Artemis Funds (Lux) – Global Select update

Source for all information: Artemis as at 31 March 2024, unless otherwise stated.

• The Artemis Funds (Lux) – Global Select Fund outperformed global equities in the quarter, returning 9.9%.
• Key overweight positions built up last year in semiconductors, healthcare and materials drove returns. Significant contributors included Nvidia (+84%), Meta (+39%) and Amazon (+20%).
• The managers maintain overweights to healthcare, financials and consumer sectors. They are particularly excited about opportunities in sub-sectors that have faced near-term headwinds, such as life sciences and consumer staples.

Performance

The Artemis Global Select Fund made 9.9% in the three months to the end of March, outperforming its MSCI AC World benchmark, which made 8.2%.

Top absolute contributors to performance (total return in GBP) included:

• Nvidia (+84%)
• Meta (+39%)
• Amazon (+20%)
• TSMC (+27%)
• Microsoft (+13%)

Top absolute detractors from performance (total return in GBP) included:

• HDFC Bank (-15%)
• Baker Hughes (-14%)
• Intel (-14%)
• Nike (-12%)
• Rio Tinto (-11%)

In terms of the general market backdrop over the quarter, Japanese equities led the way with actions taken by the Tokyo Stock Exchange over the past few years to encourage better corporate governance beginning to deliver results: many companies are now actively improving balance sheet management, helping to deliver better returns for shareholders.

They were also buoyed by the Bank of Japan’s announcement in March that it would end its policy of negative interest rates after 17 years, while loosening its yield curve control programme, as wage inflation is now running at more than 5%. The yen remains weak, however, as domestic investors continue to allocate capital to foreign bond markets where returns – both real and nominal – look more attractive.

US equities were also strong, as technology firms benefited from demand for generative artificial intelligence (AI) applications and the supply-chain components necessary to power them. For example, ServiceNow (which we don't own) beat expectations for subscription revenues and raised forecasts, saying new AI features delivered the “largest net new contract contribution of any product we have ever introduced… and it’s not price sensitive”.

IBM (which we don't own) also reported that AI and watsonx product sales doubled between the third and fourth quarters of 2023. However, with US inflation at about 3%, well above the Federal Reserve’s target, expectations for rate cuts have fallen this year and US Treasury yields have risen.

China’s Hang Seng was the worst performing major index over the quarter, as retail spending and housing data remained week. There was some better economic news in March when industrial firms recorded a +10.2% year-on-year increase in profits over the first two months of 2024, a significant improvement compared with the 2.3% decline across 2023. Further, China's manufacturing PMI came in at 50.8 in March, the first expansionary reading for a year.

The oil price (Brent Crude) rose 13.6% in dollar terms over the quarter, due to supply constraints announced by OPEC to counter record production from non-OPEC members such as the US, Brazil and Guyana. Oil tankers have also been forced to take the longer route around Africa to avoid Houthi shipping attacks. Our underweight in energy detracted slightly from performance.

Activity

In terms of geographic positioning, we have taken profits in our Japanese holdings, moving to a moderately underweight position, following the market’s rerating. We are slightly underweight the US and overweight Europe. In emerging markets, we have moved overweight, with new positions in India and Mexico, and two new holdings in China – though we remain highly selective.

When it comes to sectors, the fund remains overweight: healthcare (a sector which underperformed in 2023) as the secular growth drivers remain firmly intact and valuations attractive; financials (a diverse range of structurally advantaged compounders across insurance, financial data providers and emerging market banking); and consumer discretionary.

