Artemis Global Income Fund update

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

The fund’s objective is to grow both income and capital over a five-year period. Over the quarter to 31 March 2024, it outperformed the market and its peers, with strong returns from our holdings in the shares of financial and industrial companies seeing the fund returning 15.8%.

Over the same period, MSCI AC World NR showed a 9.2% return. (This is a widely used indicator of the performance of global stockmarkets, in which the fund invests. It acts as a ’comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by this benchmark.)

The fund’s second comparator benchmark, IA Global Equity Income NR, showed an average return of 6.2%. (This is a group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. It also acts as a ’comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by this benchmark.)

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

The quarter’s biggest positives

Our investments in defence companies continue to deliver

Rheinmetall and Mitsubishi Heavy Industries gained 79% and 66% respectively over the quarter. In February, the German chancellor and Danish prime minister accompanied Rheinmetall’s chief executive to a foundation-laying ceremony for a new ammunition plant in Germany.

After a long period of underinvestment in its military capacity, Rheinmetall’s CEO suggested that Europe will not be in a position to fully defend itself against an aggressor for another decade1. The investment that will be needed to address this shortfall and restore badly depleted stockpiles of ammunition should keep Europe’s defence companies busy for years to come.

A holding in building materials group CRH returned 27% on the quarter

CRH is just one of several companies in the fund benefiting from the boom in US manufacturing. In a presentation accompanying its results, the company noted “robust infrastructure activity underpinned by a historic increase in government funding” and looked ahead to what it describes as “a golden age for construction”.

Financial stocks made a useful contribution to returns

Our European bank stocks rallied strongly over the quarter, with BBVA the standout performer. Its shares rose by more than 32% as the rapid growth of its business in Latin America continued².

The quarter’s biggest negatives

The fund’s lack of exposure to mega-cap technology stocks was a negative

In what was an overwhelmingly positive quarter, that the fund doesn’t invest in some of the largest US technology companies such as Nvidia (up 84%) and Meta (up 39%) was the biggest negative for its relative performance. As a reminder, given their modest (or non-existent) dividends, most of these companies are not natural investments for a fund designed to deliver income.

Food producer Archer Daniels Midland came under pressure, but we retain the holding

The main negative among the companies the fund does invest in was US food producer Archer Daniels Midland (down 12%). It postponed a scheduled update to investors due to a probe into accounting practices in its nutrition division. The shares fell sharply in response. Towards the end of the quarter, however, the shares rallied sharply as the company confirmed that the issue was relatively minor and did not pose any systemic threat. News of an 11% increase in its dividend was also welcomed³.

Changes to the fund

We added a number of new holdings in Japan to the portfolio during the quarter.

Japanese companies now account for 19% of the fund. To generalise, Japanese companies are cash rich but have not always put the interests of their shareholders first. Historically, they have often had ‘cross shareholdings’ – an arrangement whereby Japanese companies own shares in each other – to help shield one another from hostile takeovers. The suspicion is that this has resulted in a degree of management complacency. But this is starting to change.

We believe ongoing reforms, including the pressure the Japanese stock exchange is placing on listed companies to improve their financial performance, could help underpin returns from our investments here. One new holding for the fund this quarter was in Nissan, which is in the process of unwinding its complex cross shareholdings with Renault⁴.

We added holdings in two gold mining companies to the portfolio.

Gold prices have risen sharply this year to all-time highs⁵, but the share prices of gold miners such as Newmont and Kinross have lagged the gains in the price of the commodity they produce due to rising costs and problems in their supply chains. We believe these pressures are now easing.

Outlook

We struggle to reconcile the strength of the US economy and lingering inflationary pressures with the widely held belief that we are about to see significant cuts in interest rates. In fact, the US economy may be at greater risk of overheating – especially given the vast scale of the ongoing investment by the US federal government in manufacturing – than it is of falling into recession.

Our approach remains the same: we continue to look away from the ‘usual suspects’ (the shares held by many global funds) and instead focus on unpopular areas of the global market that have attracted little investor attention in recent years. As a result, our fund has relatively little in common with other global funds. When we compare our portfolio with those of the 15 largest funds in the IA Global Equity Income peer group, the average overlap is just 7%⁶.