Artemis SmartGARP Global Emerging Markets Equity Fund update

Peter Saacke and Raheel Altaf, managers of the Artemis SmartGARP Global Emerging Markets Equity Fund, report on the fund over the quarter to 30 September 2023.

Summary

  • Q3 relative return +2.5%. Fund +3.7 % vs index +1.1% (in GBP)
  • Performance in top quartile vs IA sector for 1,3,5 years and since inception
  • Value bias in the fund remains substantial, 45% discount to the market…
  • …with a history of delivering good growth. Fundamental value per share of our holdings has outgrown the
  • market by 9% per annum since launch (April 2015)

Artemis SmartGARP Global Emerging Markets Equity Fund - Key financial metrics

  12m forward P/E ROE1 Dividend yield
Fund  6.4x 14.5% 5.7%
Benchmark
  11.7x 13.6% 3.0%
Relative
  -45% 1.0% 92%
Source: Artemis, Bloomberg, MSCI as at 30 September 2023. 1ROE is a blend of 3-year trailing and 2-year forward.

Performance – favourable tailwinds for our holdings

The promise of emerging markets has yet to materialise this year. In the last quarter, emerging markets stocks rose 1% (in GBP terms) marginally ahead of developed markets. Yet, market returns this year have disappointed investors. Against this challenging backdrop, our active approach has performed well and the fundamental tailwinds for our holdings remain supportive.

Attribution - Stock selection drives performance

Despite a stuttered recovery since reopening, China has presented several opportunities. Financials (PICC Property and Casualty), energy (CNOOC) and retail (Miniso) featured amongst top contributors in the period.

Elsewhere, winners came from financials and energy. Amongst financials, DB Insurance and JB Financials in Korea, Emirates Bank in the UAE featured. The Turkish stock market was a surprise winner in the period, given its economic troubles. Bottler Coca-Cola Icecek’s shares were up 49%, driven by strong operating trends.

Activity – following the process to find opportunities

We continued to find plenty of companies delivering good growth and trading on low valuations. Our systematic approach to screening companies for favourable characteristics ensures that we remain consistent in this discipline.

Additions – improving fundamental trends

Alibaba – strong beat on both revenues and earnings indicates sharply improving fundamental outlook. We added significantly, to make it the largest position in the fund.

India – Reliance Industries (energy)

Good Q2 results – Truworths (retail) and Orient Commercial (Vietnamese bank) and KEPCO (infrastructure)

Reductions - deteriorating fundamentals

Technology – TSMC, Ennoconn and Lenovo

Media – Multichoice and Tencent Music

Profit taking – Grupo Bimbo

The result of these changes is that the fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. We remain overweight China, Brazil and Turkey and underweight India, Taiwan and Saudi Arabia. At the sector level, financials, consumer discretionary and utilities feature as the largest overweights. Materials, semiconductors and software and services the largest underweights.

We remain positioned for a rotation into value stocks

We have commented for years about our gradual transition towards value parts of the market because of their attractive characteristics. Despite the outperformance of value stocks over their growth counterparts in the last few years, our valuation discount to the market has not changed materially. The fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. The price/book ratio of the fund is 0.9 and it offers a forward P/E of 6.4 vs 11.7 for the index (45% discount).

The gap in valuations between cheap and expensive stocks remains at extremely high levels compared to history. This suggests that value stocks are unusually cheap. They have been for some time now. Historically, large valuation discounts have provided some margin of safety, which has proved to be protective through more challenging and volatile market conditions. We think our discipline around valuations is likely to be a rewarding strategy as we progress through the final quarter of 2023 and for the years ahead.

Emerging markets– cheap and unloved, but pessimism well reflected in prices

For much of the period, Chinese equity markets have suffered from weaker sentiment. Periods of excess pessimism also coincide with the point of maximum financial opportunity. In our experience, these environments create good opportunities for stock pickers. Positioning in China remains light amongst Global and emerging markets funds. Yet, the potential for significant reforms, alongside unleashed consumers savings to support growth, appears to be underestimated.

More broadly, emerging markets stocks are trading on multi-decade valuation lows against developed markets across a range of metrics. With signs of supportive policy measures ahead and beneficiaries from shifting supply chains and aplenty, sentiment should improve from here. Inflationary pressures that dominated last year have softened, causing some optimism on the avoidance of a recession in developed economies. emerging markets economies are ahead of the cycle and have started easing. More flexibility around monetary and fiscal policies is causing diverging policy paths with the west and supporting economic growth prospects ahead.

Our focus on fundamentals remains persistent.

We have experienced years, where speculative behaviour, on the back of surging share prices, has reduced the focus on fundamentals. This has subsequently created excessively high valuations in parts of the market that have now started to unwind. We think this unwind has further to run. We see less risk in companies that trade on low valuations and therefore prefer to have more of our capital allocated to this part of the market.

We continue to believe that a focus on companies’ fundamentals, such as earnings and cash flow growth, combined with a strict discipline around valuations, offers the best way to navigate markets in the months ahead

Past performance is not a guide to the future.
Source: Lipper Limited/Artemis from 31 March 2023 to 30 September 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 EM NR GBP; A widely-used indicator of the performance of emerging markets stockmarkets, in which the fund invests. IA Global Emerging Markets 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.

Raheel Altaf

Manages:

‘Global emerging markets equity‘, 'Global equity' strategies

Raheel joined Artemis in 2014 and has managed Artemis‘ ‘global emerging markets equity‘ and ‘global equity’ strategies since launch in April 2015 and since April 2022, respectively.

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