Artemis Funds (Lux) – US Extended Alpha update

Source for all information: Artemis as at 31 December 2024, unless otherwise stated. The objective of the fund is to increase the value of shareholders' investments primarily through capital growth.  

In 2024, the market soared for the second consecutive year as concerns over a recession, Federal Reserve policy missteps, election uncertainty, and geopolitical tensions eased. Throughout the year, economic growth consistently exceeded expectations. At the start of 2024, consensus estimates projected just 1.5% GDP growth, with surveys indicating a 50% probability of recession. However, by year-end, GDP growth had reached 2.7%, and the perceived likelihood of a recession had declined to 20%.

Corporate earnings also exceeded expectations. Strengthening economic growth was further supported by the Federal Reserve’s summer 'pivot', when it signalled that inflation was no longer its primary concern and that a rate-cutting cycle could soon begin. However, while economic data appeared robust, sentiment surveys remained subdued. For example, consumer surveys indicated that many still felt they were in a recession, and small businesses, in particular, remained pessimistic.

As the year progressed, market focus shifted toward the U.S. election. In the lead-up, investors speculated on potential policy directions under both candidates. Following the election, optimism grew around prospects for deregulation and lower taxes, though this was tempered by concerns about the implications for the U.S. deficit.

Performance

In this dynamic environment, the S&P 500 returned 9.7% (in sterling terms) for the quarter, bringing its 2024 performance to 27.3% — marking the second consecutive year of returns exceeding 20%.

The fund marginally outperformed the index, returning 10.1% versus the index’s 9.7%. No single sector stood out significantly in terms of impact. However, our technology exposure was the largest detractor costing the fund 0.9% of relative performance. On the positive side, our consumer staples exposure added 0.6% to relative performance.

At the stock level, Liberty Media, the owner of Formula 1, was a strong contributor. As a discounted compounder, the company has the potential for double-digit profit growth, supplemented by strategic capital allocation given its relatively low leverage. In a mixed economic environment, its appeal is further enhanced by the fact that most of its profit growth drivers are idiosyncratic rather than tied to broader economic cycles.

Within financials, our holding in Jefferies, the investment bank, benefited from a recovery in capital markets and investment banking activity. Additionally, the prospect of reduced regulation under a Trump administration —particularly in M&A — further bolstered sentiment.

On the negative side, healthcare was a challenging sector, with Elevance, Avantor, and ICON underperforming. Our single largest detractor was our underweight position in Apple.

Changes to the fund

During the quarter, we made a few changes to the portfolio.

Our largest purchase was Stryker, a medical devices company with a strong track record of innovation. Within financials, we increased our position in Allstate, which is benefiting from higher auto insurance pricing and strong premium growth, with consensus earnings underestimating its profitability potential. We also initiated new positions in Capital One and Goldman Sachs.

To fund these purchases, we reduced our Apple exposure due to concerns over potential U.S.-China tariff conflicts and a softer iPhone sales outlook. In healthcare, we sold Elevance Health and UnitedHealth. Elevance faced headwinds from persistently high hospital visitation costs, which weighed on sentiment.

Technology

The fund is underweight the so-called Magnificent 7 (or Great 8, as it has now become, thanks to the addition of Broadcome), mainly because of our underweight in Apple, where high valuation and low growth sets up an unappealing risk/ reward profile. For the rest, our highest conviction holding is in Amazon, given continued market share gains in retail, cost discipline and a huge runway for growth at AWS. As regards the others, we believe Meta and Microsoft remain well placed for the AI era, but with valuations above normal ranges position sizing is currently tempered. Nvidia and Broadcom remain two of the best positioned semi companies for the AI investment wave which we think is in the early stages. On the flipside, we remain underweight Google given potential disruption risk in the core business. 

Pruning paper capacity

Our largest sector position is rather unconventionally in materials. This is a diverse sector including aggregates, seeds and aerospace companies but the one to highlight is the most unglamourous area of paper & packaging. We hold both International Paper (IP) and Smurfit Westrock. At an industry level the main catalyst is significant consolidation as International Paper buys DS Smith and Smurfit acquired Westrock. This sets up an industry where 60% of capacity is with these two companies embarking on a strategy of value over volume which likely sets up much higher future profitability and very attractive free cash flow yields in the medium term.

