Artemis US Extended Alpha Fund update

Source for all information: Artemis as at 30 June 2025, unless otherwise stated.

Review of the quarter to 30 June 2025

The second quarter of 2025 was marked by sharp geopolitical and policy-driven volatility, yet ultimately delivered strong asset returns. It began with a severe market shock as President Donald Trump announced sweeping reciprocal tariffs, triggering the S&P 500’s fifth-largest two-day decline since World War II and a sharp sell-off in Treasuries. 

However, sentiment recovered swiftly after a 90-day tariff delay was introduced, further buoyed by resilient US labour data and a temporary easing of US-China trade tensions. 

A major geopolitical flashpoint emerged in June with Israeli airstrikes on Iranian nuclear sites, briefly escalating into a wider regional confrontation involving the US. Oil prices spiked sharply before retreating as a ceasefire was quickly reached. Meanwhile, fiscal concerns resurfaced after Moody’s downgraded the US credit rating, adding upward pressure to long-term Treasury yields as the Trump administration pushed ahead with tax reform.

Despite the turbulence, the S&P 500 posted a 10.8% total return for the quarter (in dollar terms), while emerging market equities recorded their strongest performance since late 2020. The Nasdaq and Japan’s Nikkei also saw double-digit gains, while the euro appreciated sharply against the dollar, posting its second-strongest quarterly gain in a decade. The US currency had its worst first-half performance since 1973, falling 7.0% in Q2. Oil markets experienced high volatility but closed the quarter down, with Brent crude falling 9.5%. 

Overall, markets were underpinned by strong economic resilience and expectations for monetary easing, with futures pricing in 67bps of Federal Reserve rate cuts by year-end.

Against this backdrop, the Artemis US Extended Alpha Fund made 6.8% during the quarter, compared with 4.5% from its S&P 500 benchmark and 5.0% from its IA North America peer group average (all in sterling terms). At a sector level, our exposure within consumer staples and healthcare was most additive to relative returns, with financials our largest detractor.

Performance

Contributors

Our top five contributors included three names where we are either underweight (Apple) or have no exposure (UnitedHealth and Berkshire Hathaway). For Apple, the business continues to trade at a lofty valuation (30x) given the growth it delivers. It also sits in the crosshairs of the trade war between the US and China, with a large proportion of its products assembled in the latter country. Finally, it has been slow to spend on, and integrate, artificial intelligence (AI), meaning it is lagging behind other members of the so-called Magnificent Seven.

In terms of names we held, Constellation Energy, Lam Research, and Flutter made a positive contribution to performance.

Constellation Energy, the nuclear power generator, rebounded after an earlier sell-off due to solid results and improving sentiment over the AI theme in general – the feared slowdown in hyperscaler capital expenditure didn’t materialise in results.

Semiconductor equipment company Lam Research performed well, primarily driven by improving end markets in memory.

Online gaming company Flutter is seeing an improvement in sentiment, with more favourable sports results in the second quarter after a tough Q4 and Q1. It also announced a more aggressive mitigation strategy in Illinois, which is trying to raise taxes on online gambling.

The short book was additive to performance during the period, which was encouraging in such a strong market. Of note, shorts in staples, restaurants, IT services, clothing retail and waste management contributed.

Detractors

Financials proved to be the weakest area for the portfolio, with Fiserv, Allstate and Aon performing poorly.

Fiserv, the payments and bank technology provider, reported good numbers and guidance over the quarter, but the shares weakened as one of its key performance indicators spooked the market.

For Allstate, it was more a case of the market rotating out of defensives following the pause in reciprocal tariffs and the rally that followed.

Outside of financials, there was weakness in AbbVie (biotech) and CMS Energy (multi-utilities). AbbVie was affected by Trump’s push to defund research and cut drug pricing. CMS Energy, defensive in nature, was hurt by a rotation towards assets that would benefit more in a risk-on rally.

Activity

Our biggest purchase over the quarter was TransDigm, an aerospace company run in a self-declared ‘private equity’ structure. It supplies critical components to the civil and defence aircraft industry, which are typically designed in for the life of the product – in the world of aerospace, that means decades. For instance, the Boeing 737 (for which TransDigm supplies a range of products including seat locking, cockpit security, ignition systems and fuel pumps), has been in production for more than 50 years in different models, with the existing fleet likely to continue flying for many more decades.

