Artemis SmartGARP Global Equity Fund update

Source for all information: Artemis as at 31 December 2023, unless otherwise stated.

• The fund rose 0.2% in Q4 compared with 6.3% from its benchmark
• A lack of exposure to tech and a bias towards lower-risk stocks hindered performance
• Largest overweights are to banks, insurance and energy; largest underweights are to tech, financials and industrials
• At a regional level, the preference is for Europe (especially the UK), emerging markets and Japan over the US
• The fund is sticking with its value tilt

Performance – Low-risk bias hinders performance in fast-rising market

Global equities finished 2023 strongly on the back of sharply declining inflation and hopes of an imminent reversal of the Federal Reserve's policy of monetary tightening. Long-term bond yields declined a full percentage point in major economies, and long-duration assets, not least equities, rallied hard.

During the quarter, the fund's MSCI AC World index benchmark rose by 11% in dollar terms, though for UK-based investors this fell to 6.3% after sterling appreciated by more than 4% against the US currency. US and European equities performed best, while those in Japan, emerging markets and developed Asia ex-Japan lagged behind. At the sector level, semiconductor and software stocks rose by almost 20% while energy stocks fell along with oil prices.

These trends acted as headwinds for the performance of our fund: we had a 5 percentage point underweight in semiconductor and software stocks and an overweight position in emerging markets, especially China. The fund’s net asset value rose by a mere 0.2% over the quarter.

The fund’s biggest detractors in Q4 were a mix of Chinese holdings (Picc Property and Casualty, Alibaba, PetroChina and CNOOC) and energy stocks (Chevron, Technip Energies and Repsol). Just as painful, though, was the absence of meaningful positive contributors in the quarter, with only our holdings in G-III Apparel and Associated British Foods and our avoidance of laggard Tesla adding more than 0.1 point to performance.

Activity – Trimming staples, adding selected tech and natural resources

Compared with previous quarters, investment activity in Q4 was relatively muted. At the margin we reduced the fund’s underweight in the technology sector, principally through extending our position in Microsoft and reinstating a position in TSMC. We also increased our exposure to basic resources by buying shares in Rio Tinto. These purchases were mostly financed from sales in consumer staples (such as Sprouts Farmers Market, Unilever, Altria and Philip Morris) as well as some positions in industrials (such as Marubeni, Caterpillar and BWX Technologies).

These changes leave the fund’s principal exposures little changed: regionally, we remain overweight European equities (27% of the fund compared with 16% from the benchmark), emerging markets (19% compared with 11%) and Japan (7% compared with 5%) and underweight the US (43% compared with 62%). At the sector level, we still prefer banks, insurance and energy and remain well underweight technology and, to a lesser extent, financial services and industrials.

The fund also retains a pronounced tilt towards value stocks: at the end of September, it was trading on an average price-to-earnings (P/E) ratio of 8.6x compared with 16.6x from the benchmark. This 48% discount to the market is not far from its lowest point over the 20 years in which the present manager has been in charge.

Relative price-earnings ratio of SmartGARP Global Equity Fund vs. MSCI AC World index

Outlook – Cloudy with pockets of opportunity

Following two good years, the fund's performance in 2023 was disappointing. Its low exposure to the Magnificent Seven US mega-cap growth stocks (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia) hindered its progress, as did overweights in Europe and emerging markets. Most importantly, however, our bias towards stable businesses trading cheaply and with low leverage did not pay off in a year when investor optimism surged.

Still, SmartGARP, the disciplined stock-selection process that we follow, suggests these parts of the market continue to offer the most attractive returns to shareholders.

Over the 20 years the present fund manager has been in charge, sticking to our investment process, especially after a period of sub-par returns, has proved to be the correct approach. We see no reason to deviate from it now.

As we have argued before, it seems likely that the delayed impact of significant monetary tightening of the last two years will create challenging economic and market conditions. At the same time, however, it strikes us that the narrow list of stocks that has led global equity markets higher in recent years has opened up pockets of attractive investment opportunities behind it. As mentioned above, these include the UK, Japan and parts of continental Europe and emerging markets.

Therefore, while we are not particularly optimistic about the outlook for markets in general, we are rather more sanguine about the outlook for our fund. Our approach focuses on what companies are telling us regarding their individual business prospects to ensure that the fund’s positioning reflects this in a timely manner. Against this backdrop, our fund’s bias towards companies with resilient earnings and healthy balance sheets – which, as an additional layer of protection, trade well below average market valuations – remains warranted.