Artemis US Select Fund update
Cormac Weldon, manager of the Artemis US Select Fund, reports on the fund over the quarter to 30 June 2024.
Source for all information: Artemis as at 30 June 2024, unless otherwise stated.
The quarter started with a degree of fear around inflation and its persistence, with March data being released in April showing the third consecutive month of +0.4% growth in core CPI.
We also saw the ISM manufacturing index returning to expansion territory and the non-farms payroll showing robust jobs growth, forcing the Federal Reserve to delay the prospect of rate cuts to later into the year.
May proved to be a more supportive month from a macro perspective. Federal Reserve Chair Jerome Powell dismissed the notion that further rate hikes were on the table and core CPI came in cooler than previous months.
There was also some easing in the geopolitical situation in the Middle East which to a degree calmed markets.
June ushered in a series of rate cuts by other central banks, namely the ECB and the Bank of Canada. While the Federal Reserve stood firm, the market became increasingly confident that there would be one cut before year end. This notion was given further support when CPI came in at its slowest growth rate since August 2021.
Mega-cap tech continues to dominate
Markets, as one might expect, tracked expectations around rate cuts. April was a weak month for the S&P 500 but through May and June the index made up lost ground, returning 4.2% (in sterling terms) over the quarter.
A common theme over the past year has been how dominant the index’s largest constituents have been and there was no change over Q2. The S&P 500 equal-weighted significantly underperformed the market cap weighted version (EW -2.5% vs MCW 4.2%).
From a sector perspective, dispersion was particularly pronounced. Technology led the way returning 13.8%, with Communication Services (9.4%) and Utilities (4.7%) following. Laggards were Materials (-4.5%) and Industrials (-2.9%).
The fund underperformed the index over the quarter returning 2.4% vs. the S&P 500's 4.2%, although year-to-date the fund is comfortably ahead of the index and the peer group (fund 20.1% vs 16.3% Index, and 12.9% peer group).
| Three months | Six months | One year | Three years | Since launch* | |
|---|---|---|---|---|---|
| Artemis US Select Fund | 2.4% | 20.1% | 33.4% | 35.8% | 313.3% |
| S&P 500 | 4.2% | 16.3% | 25.3% | 45.5% | 319.8% |
| IA North America average | 2.0% | 12.9% | 22.1% | 31.4% | 248.6% |
Nvidia rules supreme… again
Nvidia’s market capitalisation at the start of the period was $2.3tn and at the end $3.1tn. That is the equivalent of an addition of a company the size of Tesla or – for UK investors – the equivalent of the five largest companies in the FTSE 100.
In our view, the staggering rise to date has been justified. Nvidia finds itself in a unique situation in that it is at the moment the only company that can supply the means to develop AI models.
Its customers are also those businesses that are the largest, and most cash-generative companies in the world, who are extremely motivated to make their own AI tools.
We have had an overweight position in the fund since Q2 2023 and it stands as our top contributor over one year (to June end). While for some time our estimates for Nvidia's earnings were well ahead of the analyst community, we are now becoming more wary of the level of optimism and numbers we are seeing appear from analysts leading us to be more cautious.
The ‘Nvidia multiplier effect’
Amongst our other top contributors are a series of businesses that we identified as key beneficiaries of the buildout in AI infrastructure:
- Coherent supplies high speed network cabling and lasers that allow computers that sit within data centres to be connected and run at maximum capacity.
- Micron and Western Digital supply memory chips that again are integral for the memory intensive task of training large language models.
The detractors
Amongst our detractors are businesses that performed strongly but have seen recent share price weakness, such as Builders FirstSource and Saia.
In both cases we still see very attractive tailwinds to the companies and therefore we continue to hold them.
Underweights in Apple and Alphabet also detracted from performance, though we have since reduced these underweights.
Transactions
As mentioned above we have reduced our underweights in Apple and Alphabet on a less negative outlook, as well as the upside risk/opportunity that both have in terms of how they go about integrating AI.
We have also added to our Healthcare exposure through purchases in Elevance Health and Stryker.
To fund these purchases, we trimmed our positions in Meta and Nvidia following strong share price performance and a more balanced risk-reward. We also sold out of our holding in Lamb Weston on a lack of conviction that the business could recover following an error in their enterprise resource planning system that occurred in Q1.
Outlook
It has been an extremely strong year so far for markets and for the fund, propelled by enthusiasm for AI coupled with the prospect of a soft landing.
So where does this leave markets for the second half of the year?
One might expect that returns will broaden out from the dominance of the so called ‘Magnificent 7’ which would benefit the rest of the S&P 500.
We are however not waiting around for this; we see a breadth of opportunity in a variety of sectors that are displaying the asymmetric risk reward that underpins our investment process. We are also seeing opportunity within the largest index constituents as they continue to deliver robust fundamental growth.