Artemis US Extended Alpha Fund update
Adrian Brass, James Dudgeon and William Warren, managers of the Artemis US Extended Alpha Fund, report on the fund over the quarter to 31 March 2025.
Source for all information: Artemis as at 31 March 2025, unless otherwise stated.
Market review
Q1 2025 was marked by heightened volatility and a distinct 'risk-off' tone in global markets. The S&P 500 recorded its worst quarterly return since 2022, falling 4.4% (in US dollar terms), as investor sentiment deteriorated amid a sharp escalation in US trade protectionism. The new Trump administration introduced sweeping tariffs on Canada, Mexico, China, and key industrial goods, fuelling stagflation fears. Meanwhile, the release of DeepSeek’s AI model triggered questions about stretched tech valuations, with the Magnificent 7 ending the quarter in bear market territory.
Despite a promising start to the year, bolstered by robust US growth indicators and expectations that the Federal Reserve would cut interest rates, sentiment reversed sharply by March. Inflation concerns intensified following the tariff announcements, pushing market-based inflation expectations to multi-year highs. Gold surged 19%, its strongest quarterly gain since 1986, while US Treasuries rallied on recession fears, with the 10-year yield falling to 4.21%. The US dollar weakened sharply, down nearly 4%, as risk appetite waned and rate expectations adjusted.
Performance
| Three months | Six months | One year | Three years | Five years | |
|---|---|---|---|---|---|
| Artemis US Extended Alpha Fund | -12.9% | -4.2% | -5.4% | 21.0% | 90.0% |
| S&P 500 NR | -7.1% | 1.9% | 5.9% | 32.3% | 125.3% |
| IA North America Average | -8.1% | 0.7% | 2.2% | 22.2% | 103.1% |
In this environment, the fund underperformed the index, returning -12.9% vs -7.1% for the S&P 500 TR (in US dollar terms). We began the year optimistic about the Trump administration’s agenda: deregulation, cost-cutting within government, and a generally market-supportive stance, despite his tariff views. Fund performance suffered, however, as the risks to the US economy from volatile tariff measures grew. At a sector level, our exposure to industrials, healthcare, and tech detracted from performance. On the positive side, financials, particularly our insurance holdings, offered some protection as well as utilities as the market fled to defensive areas of the market.
From a stock perspective, our largest detractors were PG&E (utilities), Jefferies (investment bank), Saia (trucking), and Burlington (retail). PG&E came under pressure due to devastating fires in Los Angeles in January, prompting a sharp sell-off. The concern was that the Wildfire Insurance Fund ($21bn) might be depleted by the event, increasing future risk unless replenished—a mechanism that had yet to be truly tested. For Jefferies, optimism around a recovery in M&A activity failed to materialise, despite expectations that the Trump administration would be more business-friendly. Saia, a small-cap cyclical, sold off on recession fears—despite posting solid results for the quarter.
On the positive side, our rotation into more defensive areas of the market was positive, particularly in insurance. Our holdings in Progressive, Aon and Allstate were protective in what was a challenging quarter for US equities. Outside insurance, our underweight in Apple and exposure to Mastercard also added value. During March, we had some support from shorts in areas such as consumer credit, food distribution, online gaming, packaging and trucking. However, while helpful, these were not large enough to offset all of the weakness in the longs.
Changes to the fund
As mentioned, we entered the year relatively optimistic about the potential benefits of Trump’s deregulation agenda. It quickly became clear, however, that the pain from DOGE and tariffs would preclude any benefits. Accordingly, we adjusted the portfolio—mostly during March—dialling back cyclical exposure.
The silver lining is that the market has punished both strong and weak businesses alike, including those directly impacted by tariffs and others less exposed. We took this as an opportunity to upgrade our holdings, increasing exposure to companies in which we have stronger conviction on fundamentals and multi-year risk/reward. We added Coca-Cola, AbbVie, S&P Global and Somnigroup to the portfolio. On the sales side, we sold positions in Goldman Sachs, Fidelity National, and PG&E.
Summary
At the fund level, our net position is 94%, with a beta of 0.94. This reflects heightened economic uncertainty and a rising risk of recession. We also recognize that we may be approaching the point of maximum pessimism from a headline perspective. Sentiment could shift if we see: 1) Trump announcing 'great deals' with multiple countries, or 2) pressure from Republicans and influential backers—from Schwarzman to Bezos, Cook, Ackman, and Musk—forcing a policy reversal.
Our base case, looking 12–18 months out, is that it’s highly unlikely Trump would want to enter the midterms as the president blamed for higher inflation (tariffs), higher unemployment (uncertainty), and a weaker stock market, without any wins to show. He’ll want deals. He’ll want to point to lower taxes and interest rates. While many of these goals conflict (tariffs = higher prices = tough for the Fed to cut), we believe it’s naïve to assume the worst-case scenario persists through the medium term.
That being said, The fund is defensively positioned with a range of discounted compounders in areas from auto insurance and soft drinks through to food distribution. We are underweight cyclicals but with exposure to depressed long-term winners at great valuations, offset by a range of shorts where we believe the risk profile is asymmetric to the downside.