Artemis SmartGARP Paris-Aligned Global Equity Fund update

Source for all information: Artemis as at 1 December 2023, unless otherwise stated.

• The fund rose 1.7% in Q4 compared with 7.6% from its benchmark
• A lack of exposure to tech and a bias towards lower-risk stocks hindered performance
• Largest overweights are to banks, insurance and utilities; largest underweights are to tech, financials and industrials
• At a regional level, the preference is for Europe (especially the UK) and emerging markets over the US
• The fund is sticking with its value tilt

Performance – Low-risk bias a drag in sharply rising market

Global equities finished 2023 strongly on the back of sharply declining inflation and hopes of an imminent reversal of the Federal Reserve's policy of monetary tightening. Long-term bond yields declined a full percentage point in major economies, while long-duration assets, not least equities, rallied hard.

During the quarter, the fund's MSCI ACWI Climate Paris Aligned index benchmark rose by 12.4% in dollar terms, though for UK-based investors this fell to 7.6% after sterling appreciated by more than 4% against the US currency. US and European equities performed best, while those in Japan, emerging markets and developed Asia ex-Japan lagged behind. At the sector level, semiconductor and software stocks rose by almost 20% while energy stocks fell along with oil prices.

These trends acted as headwinds for the performance of our fund: we had large underweights in semiconductor and software stocks and overweights in emerging markets, especially China. The fund’s net asset value rose by a mere 1.7% over the quarter.

The fund’s biggest detractors in Q4 were a mix of Chinese holdings (Picc Property and Casualty, Alibaba, United Laboratories International, Zhejiang Expressway) and financials (Barclays and Unum). Just as painful was the absence of meaningful positive contributors during the quarter, with only our holdings in G-III Apparel, Plus500 and Banco do Brasil and our avoidance of laggard Tesla adding more than 0.1 point to performance.

Activity – Trimming staples, adding selected tech and utilities

Compared with previous quarters, investment activity during Q4 was relatively muted. At the margin we reduced the fund’s underweight in the technology sector, principally through extending our position in Microsoft and reinstating a position in TSMC. We also increased our exposure to utilities through buying shares in Spain’s Iberdrola. These purchases were mostly financed from sales in consumer staples (such as Sprouts Farmers Market, Unilever, Coca-Cola and PepsiCo) and, to a lesser extent, industrials (such as Mears, Wex, Rexel and BWX Technologies).

These changes leave the fund’s principal exposures little changed: regionally, we remain overweight European equities (36% compared with 16% from the benchmark) and emerging markets (16% compared with 11%) and underweight the US (39% compared with 62%). At the sector level, we still prefer banks, insurance and now also utilities and remain well underweight technology and, to a lesser extent, financial services and industrials.

The fund also retains a pronounced tilt towards value stocks: at the end of September, it was trading on an average price-to-earnings (P/E) ratio of 8.9x compared with 19.6x from its benchmark. This 55% discount to the market is not far from its lowest point over the 20 years in which the present manager has been in charge.

Relative P/E ratio of Artemis SmartGARP Paris-Aligned Global Equity Fund vs MSCI AC World index

ESG – Continuing improvement of fund’s climate characteristics

As mentioned previously, we updated the fund’s objective in February 2022 and changed its benchmark to the MSCI ACWI Climate Paris Aligned index. The fund now has an explicit constraint that its overall temperature alignment must be below 2°C.

The fund’s Implied Temperature Rise fell from 1.7°C at the end of March 2022 to 1.5 degrees to the end of June 2023.

Implied Temperature Rise

It is worth noting that the fund’s progress towards a temperature alignment of 1.5°C happened much faster than we anticipated when we changed its objective and benchmark in 2022. Pleasing though this development is, it is also partly a reflection of which companies SmartGARP, the proprietary quantitative stock-screening tool we use to identify investment opportunities, highlights as most attractive at present.

For example, the fund’s exposure to energy, natural resources and industrials fell last year as their attractiveness declined relative to stocks in sectors with a lower carbon footprint, such as software, insurance and media. It is quite possible that a situation arises where the pendulum swings back and SmartGARP sees more investment opportunities in sectors with a larger carbon footprint.

To the extent that our fund aims to deliver good investment returns subject to a temperature-alignment constraint of less than 2°C, it may see an increase from its current level. Nonetheless, we expect that the fund’s Implied Temperature Rise will eventually fall below 1.5°C over the medium to long term.

It is also worth noting that the recent decline in the fund’s carbon footprint is but a continuation of a longer-term trend of the fund’s improving climate characteristics. These are related, in part, to the introduction of an explicit ESG factor into SmartGARP in 2019 and its further development in 2021.

The chart below illustrates this trend, showing the fund’s carbon intensity over the last few years. At the end of December 2023, the fund’s Scope 1 and 2 carbon emissions intensity stood at 28.4 TCO2 (total carbon dioxide) per $1 million of revenues compared with 37.2 from the MSCI ACWI Climate Paris Aligned index. By comparison, the intensity of the MSCI AC World index, an unconstrained broad global market, stood at 128.7 TCO2 per $1 million.

Carbon Intensity Fund vs Benchmark 

Outlook – Cloudy with pockets of opportunity

Following two good years, the fund's performance in 2023 was disappointing. Its low exposure to the Magnificent Seven US mega-cap growth stocks (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia) hindered its progress, as did overweights in Europe and emerging markets. Most importantly, however, our bias towards stable businesses trading cheaply and with low leverage did not pay off in a year when investor optimism surged.

Still, SmartGARP, the disciplined stock-selection process we follow, suggests these parts of the market continue to offer the most attractive returns to shareholders.

Over the 20 years the present fund manager has been in charge, sticking to our investment process, especially after a period of sub-par returns, has proved to be the correct approach. We see no reason to deviate from it now

As we have argued before, it seems likely that the delayed impact of significant monetary tightening of the last two years will create challenging economic and market conditions. At the same time, however, it strikes us that the narrow list of stocks that has led global equity markets higher in recent years has opened up pockets of attractive investment opportunities behind it. As mentioned above, these include the UK, parts of continental Europe and emerging markets.

Therefore, while we are not particularly optimistic about the outlook for markets in general, we are rather more sanguine about the outlook for our fund. Our approach focuses on what companies are telling us regarding their individual business prospects to ensure that the fund’s positioning reflects this in a timely manner.

Against this backdrop, our fund’s bias towards companies with resilient earnings and healthy balance sheets – which, as an additional layer of protection, trade well below average market valuations – remains warranted.