Artemis US Select Fund update
Cormac Weldon, manager of the Artemis US Select Fund, reports on the fund over the quarter to 31 March 2025.
Source for all information: Artemis as at 31 March 2025, unless otherwise stated.
Year-to-date review
We would normally write a summary of the quarter just passed, but that period excludes a series of monumental announcements by President Trump about tariffs. We have therefore decided to incorporate those few days at the start of April which will likely live in investors’ memories for some time. Year to date, US equities have largely been dictated by two forces: tariffs and the arrival of Chinese AI company DeepSeek. For larger companies in the US, it has been painful on both fronts. Larger companies tend to have more geographically diverse supply chains and derive more of their revenue from outside the US, making them more exposed to a trade war. It is also the case that the largest index constituents are those that have been deemed to benefit most from AI, particularly the so called ‘Magnificent 7’ and therefore experienced the most pain on the arrival of DeepSeek.
We must acknowledge from the outset that the portfolio was too optimistically positioned for economic growth, and we have since taken action to reduce our exposure. However, the fund's performance was also affected by a broad-based selling of winners, especially those with higher-than-average valuations. While we understand this reflex to lock in gains, we believe that a focus on a company's competitive advantage, as evidenced by high returns on equity, and supported by an even more attractive risk-reward ratio, will be a winning strategy going forward, as it has been for the last decade.
Tariffs
We have to acknowledge from the outset that Trump is serious about tariffs, more so than many market participants had expected when he entered office. This may be an obvious statement but an important one. Revenue generated from tariffs is absolutely central to his ambition to provide tax cuts and therefore, as we stand - and despite his temporary pause on many tariffs - it seems unlikely that he will change direction completely. This suggests to us that tariffs are here to stay.
In terms of how we are approaching the disruption, we have adjusted the portfolio in light of what is a more uncertain economic outlook for the US, reducing what we call the 'Recovery' and 'Cyclical' areas of the portfolio and adding to the 'Bond Proxy' component.
US Select Fund
Looking at the portfolio in aggregate, its beta has come down, as well as the P/E, which is now trading broadly in line with the market. Return on equity has increased, tying in with our move into more high-quality businesses.
DeepSeek
Adding to growing worries around tariffs was the arrival of Chinese AI chatbot DeepSeek in January, which caused weakness across the AI supply chain. Despite a belief that this would mean companies would cut their spending on AI, we saw all the hyperscalers come out and confirm their huge (around $300bn) capital expenditure plans would remain in place. Despite this, the market began to doubt the two dominant narratives that have been driving markets: AI investment and US exceptionalism.
A great example of where we believe this reaction was unwarranted (and to which we have added on weakness) was a business called Comfort Systems, a supplier of skilled labour, as well as modular data centre construction, which is in particularly high demand at present. There is a structural shortage of skilled labour in the US, with one person entering the workforce for every three leaving. This issue is exacerbated by Trump’s immigration policies which will further constrict the labour supply. In addition, if investment in the US (in terms of building factories, data centres, roads and bridges) is an aim of Trump, then Comfort Systems is precisely the type of business that stands to benefit. Blend this with hyperscalers’ commitments to building out AI infrastructure, the 44% decline in the company’s share price since 24th January seems all the more unwarranted.
Market moves since the announcement of the tariffs have been historic, with the largest number of shares ever traded on Friday 4 April, followed by another record-breaking day on Monday, 7 April. There is clearly major repositioning taking place across global markets as investors pare back bets on a robust US economy and pivot into areas that are more defensive in nature. At a sector level, it has been the technology and consumer discretionary areas that have suffered the worst declines, with consumer staples holding up best, although still posting a negative return.
Interestingly the companies that have led the US market rally over the last few years have been those businesses that have experienced some of the most severe share price declines.
Performance
| Three months | Six months | One year | Three years | Five years | |
|---|---|---|---|---|---|
| Artemis US Select Fund | -14.7% | -5.5% | -5.9% | 19.2% | 79.9% |
| S&P 500 | -7.2% | 1.8% | 5.9% | 32.2% | 125.1% |
| IA North America average | -8.1% | 0.7% | 2.2% | 22.2% | 103.1% |
Source: Lipper Limited/Artemis for class I accumulation GBP.
Q1 Summary
- Fund underperforms returning -14.7% vs -7.2%.
- Industrials and healthcare exposure hurt performance.
- Top detractors: Saia, West Pharma, Vulcan.
- Top contributors: Allstate, Apple (underweight), Alphabet (underweight).
- Tariff turmoil uproots market optimism.
Fund performance
In this environment the fund has underperformed. At a sector level, it was our health care and industrials exposures that were most damaging to fund performance. Being underweight the technology sector did help performance though the benefit was only marginal. In terms of the top contributors and detractors over the period, we have included more detail below:
Negative contributors:
Saia: this trucking business suffered over the period given its cyclical nature (i.e. tied to industrial activity) and that it is smaller in size. Tariffs have been painful for the business too as they will weigh on traffic and driver costs. We have reduced the position to a smaller size on the understanding that the catalysts to reach our upside have been pushed out.
