Artemis Positive Future Fund update

Source for all information: Artemis as at 31 March 2024, unless otherwise stated.

• A new lead manager was appointed in March 2024.
• A greater emphasis is now being placed on dialogue and engagement with portfolio companies to drive positive environmental and social change.
• New holdings include Synopsys, Graphic Packaging and Willscot Mobile.

Portfolio management change

On 12 March 2024, Artemis announced the restructuring of its impact equities team. Four members of the team left the company and Sacha El Khoury, Artemis’ Head of Impact and Sustainable Equities, is now the lead manager of the Artemis Positive Future Fund.

While the fund’s objective remains the same, a greater emphasis is now being placed on driving positive change in environmental and social issues through constructive dialogue and engagement with companies. From a portfolio construction point of view, meanwhile, there is now increased focus on risk-adjusted returns with increased discipline around valuations.

Market review

Resilient economic data buoyed investor sentiment over the quarter. The US economy grew by more than expected during the final quarter of 2023 and survey data, such as the US Purchasing Managers’ Index (PMI), continued to point to expansion. Other economic data also supported the idea that US economy is seeing a ‘soft landing’.

The fund’s benchmark, the MSCI AC World Index, rose by 8.2% in dollar terms over the quarter. Although just five stocks (Nvidia, Microsoft, Meta, Amazon and Eli Lilly) accounted for a third of that gain, market breadth does appear to be increasing. (Market breadth is a measure of how many stocks are advancing versus declining in an index; increased breadth paired with a rising index indicates a greater number of companies are participating in a rally). Companies across the information technology, financials and industrials sectors were all strong positive contributors to market returns over the period.

In terms of styles, growth stocks outperformed value stocks. Less helpfully, small caps underperformed the wider market as a whole despite outperforming the broader market in March.

Performance: detractors and contributors

The fund returned 2.8% in sterling terms, underperforming the benchmark index. Its overweight to industrials, and its lack of exposure to the underperforming consumer staples, utilities and real estate sectors meant that sector allocation was broadly positive. Set against that, however, stock selection – particularly in the information technology, consumer discretionary and industrials sectors - was negative. 

The biggest relative detractors included:

Aehr Test, the US-listed semiconductor testing company, which downgraded its earnings outlook twice in the quarter due to slowing demand for electric vehicles and high levels of inventory, which caused the industry to revise its capital-expenditure plans. Aehr Test is unusually dependent on a small number of customers so, when a number of large orders failed to materialise, investor confidence took a hit. The share price fell by 47% from 1 January to 19 March. We sold the fund’s holding before the second downgrade on 25 March. The stock has continued to underperform since we sold it.

PowerSchool Holdings, which supplies cloud-based software to the education sector, fell after an underwhelming trading update.

Shares in Universal Display, a leader in the research, development and commercialisation of phosphorescent OLED (PHOLED) technologies drifted lower over the quarter. While results were mixed, forward-looking guidance, pointed to a pick-up in growth as the commercialisation of blue PHOLED materials comes into view.

Oxford Instruments, the UK-based manufacturer of advanced instrumentation equipment for the semiconductor, healthcare and advanced materials markets fell by 7.5% in sterling terms.

The largest positive contributor to the fund’s performance was Disco, the Japanese manufacturer of tools for polishing and cutting semiconductors. It is a beneficiary of enthusiasm for generative AI and the resulting increase in demand for advanced semiconductors. Its share price rose by 53% on the quarter.

A number of industrial stocks featured among the top 10 contributors. They included:

• Core & Main, a US-listed water infrastructure company.
• Montrose Environmental, the US-based provider of environmental services.
• MSA Safety, the manufacturer of safety products such as breathing apparatus.

The portfolio’s non-financial performance

We will provide an update on the fund’s non-financial performance and our engagement activity in future quarterly updates.

Portfolio activity

Activity levels within the portfolio were higher than we would normally expect as a result of the appointment of the new lead manager and the transition to a new investment approach.

Prior to 12 March, new additions included:

• Technogym, an Italian manufacturer of premium fitness equipment.
• On Running, a footwear brand with impressive sustainability credentials
• Core & Main, a distributor of products used in maintaining and upgrading water infrastructure; it has an opportunity to take part in the consolidation of a very fragmented market.
• NVent, a manufacturer of electrical enclosures. It is benefiting from electrification of the economy (grid infrastructure) and datacentre spending.

Outright sales in the period included:

• Teradyne, the semiconductor-testing company. This was sold due to weak outlook for demand semiconductors from the electric vehicle industry.
• Airtel Africa, the African telecom company, continued to underperform and was sold.
• IDP Education, the Australian provider of international student-placement services, was sold following a fundamental review of its prospects and concerns over durability of returns.

Changes made to the portfolio following the appointment of the new lead manager on 12 March were designed to deliver improved risk-adjusted returns for the portfolio and reflected an increased focus on valuations and quality.

New buys:

Synopsys supplies tools and services to the semiconductor design and manufacturing industry player and is exposed to the growth in generative AI.

NU Holdings, this rapidly growing digital bank is disrupting the Brazilian, Mexican and Colombian markets and promoting financial inclusion.

We see an attractive balance between risk and reward at Pearson given the improved growth and margin profile of this business.

Prysmian is a leading manufacturer of power and telecom cables with a 30%-40% market share. It is benefiting from very strong demand for cables driven by the electrification of the economy and the drive to make power grids more resilient as renewables are integrated.

Graphic Packaging is a vertically integrated paper-based consumer packaging company. It is benefiting from structural trend away from plastic packaging towards paper.

Willscot Mobile provides modular temporary workspaces and storage solutions and can be considered part of the circular economy.

Outright sales included Basic Fit, Aehr Test (prior to its second profit warning), Zscaler, Shoals, Energy Recovery, Universal Display, Insulet and Coursera.

Outlook

The recent ‘narrowness’ of the market, in which a handful of mega-cap companies have dominated returns, is presenting investors with opportunities to pick up attractive investments in overlooked areas such as healthcare.

Through the second quarter, the fund’s new lead manager will continue to transition the portfolio to a more balanced position by investing in high-quality businesses that make a positive impact on environment and society – but only where they believe there is sufficient margin of safety in the valuation to allow the fund to deliver robust risk-adjusted returns.