Artemis Funds (Lux) – Positive Future update

Source for all information: Artemis as at 30 September 2023, unless otherwise stated.

Review of the quarter to 31 December 2023.

• The final quarter of 2023 may have marked a turning point in the performance of the small and mid-cap growth stocks our strategy invests in.
• Valuations in the parts of the market we invest in are still close to historic lows.
• Medical technology stocks are bouncing back from weakness on fears of the potential impact of GLP-1 treatments.

2023 ended on a positive note for small- and mid-cap growth stocks

The fund returned 3.1% over the quarter, lagging the 6.3% return from the MSCI AC World Index. The bulk of that relative underperformance, however, came in October. As the year drew to a close, the market broadened out, with small- and mid-cap growth stocks outperforming large-cap growth stocks by the widest margin since the fund’s inception.

December also saw the Russell 2000 index, which US smaller companies, enjoying its best month since the fund’s launch. And, while the ‘Magnificent Seven’ continued to outperform, large caps more broadly underperformed small- and mid-caps. Interestingly, the highest risk small- and mid-cap names typically performed the best.

Valuations in our part of the market now appear compelling

Following two consecutive years of underperformance, we believe the valuations of small and mid-caps are extremely attractive and that, as we move through 2024, we will see a new cycle of outperformance from this part of the market. We therefore continue to focus on identifying structurally growing small- and mid-cap growth companies that have a measurable positive impact.

Updates on impact

As natural disasters increase, gathering data on climate risk becomes essential

According to reinsurer Swiss Re, insured losses for natural catastrophes in the first half of 2023 were 54% above their 10-year average. Our climate is changing and, as it does, insurance companies are amending their policies to reflect the increased risks or, in the most disaster-prone areas, ceasing to offer cover altogether. This is climate-change ‘price discovery’ in action. As such, understanding current and future climate risks is increasingly important for insurers, for companies and for the investors who finance them. We believe one of our holdings – Verisk – has an important role to play in deepening that understanding.

Verisk is a leading provider of risk-intelligence data to the insurance sector.

Built by an in-house team of climate scientists, Verisk’s Climate Dataset is designed to help companies perform global risk assessments across their operations and supply chains and so consider the interconnected risks that a changing climate presents. It is also designed to assist corporates with their ESG disclosure obligations, such as the Task Force on Climate-related Financial Disclosures (TCFD) and European Sustainability Reporting Standards (ESRS).

Wolters Kluwer’s software tools assist companies with their ESG reporting.

We added a new holding in Wolters Kluwer during the quarter. It provides a range of products to knowledge-based industries where there is regular regulatory change, such as the healthcare, financial and legal sectors. Although it is still a relatively small part of the business, Wolters recently carved out a ‘corporate performance & ESG’ division in anticipation of the significant opportunity it sees in ESG data management. In addition to the TCFD and ESRS, other drivers include the EU carbon border adjustment mechanism and forthcoming Californian and SEC climate disclosure rules.

Airtel Africa: aggressively decarbonising its operations

During the quarter, Airtel Africa, the African telecom provider, provided further details on its decarbonisation strategy. Airtel is one of the larger greenhouse gas emitters in our portfolio. The bulk of its emissions arise from its use of diesel to power its telecom towers in remote locations. The company has set an aggressive decarbonisation target for its operations, seeking a 62% reduction in emissions by 2030 and a longer-term objective for net zero by 2050. These targets need to be seen in context. Demand for Airtel Africa’s products and services (and the associated demand for energy) is exploding and has significant room to grow. Just 40% of Africa’s population has internet access versus near-universal (c.95%) access in the West.

Because the renewable energy market in Africa is nascent, Airtel is not always able to purchase renewable electricity, a common strategy deployed by companies in the West to decarbonise their operations. At the same time, there is a strong incentive for Airtel to reduce its reliance on fossil fuels, not least because Nigeria, its largest market, recently ended subsidies for fossil fuels. This led to significant price increases but should help to stimulate the country’s solar market.