West Pharmaceutical: West Pharmaceutical Services is a global company that designs and manufactures advanced drug delivery systems, such as rubber closures, stoppers, and syringes, for the pharmaceutical and biotechnology industries. Their products are used to package and deliver injectable medications safely, ensuring the integrity and effectiveness of the drugs during storage and administration. The company reported results in February and beat expectations on both sales and profits, but guided very conservatively on next year's earnings, which caused the stock to sell off. We have since sold out of the position.
Vulcan Materials: this producer of construction aggregates, primarily asphalt mix and concrete, suffered on the possibility of weaker pricing. We would also point towards weather-related delays to construction and macro-economic uncertainty, which is affecting private construction.
Avantor: the supplier of products to the life sciences sector reported a mixed set of results over the month and guided expectations more cautiously than the market had anticipated. The business has a stable recurring revenue model and long-term growth drivers. However, near-term pressures from slower biopharma spending, inventory destocking, and macroeconomic uncertainty could put pressure revenue and margins. The current risk reward is very favourable following the share price weakness, but we are cognizant that the next few quarters will lack a catalyst until the company can prove that it can meet expectations on profits.
Positive contributors:
Allstate: the company is one of the largest publicly held insurance companies in the United States. Allstate primarily offers property and casualty insurance products, including auto, home, renters, and life insurance. The share price fell over the quarter but held up relatively well. A tailwind as we move forward should be PIF (policies in force) growth, which for Allstate is underpinned by pricing stabilisation and an attractive suite of products.
Apple (underweight): our longstanding underweight in Apple was initially on the premise that its main profit driver (the iPhone) was experiencing a demand slowdown as high prices and competition, particularly in China, dampened growth. Apple has also been notably slow in building out an AI offering, which means producing one now that is fit for purpose would likely erode margins as the company would need to outsource to a competitor with a more developed offering. There are also concerns around Apple's supply chain which is spread over Asia (Vietnam, China, India) and therefore subject to punitive tariffs.
Alphabet (underweight): our relative underweight to the parent of Google over the quarter came from a belief that not only does the massive CAPEX on AI make the business structurally lower return, but it also faces fierce competition from Meta who we believe will be able to encroach on Google’s fantastic advertising search margins. Alphabet reported results recently, citing cloud growth that was slower than anticipated due to capacity constraints. Customers are consuming significantly more computer power (eight times as much) than they did 18 months ago, largely AI related. Alphabet plans to spend $75 billion through 2025 to build out capacity to meet this demand.
Corteva: the agricultural company that specialises in seed and crop protection solutions was spun out of DowDuPont in 2019. The company's aim is to increase agricultural productivity. We like the stock because we think it has potential to trade on a higher multiple and because it would benefit from an upswing in the agricultural cycle. We would note that recently net acreage has been added in the US, which is a small but positive sign.
Fiserv: the global payments business has grown EPS in double digits for 40 years straight, an astounding feat. The company reported results over the month, with EPS ahead of expectations underpinned by a beat on margin that more than offset a revenue miss. Fiserv continues to grow its point-of-sale management system, Clover, which is designed to help small to medium-sized businesses streamline operations by integrating hardware and software solutions, such as POS terminals, mobile devices, and cloud-based applications.
Activity & Positioning:
In advance of ‘Liberation Day’ we reduced our weighting in a number of stocks which were considered more economically sensitive. These include SAIA (trucking), Eagle Materials (cement), as well as Goldman Sachs (investment bank). We do however believe that once we have more visibility of the fundamentals of the economy, these companies will perform strongly and as a result we would expect to add to those positions at an opportune time. On the flipside of this, we added to the stability of projected earnings by buying a position in Coca-Cola and increasing our existing position in Pacific Gas & Electric after a degree of underperformance. One area where we remain positive is on spending related to AI datacentre buildout. With this in mind, we used the significant weakness in Comfort Systems to add the stock to the portfolio.
Outlook
It is perhaps a fool’s game to predict what might occur over the next few weeks and months, but in the short term it is sensible to take a more cautious approach until such time as the path ahead becomes clearer. We are also taking advantage of share price weakness where we have high conviction in our thesis for a company.
Source: Lipper Limited/Artemis as at 31 March 2025 for class I accumulation GBP.
All figures show total returns with dividends and/or income reinvested, net of all charges.
Performance does not take account of any costs incurred when investors buy or sell the fund.
Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class.
Classes may have charges or a hedging approach different from those in the IA sector benchmark.
Benchmarks: S&P 500 TR; A widely-used indicator of the performance of 500 large publicly-traded US companies, some of which the fund invests in. IA North America NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. These act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.