We initiated new positions in the following companies during the quarter:

• Campari Group – The beverage maker has delivered high single-digit organic revenue growth for more than a decade, as consumers have switched from drinking beer to spirits at a higher price point. It has a successful track record of acquiring and rejuvenating formerly stagnant brands and we are excited about its takeover of Courvoisier. Yet aside from March 2020, the shares now trade at their lowest valuation in seven years.
• AMD – A new product will allow the semiconductor company to benefit from the shift in data-centre architecture towards parallel processing.
• Elevance Health – Following our decision to sell Humana last year, we added Elevance Health – a high-quality and diversified US health insurer – to the portfolio in January.
• Micron Technology – We are using this data-storage technology company to play the inflection point in memory chip demand.
• Ryanair – This founder-led airline has leveraged its cost competitiveness to consistently take market share. Travel demand remains a robust secular growth trend that Ryanair is well positioned for.
• Nestlé – Strong market positioning means 85% of Nestlé’s brands are number 1 or 2 in their categories, enabling strong pricing power. It is the market leader in pet care and coffee, which are not only higher-growth areas but are better exposed to ‘premiumisation’ trends. While 2023 was a tough period for consumers, who largely traded down to cheaper items, confidence and spending patterns are normalising as inflation cools. Yet Nestle’s valuation sits at a 10-year low.

These additions were funded by trimming positions in Nvidia, Meta, LAM Research and Eagle Materials and complete sales of Siemens, Intel and Baker Hughes.

Outlook

The strong recent performance of global equity markets has led to questions about whether we are entering bubble territory. While some sectors are trading on high multiples, in general we are still finding plenty of attractive opportunities across global markets.

The ‘Magnificent Seven’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) have started to see more differentiation, which is encouraging from a stock-selection perspective. The ‘Fantastic Four’ – referring to Amazon, Meta, Microsoft and Nvidia – is probably a better monicker. Tesla has spluttered as always, while Apple and Alphabet seem to have fallen behind in the AI power race.

Marc Andreessen (founder of venture capital firm Andreessen Horowitz) wrote an article in 2011 called “Why software is eating the world” which has proved prescient – we have seen an increase in the proportion of company budgets being spent on software, delivering sustained growth for the businesses that supply it.

However, none of this would be possible without semiconductors, the capabilities of which have been expanding at a prodigious rate. The portfolio theme of ‘semiconductor ubiquity’ has led to us investing in stocks with a strong position in this value chain and a powerful tailwind behind them.

We are also focused on other more neglected areas. For example, we own Thermo Fisher Scientific and Revvity in the life sciences sector. Thermo Fisher offers its pharma and biotech clients a one-stop shop across clinical research and drug development and manufacturing, with a leading instrument portfolio and a record of powerful cash generation over the longer term. It is also led by a best-in-class management team.

Revvity has been transformed since divesting its analytical and food segments, and now has a leading antibody drug-development portfolio and dominant positions in reproductive testing and rare-disease diagnostics. However, a lull in the biotech funding environment following a lengthy period of low interest rates and easy money, as well as economic weakness in China, weighed on company performance in 2023, which is likely to carry on into the first half of 2024.

Nonetheless, long-term growth trends remain very supportive, leaving Thermo Fisher and Revvity on attractive valuations for those willing to take a longer-term view.

Similar dynamics are at play in the consumer segment, where we have recently added Campari and Nestlé to the portfolio.

Inflationary pressures have led consumers to trade down over the past 18 months, but this has created opportunities to buy best-in-class businesses where, while revenue and profit growth have slowed in the short term, the long-term opportunity remains compelling.

Similarly, we have been selectively buying Chinese consumer companies – PDD and Meituan, where the long-term growth opportunities are sizable and management teams have track records of successful execution, yet valuations are depressed as investors remain cautious on the economic and political environment.

We continue to focus on best-in-class businesses delivering sustainable growth and high profit margins, protected by durable competitive moats, but that trade at attractive valuations. While the P/E ratio of the aggregate Artemis Funds (Lux) – Global Select portfolio stands at 22x compared with 17.5x for the MSCI AC World index, it has a higher return-on-equity (14.8% compared with 11.6%) and operating profit margin (17.2% compared with 12.6%), as well as a lower leverage ratio (debt/EBITDA) of 2x compared with 3.1x from the index¹.