Positives

Medical technology stocks continued to bounce back, outperforming more defensive healthcare names such as pharmaceuticals and managed care stocks. DexCom (up 26%) and Insulet (up 30%) continued to bounce back from earlier

weakness related to fears that GLP-1s (the so-called ‘skinny jab’) would reduce the number of type 2 diabetics using their technologies (continuous glucose monitors and insulin pump patches). For reasons we recently explored in our Positive Sum blog, we think those fears are overblown. Both companies reported very strong results in Q3 and the most recent GLP-1 study was less bullish than many expected. Meanwhile, Terumo (up 18%) shares reacted very well to a good set of results. We subsequently trimmed the position on valuation grounds.

Cochlear (up 18%) saw continued positive momentum following a well-received investor day and confirmation of a very successful product cycle. With around 6% of the fund invested here, this is currently the fund’s largest position.

Universal Display (up 17%) rallied in response to improving sentiment around demand for its energy-efficient organic light emitting diode (OLED) display technology. OLEDs are fuelling the adoption of foldable and rollable screens in a range of consumer electronics and Universal Display’s customers announced new fabs that will employ its technology.

Energy and utilities were weak. These are areas in which portfolio is structurally zero weighted.

Negatives

Ameresco (down 46%) Renewable energy stocks came under pressure and Ameresco published disappointing guidance on earnings in its quarterly results. We sold the holding due to the increased uncertainty in this area and a breach of our investment thesis.

Chroma ATE (down 22%) Quarterly results from precision-testing specialist Chroma ATE fell short of expectations. While expected AI orders are coming through more slowly than hoped we expect to see signs of improvement in its fourth-quarter update.

Aehr Test (down 45%) Aehr Test performed fairly well over 2023 as a whole (up 25%). But it relinquished some of its earlier gains in the final quarter due to weakness in its order book and disappointing guidance from a key customer in the supply chain for EV power semiconductors.

IDP Education (down 29%): Restrictions on foreign students travelling to Canada from India, which IDP facilitates, created negative short-term sentiment around the stock. We retain our holding.

Purchases

Doximity We added a new position in what we regard as a high-quality, software-as-a-service company with strong network effects. It provides an online networking service to healthcare professionals, allowing them to share news, discuss treatments and collaborate. It was trading at a discount to its long-term average due to what we believe to be temporary weakness in advertising spending by pharmaceutical companies.

Wolters Kluwer We added a new position in this information and solutions provider which is a beneficiary of regulatory tailwinds in areas like ESG reporting.

MSA Safety supplies safety equipment used in hazardous conditions in industries such as construction, the military, fire service and chemical plants. This is, in our view, a high-quality industrial company with solid demand in its end markets, a good management team and which offered good relative value following a pullback in its share price.

Icon runs drug trials for large pharmaceutical companies. Its earnings are of high quality, its management is highly regarded and it is trading at relatively attractive valuation.

Shoals Technologies provides electrical balance of system (EBOS) components through which solar panels are connected to solar inverters. While it is more focussed on utility-scale providers than on the residential solar market, its shares sold off in sympathy with residential solar names, giving us a good entry point.

Sales

Ameresco Very weak guidance on earnings materially increased uncertainty around the investment thesis.

Kerry Group published a disappointing set of results. The impact case here was built on engagement with the company, which was not progressing as we had hoped. Whether fairly or not, Kerry is also regarded as at risk from the uptake of GLP1 drugs.

IQVIA We have some governance concerns regarding the chief executive and concerns about its competitive position relative to Veeva. We now regard Icon as a better-managed competitor with greater potential upside.

Reduced clean energy names (SolarEdge, Alfen, Deme and First Solar). In part, this was to fund the addition of Shoals Technologies to the portfolio. But it was also a pragmatic response to continuing uncertainty in the clean tech market. Residential solar markets are weak and, after changes to US regulation, an excess of Chinese-built product is sitting in European and Asian inventory channels.

Reduced Disco – Demand for Disco’s technology is supported by accelerating adoption of electric vehicles, by growth in demand for power semiconductors based on silicon carbide and for AI-related products. Its shares, however, had more than doubled from the lows seen in the final quarter of 2022, so we took some profits.