Food distributors gaining market share

While we struggle to find attractive investments in classic consumer staples given the lack of growth and innovation, we have a large position in food distributors, namely US Foods and Performance Foods. This is a very fragmented industry. Like many areas of the economy, food distribution businesses with scale should take material market share.

Finding value in financials

The fund is overweight financials, with a broad range of exposures across insurance, payments, banks, credit cards and alternatives. For insurance, we see Progressive and Allstate benefiting from higher pricing in auto and now good premium growth with consensus earnings underestimating potential profitability. For banks, a strong economy and lower regulation should be a powerful cocktail for those companies exposed to capital markets (Goldman & Jefferies).

Pumping up power demand

Within the more classically defensive sectors, we remain bullish on utilities and cautious on healthcare and staples. Utilities are seeing more investment opportunities than they have in decades with growing power demand, thanks in part to data centres accelerating the need for more generation and transmission. We own nuclear energy producer Constellation Energy to directly benefit from the need for reliable clean power (nuclear) at premium prices. Among regulated utilities we own NiSource and PPL given our expectation they should deliver earnings growth at the top of the peer group driven with potential for further upside from data centres investment. Finally, we continue to own PG&E as its valuation remains heavily discounted as investors still seem to be wary of wildfire risk despite another season passing by without major incident.

On the infrastructure side we think 2025 is set up to be a better year for non-residential construction alongside the tailwinds from the Inflation Reduction Act, the data centre build out and lower regulation. Our primary exposure here is Vulcan Materials which has exhibited quite extraordinary pricing power in the last few years but is still operating with volumes well below normal. As volumes recover we should see strong earnings flow through.

Life sciences recovery

While we are underweight healthcare, we continue to believe the life sciences sector has huge potential in the next few years. The sector historically delivered consistent mid s.d organic growth but has now suffered a multi-year covid hangover. Organic growth is still in the “less bad” phase, but as this transitions to growth in 2025 and beyond we think the sector is attractively valued. We are just starting to see signs of life in the crucial bioproduction segment and as we get further confirmation, this is an area of the portfolio where position sizing could increase.

Opportunities in Tech outside of Mega cap

Outside of the mega caps, in Technology we remain optimistic on the build out of AI infrastructure. Whilst Nvidia grabs the headlines, and we remain positive we continue to believe the market is under appreciating the future earnings power of companies across high bandwidth memory (Micron), IT hardware (Hewlett Packard), and custom chips (Broadcom). In software, our key holding for many years has been Microsoft but we are spending more time trying to find companies that can benefit from AI rather than ben disrupted by it.

Idiosyncratic stock opportunities

Whilst most of the discussion above has been through the lens of sectors, we have a number of large holdings which don’t fit neatly into a sector theme. This would include Burlington Stores, the off-price retailer which has dramatically improved operationally and is set for substantial earnings growth. Formula 1 which is entering the year with good momentum as GM has announced they will enter from 2026. Parker Hannifin is an incredibly well financed industrial which gives us exposure to the recovery in aerospace but also cyclical recovery from a range of industrial end markets which are currently depressed.

Short opportunities

On the short side we categorise stocks among 'expensive darlings', 'value traps' and 'cyclical opportunities'. In 2024 the short book made a meaningfully positive contribution to the fund's performance, partly helped by the relatively concentrated performance of the market. That said, we continue to find plenty of businesses in each category, but it is the second two where we have had more success. Many of the businesses we thought were expensive at the start of 2024, ended the year even more expensive.

We continue to think many areas of the market are going through enormous structural change with winners and losers. The short book gives us the opportunity to benefit from this by shorting companies that tend to be smaller parts of the index. Some examples where we remain active include; telecom companies under threat from worsening dynamics in the market; retailers exposed to the twin threat of Amazon and Walmart’s success online; healthcare & consumer staples on the wrong side of the GLP1 phenomenon; technology companies likely crowded out or disrupted from AI; companies exposed to government cost plus contracts; plastic packaging exposed businesses. For these areas, we think the market continues to underestimate the future profitability which when combined with high levels of borrowing often leads continued relative downside.