Artemis Global Select Fund update

Summary

The fund returned 0.5%, slightly behind its benchmark the MSCI All Country World index, which returned 0.6%, mainly driven by the energy and financials sectors. Oil production cuts led to higher prices, and central bankers stressed the likelihood that rates would stay elevated for longer than expected (supporting banks' profits as they benefit from higher interest rates).

We have made some changes in the fund, buying holdings in sectors and geographies that we are not exposed to elsewhere in the portfolio – such as Grupo Financiero Banorte (a play on Mexican economic growth), Aon (insurance broking), Ferguson (US residential construction) and HDFC Bank (India). These are high-quality businesses supported by secular growth trends and add further diversification at a portfolio level.

Narratives keep shifting around interest rates, Chinese economic recovery and the possibility of a soft or a hard landing. Yet we retain conviction in our selection of high-quality companies exposed to long term secular growth themes trading at attractive cash-flow based valuations to drive compelling returns over the longer term.

The fund performed in line with the market

MSCI ACWI was up +0.6% (in GBP) over the quarter, with the fund slightly behind this at +0.5% (I Acc share class).

Saudi and Russian oil cuts began to affect global supply levels and the oil price rallied. Energy stocks led global equities as a result. The portfolio’s only energy holding, Halliburton, performed well. Financials were the second-best performing sector as 'higher-for-longer' interest rates support banks' profitability. In the insurance sector the price for writing new policies remains high given various climate, geopolitical and inflationary risks. The portfolio’s holdings in two large Japanese banks benefited from higher bond yields in Japan.

On the negative side, rate-sensitive sectors pulled back following the US Federal Reserve meeting and Chair Jerome Powell's comments that interest rates will remain elevated for longer. Long-duration sectors such as technology, utilities and consumer staples were the weakest performing.

Top contributors to performance were:

• MUFJ and SMFG (both +22% total return in GBP)
• Novo Nordisk (+19% total return in GBP)
• Halliburton (+30% total return in GBP)

Top detractors from performance were:

• LVMH (-16% total return in GBP) and Richemont (-24% total return in GBP)
• Estee Lauder (-23% total return in GBP)
• Keyence (-17% total return in GBP)
• Favouring Japan and Europe over the US

The fund remains slightly underweight US, and overweight Japan and Europe where we have found better value for money this year. In terms of sectors, it is underweight energy (Baker Hughes is our only holding there) and overweight healthcare (a sector which has underperformed year to date) as the secular growth drivers remain firmly intact and the valuations attractive.

Buying a range of new positions

ASML – long-term beneficiary of semiconductor demand and miniaturization.

CME Group – one of the largest and most liquid exchange operators globally, trading at a cheap valuation, and positively exposed to the long-term increase in penetration for its products, continued product innovation and greater volatility in bond markets.

Haleon – consumer health business trading at an attractive valuation with positive long-term growth drivers from emerging market consumption, new products, pricing power and consolidation opportunities.

Meta – capturing larger share of growing global online ad spend, built AI-powered targeted ads algorithm, TikTok growth slowing and Pinterest/Twitter losing share, low valuation.

Ferguson – high-quality building products distributor in the US, track record of share gains driven by geographical coverage and speed of delivery, attractive long-term margin expansion potential, very reasonable valuation.

Aon – insurance broker exposed to higher cost of writing policies given geopolitical, climate and inflationary risks. Long-term margin expansion opportunity, and a good track record of value additive capital allocation.

HDFC Bank – credit penetration remains low in India, HDFC Bank continues to take share from state-owned banks, and a recent merger with a mortgage company expose HDFC to India’s accelerating housing market.

Grupo Financiero Banorte – Mexico is a key beneficiary of global supply chains shifting away from China, leading to a healthy outlook for manufacturing activity and job creation. Banorte is the second largest lender in Mexico, and it is priced attractively given its loan growth and profitability potential.

Baker Hughes – there is a compelling margin improvement story, exposure to natural gas, the company is investing to be an energy transition beneficiary, and has diversified geographical end markets.

Sold positions:

IBM – tough mainframe comparatives and concerned about outlook for IT consulting business’s growth rate.

Hexagon – with macro uncertainty impacting the company’s outlook, and a premium valuation to the sector, we sold out of our position in Hexagon. Over the quarter a short report emerged detailing concern over governance issues and aggressive accounting. On balance we did not believe that these were adequately compensated for in the valuation and when combined with our original concerns led to the decision to sell our holding, avoiding further losses.

Siemens Energy – continued uncertainty around the cost liabilities from the Gamesa acquisition that are likely to be unresolved for some time, and some building concerns on the challenges in the wind industry.

Mettler Toledo – despite end market demand weakening near term, the valuation is expensive, and this despite the business being heavily exposed to end client capex, 50%+ industrial end markets, and c.20% of sales from China.

Accenture – weakening outlook for consulting project bookings whilst valuation is quite full.

Avery Dennison – challenging recovery in end markets whilst valuation does not reflect consumer downturn risk.

Richemont – a disparity between 'hard' luxury (jewellery, watches) and 'soft' luxury (designer clothing, bags) – with the former more cyclical – is emerging, so we prefer LVMH over Richemont.

SMC – automation orders continue to weaken, so we sold the remaining small holding.

Omnicom – Q2 results highlighted idiosyncratic end market weakness driven by project delays and cost cutting at large tech clients. We decided to sell our position during the quarter given some of the fresh uncertainty over the earnings outlook.

Halliburton – switched into Baker Hughes position (discussed above).

Outlook – Continuing to focus on high-quality companies…

Equity markets continue to be sensitive to macroeconomic concerns including US interest rates, economic weakness in China and potential significant policy changes and inflationary pressures in Japan. Given these points and the continued volatility of interest rates, we remain focused on resilient businesses with strong balance sheets and low financial gearing. According to Bloomberg, the aggregate net debt/equity of the fund's holdings is 28% vs. the benchmark's figure of 85%. We continue to focus our time and energy on identifying high-quality businesses trading at attractive valuations due to near-term headwinds (such as Haleon’s share overhang, HDFC’s merger, Estee Lauder’s China disruption etc.), with long-term supportive trends.

There is great divergence in global economies at the moment, with the US seeing slowing inflation, Europe still dealing with wage inflation, China attempting to recover, and Japan moving from ultra-dovish to slightly less dovish – but still extremely low interest rates. This heterogeneity is providing opportunities for a disciplined global stock picker, with the opportunity set outside the US looking relatively attractive and so the portfolio continues to be overweight Japan and Europe at the expense of the US to take advantage of the discounted valuations available.

While for now many market participants expect a soft economic landing, the full impact of rate hikes typically materialises 12-18 months after the event. Given how unusual this cycle is due to the massive distortions around the pandemic - both

lockdowns and the related stimulus efforts, and their economic consequences it is perhaps harder for macroeconomic forecasts to estimate the levels of inflation and interest rates then under a normal cycle.