Artemis SmartGARP Global Equity Fund update
Peter Saacke, manager of the Artemis SmartGARP Global Equity Fund, reports on the fund over the quarter to 31 March 2023 and his views on the outlook.
Highlights:
- Lagging a buoyant start to the year
- Rebound in megacap growth stocks offsets banking stress to lead markets higher
- Fund down 1.3% versus 4.4% rise of benchmark during the quarter.
- Underweight Apple, NVIDIA, Microsoft, Tesla and Meta the biggest five performance detractors.
- Adding to Japan exposure at expense of Europe; cutting back on energy.
- Fund sticking to its tilt towards value and low risk
Performance – Strong start to year in spite of banking crisis and weaker economy
Hopes that gradually falling inflation, weaker economic activity and the turmoil in the US and European banking sectors will prompt an easing of monetary policy in months to come led to a strong start to the year in global equities.
The MSCI All Country World index rose by 7.4% including dividends in US dollar terms. European equities (+10.4%) led the way while emerging markets and developed Asia lagged with gains of around +5%. Sector performances diverged much more. Semiconductor stocks were up by 31% on average, with media and tech hardware stocks also rising by more than 20%. Unsurprisingly, banks were weakest (-4%), while energy, insurance and healthcare stocks also declined.
These trends were mostly headwinds for the performance of our fund: Our overweights in banks, insurance and energy hurt as did our large underweight in technology in general and megacap tech in particular. Moreover, at the regional level our overweights in emerging markets and Japan were drags while our overweight in European equities only helped at the margin. For the quarter as a whole, the fund’s net asset value fell by 1.3% versus a benchmark return of +4.4% in sterling terms.
Unusually, 6 of the top 10 detractors from performance were megacap growth stocks (Apple, NVIDIA, Micorosft, Tesla Meta Platforms and Amazon.com), which together cost 2.4%-age points of performance and thus accounted for about half of our fund’s underperformance in Q1. Other detractors include US insurers Metlife and American International Group which gave back some of their strong gains in 2022. It’s worth noting that while our overweight in banks did not help performance, only one bank investment (American Bank OZK) was a material drag on performance, costing a relatively modest 0.19%.
On the positive side, solely Perion Networks, an Israel-based digital advertising company, stood out, rising more than 50% in Q1, and adding 0.3% to the fund’s performance during the quarter.
Activity – Adding to basic resources and tech at expense of energy
Portfolio turnover in Q1 was significant. Weaker oil prices prompted us to cut back our exposure to the energy sector significantly. We thus sold our holdings in Chevron, Shell, and Total Energies while also reducing our positions in Exxon and Equinor.
We reinvested the proceeds of these sales in the technology and basic resource sectors, establishing new positions in Cisco, Meta, Steel Dynamics, Dundee Precious Metals and Commercial Metals Corp while also adding to our holdings in Perion and Alibaba.
We also made changes to our exposure within the banking sector. While we did not own any of the troubled US regional banks, we nonetheless cut back our exposure to the sector, with sales of Washington Federal, Fulton Financial and EastWest Bancorp. We reallocated the capital thus freed up to larger banks such as HSBC and JP Morgan, while also, opportunistically establishing a new position in UBS after the announcement of its takeover of Credit Suisse.
Finally, we have also added somewhat to our exposure to Japanese equities, many of which benefit from very attractive valuations coupled with catalysts in the form of improving fundamentals.
Still, in spite of these changes, the fund’s principal exposures have not changed dramatically. Regionally we continue to be overweight in emerging markets (22% of fund vs. 11% benchmark weight) and Europe (24% versus 17%) and underweight especially in North America (42% versus 63%). At the sector level, we still prefer banks, insurance and consumer staples and remain very underweight technology and, to a lesser extent, financial services.
Last, not least, the fund’s tilt towards value stocks remains very pronounced: at the end of September, the fund was trading on an average price-earnings ratio of 7.9 versus the benchmark at 15.4. This 49% discount to the market remains very low in the context of the more than 19 years the present manager has managed the fund.
Relative price-earnings ratio of SmartGARP Global Equity Fund vs. market
Outlook – US economy slowing down, weaker earnings ahead?
While the market has taken comfort from the recent modest declines in headline rates of inflation and lowered expectations of peak central bank interest rates, we remain concerned about the delayed impact of earlier significant tightening of monetary policy as well as about the knock-on effect of the banking crisis on the economy in general and corporate earnings in particular.
While the US labour market remains resilient, surveys of the activity of both the manufacturing and service sectors are showing signs of weakening. We will thus be watching the imminent Q1 US corporate results season particularly closely for signs of deterioration in companies’ fortunes. The only bright spot is China and, accordingly, Asia more generally. Here, inflation is much more contained and monetary and fiscal policy are stimulative, unlike in the West.
In short, we expect markets to stay volatile and for regional and sectoral performance to remain significant. Still, volatile markets do also create opportunities for skilful active fund managers. While the outlook for equity indices may be muted, we still believe that there remain segments in the global stock market where the gap between companies’ valuations and their fundamentals remains wide and exceptional opportunities persist.
Against this backdrop, our fund’s bias towards companies with resilient earnings and healthy balance sheets, which, as an additional layer of protection, trade on well below market valuations, continues to be warranted, in our view.
Source: Lipper Limited/Artemis from 31 December 2022 to 31 March 2023 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: MSCI AC World NR; A widely-used indicator of the performance of global stockmarkets, in which the fund invests. IA Global NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. These benchmarks act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.