The Artemis SmartGARP investment process
SmartGARP® is Artemis’ in-house software tool which screens the stock markets to help our fund managers identify companies with the most attractive financial characteristics.
Our investment philosophy
We believe that inefficiencies exist in global stock markets because investors do not always act rationally. We seek to exploit the effect of investors’ behavioural biases by being more objective, rigorous and systematic in both our analysis of companies’ financial characteristics and in our decision-making.
We also believe that a company’s share price follows its business performance in the long run. But at times, divergences can occur due to changes in sentiment.
These times of divergence can signal a risk or present an opportunity.
By mitigating these risks and focusing on opportunities, we believe that we can generate significant returns over time. Identifying compelling investment opportunities from a universe of thousands of companies around the world is extremely challenging, particularly as the market environment in which they are operating is constantly changing.
To do this efficiently and effectively, we believe that a quantitative data-driven approach has a significant edge over the human brain.
Several of our funds use our proprietary stock screening tool, SmartGARP, which has been developed and refined over the last 30 years. It puts a range of fundamental stock data, behavioural and market insights into a systematic framework, which makes it easier to assess the relative attractiveness of companies.
At the same time, we recognise that all quantitative stock selection and risk management processes have their inherent limitations. As a result, we think it is essential that the fund manager complements them with their own judgment to carry out due diligence on individual companies and to ensure a broad diversification of portfolio risks.
How does the SmartGARP process work?
SmartGARP is a systematic, evidence-based process, focused on company fundamentals.
It aims to identify companies with superior fundamental growth that are trading on reasonable valuations across a broad universe of investable companies.
The objective is to alert the manager to stocks where certain variables are influencing the share price and also to identify the best entry point for investment.
- We start with a universe of all listed companies from around the world.
- Once market capitalisation, liquidity and research coverage filters are applied, this reduces the universe to around 7,700 investable companies.
- We score all companies on eight investment factors. These include bottom-up and top-down inputs and incorporate fundamental and market trends as well as behavioural insights.
- Every company we cover is measured across these eight factors and is assigned an overall score whereby 100 is excellent and 0 is very poor. Stocks with a score of above 90 are considered for inclusion in the fund.
| Bottom-up factors |
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| Growth: and... |
| Value: the expected return of any financial asset is a function of its current valuation and the future growth rate of its cashflows. So these factors lie at the heart of the SmartGARP model. They highlight companies that are showing earnings growth above market levels while trading at attractive valuations. |
| Estimate revisions: considers measures such as changes to earnings forecasts, forecasts adjusted by dispersion, changes in highest/lowest earnings estimates and earnings up and downgrades. |
| Momentum: looks at the stock price movement, including price momentum, price movements over results days and changes in broker recommendations. |
| ESG: we look for companies with strong ESG credentials and/or those that are showing significant improvements. |
| Accruals: combines a series of measures to assess the degree to which companies make use of accounting standards to enhance reported results. |
| Top-down factors |
|---|
| Macro: looks at changes in current and forecast measures such as GDP growth, inflation, bond yields, interest rates, yield curves, commodities and oil prices. |
| Investor sentiment and ownership: is a sector level factor which seeks to evaluate how the broad investor community is positioned in their portfolios. |
The investment team’s judgement
Following the screening process, we carry out due diligence to ensure that there is a real investment story behind a company’s attractive SmartGARP score.
This due diligence is primarily looking for any non-operational issues or other company specific information that may be skewing a company’s SmartGARP characteristics (eg accounting changes, acquisitions, disposals, etc).
Importantly, this is strictly a validation exercise to ensure that the financial data is a complete and accurate reflection of the underlying characteristics of a company. The fund manager is not looking to gain intimate and detailed insights of the company’s business or its management, which might compromise the investment process by introducing subjectivity and behavioural bias.
We also ensure that the funds are well-diversified by number of holdings, sector and region, as well as by style and size tilts.
SmartGARP in practice: Hon Hai
Hon Hai (known internationally as Foxconn) is a leading Taiwanese electronics company. Its customers include Apple, Cisco, Dell and Amazon.
It emerged in the late 90s as a key supplier to desktop PC manufacturers and then shifted to mobile phones and has more recently made inroads in cloud computing and electric vehicles.
The chart shows the 25-year history of its share price performance relative to the market (green line) and its fundamental value per share relative to the market (blue line).
The relative value per share we construct combines the earnings, cashflows, dividends, operating profits and asset values of the company and compares the growth in these measures to that of the overall market.
This is a framework we can apply to any of the companies in our investment universe.
Ultimately, share prices follow fundamentals.
In the long-term, we believe the two lines are highly correlated and held together by an elastic band. Divergences can occur between the two, but usually these will snap back and correct. At times, share prices can overshoot the performance of the business, as they did in the period of the financial crisis.
This is often down to over-optimism about future growth prospects or a lack of account for risks to growth. Similarly, there are times where investors are cautious about the future and share prices can lag fundamentals, as they have more recently.
Our process allows us to track the performance of the business closely. We anchor our decision making to the path this business performance takes.
However, given uncertainty about the future, we use an iterative approach that increases positions gradually. This limits our own market timing risks and puts more capital into companies that have appeared attractive for a longer period of time.
Additionally, we are disciplined to cut positions where the catalysts for a re-rating don’t follow through.
In the case of Hon Hai, the share price has lagged the improving profit outlook for the company in the last few years. This suggests the company’s share price is discounted versus fundamentals. Should the profit outlook continue to improve, we would expect the share price to respond positively.
