Artemis US Select Fund update

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

The fund’s objective is to grow capital over a five-year period. The Artemis US Select Fund made 2.4% during the quarter, underperforming its first benchmark, the S&P 500 index¹, which made 4.2%, but outperforming its second benchmark, the Investment Association North America sector average², which made 2.0%. Year to date the fund has returned 20.1%, well ahead of the 16.3% made by the S&P 500 and 12.9% from its sector.  

For full five-year discrete performance, please see below. Please remember that past performance is not a guide to the future.

The quarter started with a degree of fear around inflation in the US and its persistence, with March data showing the third consecutive month of 0.4% growth in core CPI (the consumer price index excluding food and energy). We also saw an increase in manufacturing activity and robust jobs growth, forcing the US’s central bank, the Federal Reserve, to delay the prospect of interest rate cuts to later in the year. Lower interest rates are generally good for stockmarkets as they make other financial assets such as government bonds and cash savings accounts look less attractive.

May proved to be a more supportive month. Chair of the Federal Reserve Jerome Powell dismissed the notion that further interest rate hikes were on the table, while core CPI came in lower.

There was also some easing in the situation in the Middle East, which calmed markets to a degree. June ushered in a series of interest rate cuts by other central banks, namely the European Central Bank and the Bank of Canada. While the Federal Reserve stood firm, the market became confident that there would be one interest rate cut before year end. This notion was given further support when CPI came in at its slowest growth rate since August 2021.

A common theme over the past year has been how dominant the US stockmarket’s largest constituents have been and there was no change during the second quarter.

The S&P 500 significantly outperformed the equal-weighted version (whereby an equal amount of money is invested in the shares of each company) of the index. There was a great deal of variation in sectors, with technology leading the way, up 13.8%, followed by communication services (up 9.4%) and utilities (up 4.7%). The laggards were materials (down 4.5%) and industrials (down 2.9%).

Nvidia rules supreme… again

Chip designer Nvidia started the quarter with a total value of $2.3 trillion and ended it at $3.1 trillion. That is the equivalent of an addition of a company the size of Tesla or – for UK investors – the equivalent of the five largest companies in the FTSE 100. In our view, the staggering rise to date has been justified. Nvidia finds itself in a unique situation in that it is the only company that can supply the means to develop artificial intelligence (AI) models.

Meanwhile, its customers are the largest and most cash-generative companies in the world, all of which have prioritised making their own AI tools. We have had an overweight (above average) position in Nvidia since the second quarter of 2023 and it stands as our top contributor over the past year. While our estimates for Nvidia's profits were well ahead of the consensus for some time, we are now becoming more wary of the level of optimism towards the company, leading us to be more cautious.

The ‘Nvidia multiplier effect’

Among our other top contributors were a series of businesses that we identified as key beneficiaries of the demand for AI infrastructure. Coherent supplies high-speed network cabling and lasers, allowing computers that sit in data centres to be connected and run at maximum capacity. Micron and Western Digital supply memory chips that again are integral for the memory-intensive task of training large language models.

The detractors

Among our holdings that detracted from performance were companies whose shares did poorly even though the underlying businesses did well, including Builders FirstSource and less-than-truckload (small-freight transportation) company Saia. In both cases, the companies have attractive prospects, so we continue to hold them. Underweights (below-average positions) in Apple and Alphabet also detracted from performance, though we have since increased our positions, partly because of the opportunities we see in AI.

Transactions

We added to our healthcare exposure, buying Elevance Health and Stryker.

To fund these purchases, we trimmed our positions in Meta and Nvidia following strong share price performance, which resulted in a lower risk/reward trade-off. We also sold out of our holding in potato-products supplier Lamb Weston on a lack of conviction that the business could recover following a first-quarter error in its enterprise resource planning system.

Outlook

It has been an extremely strong year so far for markets and for the fund, propelled by enthusiasm for AI and the prospect of a soft landing (a fall in interest rates without a recession). So where does this leave markets for the second half of the year? One might expect that returns will broaden out from the dominance of the so called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), which would benefit the rest of the S&P 500.

We are, however, not waiting around for this movement. There is a breadth of opportunity in a variety of sectors that are displaying the asymmetric risk/reward that underpins our investment process. We are also seeing opportunity within the largest index constituents as their underlying businesses continue to deliver robust growth.