The company supplies products for new planes (original equipment [OE]) as well as aftermarket products for refurbishments. These long-duration cycles provide an attractive backdrop for many aerospace suppliers and especially those with exposure to the typically higher margin after-market side (where TransDigm gets more than half its revenue, helping it generate an enviable 54% EBITDA margin last year).

Sales into the OE, aftermarket and defence markets all appear to be healthy for the coming years. However, OE sales are currently depressed due to the well-flagged production issues at Boeing, which are now alleviating. Aftermarket tends to be relatively steady (pandemics excepted) and the defence orderbook is strengthening due to global conflicts. In summary, this is a high-return, high-quality company with the potential to increase revenue at more than 10% per annum over the coming years, yet it is trading at a discount to its normal sector premium and history. On top of this, there is optionality over capital allocation, given it is under levered versus its target.

We also added Bank of New York Mellon (BNY), a broad financial services business with leading franchises in areas such as custody, clearing and securities services, and with very little credit exposure like normal banks. Under new leadership, which has overhauled the top-level management, it has talked of accelerating organic growth through innovation, cross-selling and frugality. BNY tends to be embedded in long-term critical relationships with its clients and so should be in a good position to add more services to each one.

On a recent trip to the US, we met with several senior leaders at BNY including the head of one of its growth divisions, Pershing, which provides a platform to independent brokers. The cultural shift towards developing new services, increasing the attach rate to existing customers and integrating and embracing AI was evident and, moreover, management is incentivised on this basis.

The stock has started to experience accelerating organic growth (to around 5 to 6%) which is the management team's aspiration, yet Wall Street assumes this will fade back down to 3% or so in the near future. The cost initiatives mean that this level of growth is enough to trigger solid 12 to 15% EPS (earnings per share) growth, which we believe is undervalued at the current P/E of 12x. We see this as a potential long-runway internal improvement story, trading at a discounted valuation and with good downside protection due to being on the same valuation as normal banks, yet having much lower cyclicality. In time it could re-rerate substantially.

On the disposal side, utility PPL had re-rated quite substantially since we invested and hence the risk/reward profile no longer warranted a holding. TransUnion, the credit bureau and information services business, had become a lower conviction holding due to persistently high interest rates delaying its cyclical recovery and increasing signs of competition building in the core credit file business.

Outlook

Pockets of risk are building, with ebullient sentiment displayed across many areas. We can see this in retail flows, high-momentum stocks, high-beta or profitless stocks driving the market as well as recent IPOs coming in hot and rising quickly. Alongside this, market-wide valuations are back to peak levels.

For the economy, the market is brushing off the non-stop rise in US debt levels, accompanied by a near-7% budget deficit, and has firmly accepted the TACO (Trump always chickens out) playbook for the administration in regard to tariffs.

Finally, the impact of the recent tax bill is more mixed than uniformly positive in our view. Corporates are unlikely to see a change to tax rates (it is an extension, not a lowering) while there are cuts to healthcare (Medicaid) and renewables.

On the more positive side, inflation has moderated, the Fed seems to be signalling a path to rate cuts this year, the AI investment boom is continuing unabated and, so far, corporate profits are rising at a decent clip.

At a fund level, we tend to be underexposed to the highest-beta areas on the long side, which we see as a sign of market frothiness. The fund has kept up with the market during this rally due to some good stock selection and a positive contribution from the short book.

Overall, the fund is balanced, with a net position of 0.98. The majority of the long book is held in discounted compounders – some of which have lagged in the recent period – but with strong franchises, secular growth and attractive valuations, look well placed for future gains.

Some of the larger positions include media (discussed above), food distribution (US Foods), online gaming (Flutter), financial services (S&P Global and Mastercard), railroad (Canadian Pacific Railway), drug distribution (Cardinal Health), crop science (Corteva), aerospace (TransDigm and Parker) and electric utilities (NiSource and Constellation). The fund also has a range of depressed cyclical stocks with substantial earnings and valuation potential, including semiconductors (Texas Instruments and Lam Research), life sciences (Danaher and Thermo), capital markets (Jefferies and KKR) and packaging (Smurfit).

In the short book, we retain a broad range of value traps in areas from legacy retail, telecoms, staples, asset management and health services, as well as select 'darlings' (companies with dangerously high valuations and expectations) where we have a negative catalyst, including software, retail and business services. Given our focus on discounted compounders and depressed cyclicals, a broadening of the market away from a small number of high-flyers would likely become a performance tailwind for the fund.