American sector. We would note, however, that due to the timing at which fund returns are calculated, the fund's performance figures for the quarter do not reflect the sharp market rally that occurred on 31 March.

Past performance is not a guide to the future. Source: Lipper Limited/Artemis for class I accumulation GBP to 31 March 2026. All figures show total returns with dividends and/or income reinvested, net of all charges and performance fees. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. Classes may have charges or a hedging approach different from those in the IA sector benchmark.

Contributors 

The single largest positive contribution to returns over the quarter came from US Foods. This food distributor continues to gain market share and reiterated its expectation that its earnings per share would increase at a compound annual rate of 20%. We continue to hold a large position in this company whose shares appear undervalued, particularly relative to its peers (we currently own a short position in one of its rivals). 

Results and guidance from memory supplier SanDisk came in significantly ahead of expectations as demand from data centres pushed prices for NAND memory sharply higher. The NAND industry was loss making just a few quarters back, so plans to increase capacity were scrapped. As a result, memory supplies are now very tight. We initiated our holding last year after meeting the company in the US. Whilst we have been taken some profits following the substantial appreciation in its share price, we expect demand for NAND memory, which is vital to the AI buildout, to remain strong. 

Part of our AI 'picks and shovels' theme, GE Vernova's share price surged higher as orders for its gas-fired power turbines from AI hyperscalers continued to pour in. 

Detractors

Fears over potential disruption by AI weighed on our holding in IQVIA, which provides data services and research outsourcing to the healthcare sector. The market's concern is that that R&D across the healthcare sector will be disrupted by a new generation of powerful AI tools. After meeting with management and debating potential outcomes across the team, we reduced our position.

Another key detractor was the long position in cruise operator Carnival. Fuel is one of the biggest costs for shipping operators and, in contrast to many of its peers, Carnival has historically opted against hedging those costs. The sharp rise in energy prices precipitated by the Iran war appears likely to have an impact on its bottom line. As oil prices rose, not owning Exxon Mobil, the largest energy company in the US, also hurt.  

Purchases

The biggest addition to the portfolio over the quarter was Targa Resources, a modestly valued energy company operating in the Permian Basin, the largest onshore oilfield in the US. It has ambitious plans to grow by leveraging its extensive network in the Permian and the years ahead should see it reaping the benefits of its current programme of capital investment.

JB Hunt is a transport company with a leading ‘intermodal’ network that takes freight from trucks to the railway and then back to trucks, cutting costs and improving service to its customers. Shipping volumes and pricing have been weak over the past two years, but there are signs that returns are improving. Moreover, President Trump’s tighter requirements for work permits are thinning out America's workforce of truck drivers (perhaps by as much as 10% or even 20%). That should improve pricing across the shipping industry. If the US economy can remain healthy, we believe JB Hunt's earnings could grow at more than 20% per year. Set against this long position, we have a number of short positions in slower growing but more expensive transport stocks.

Gildan Activewear is a low cost, vertically integrated manufacturer of T-shirts and fleeces, which it supplies to wholesalers and direct to retailers. It has steadily increased its competitive cost advantage by reinvesting in its manufacturing capabilities. Its success has encouraged its competitors to leave the industry. Its recent acquisition of Hanesbrands adds scale, could generate cost synergies and could begin to unlock growth opportunities for a business that has historically been starved of investment.

Sales

By significantly reducing our holdings in Microsoft, Amazon and Alphabet, we have continued to reduce the fund's exposure to the Magnificent Seven stocks. The hyperscalers continue to increase their capex forecasts for the year ahead and this investment is transforming them from being capital-light, free cashflow-generating machines into something significantly more capital-intensive. They are now forecast to generate minimal if any cashflow in the coming years and the jury is currently out on what – if any – the benefit to their growth will be. We still think 'picks and shovels' companies like GE Vernova are the best way to gain exposure to the AI build out. We retain modestly overweight positions in Nvidia and Alphabet, with underweights in the other stocks. 

We exited the position in Ulta Beauty, after a surge higher in its share price pushed its valuation up to our target.

We reduced some portfolio risk at the outbreak of the Iran war. Perhaps most notably we took money out of our positions in banks such as Wells Fargo. This is due the potential for higher inflation to push lending costs higher and for loan losses to squeeze bank profits and sentiment. While this is not our base-case scenario, we wished to reduce our exposure to the sector to reflect the new uncertainties that now face it. We are likely to add to these holdings again should the situation change.

Outlook

Before the war in Iran, we were positive on the outlook for the US market. We expected economic growth to broaden out to areas of the economy where growth had formerly been subdued. The war, however, pushed oil prices, changed expectations for interest rates and disrupted supply chains, threatening this benign outlook. 

Away from geopolitics, two themes stand out. First, AI-related spending remains strong, with clear beneficiaries across producers of semiconductors, memory and cloud infrastructure. At the same time, we remain cautious on areas vulnerable either to direct disruption by AI or to a reallocation of enterprise spending. Second, the US consumer remains selective rather than weak. Clearly, higher gasoline prices may become a headwind, but tax refunds are running ahead of last year's rate and should help support demand. Recent updates from holdings such as Burlington Stores and Carnival suggest that the consumer economy remains resilient.

We have a high degree of conviction in all our positions, whether long or short. Our long positions tend to be in long-term compounders trading on discounted valuations or in cyclical stocks with depressed share prices. We believe they offer an attractive balance between risk and reward, and are poised to deliver stronger growth than the wider US market over the coming years. Our short positions, meanwhile, tend to be in value traps or in companies where a combination of high expectations and elevated valuations makes disappointment likely. The fund's net market exposure is 95%. Its main overweight positions are in utilities and healthcare, with a large underweight in technology.