Artemis US Smaller Companies Fund update
Cormac Weldon and Olivia Micklem, managers of the Artemis US Smaller Companies Fund, report on the fund over the quarter to 31 March 2024 and their views on the outlook.
Source for all information: Artemis as at 31 March 2024, unless otherwise stated. The fund’s objective is to grow capital over a five-year period.
The fund returned 16.1% over the quarter, outperforming its benchmark, the Russell 2000 index1, which returned 6.1%, and its second benchmark, the IA North American Smaller Companies sector2, which returned 6.5% (all in sterling terms).
For five-year annualised performance, see below. Please remember that past performance is not a guide to the future.
Despite signs of stress, it was still the view of stockmarkets, and perhaps the Federal Reserve, the US’s central bank, that we will avoid a recession, with the US economy remaining remarkably robust in the face of higher rates. This resilience prompted fears that inflation could remain high, so the stockmarket predicted fewer interest rate cuts this year.
Central banks raise interest rates to help reduce inflation. Higher rates are negative for stockmarkets as they make other assets such as cash and bonds more attractive.
Small caps disappoint relative to their larger peers
So far in 2024, smaller companies have underperformed larger companies.
In terms of sectors, technology once again led the way, with energy coming in second after tensions in the Middle East supported energy prices. Telecommunications proved to be the worst performer.
Fund performs very well
On a relative basis the fund has had one of the best quarters of performance since its inception. The source of this outperformance can almost entirely be attributed to share selection, particularly within our industrials holdings. We have also had notable contributions from the utilities and consumer discretionary (non-essential goods) sectors. Our relatively small positions in the energy sector held back the fund's performance.
However, please bear in mind that all financial investments involve taking risk and the value of your investment may go down as well as up. In addition, the past performance of stockmarkets is not a guide to their future performance.
Trucking continues its strong run
Saia, our ‘less than truckload’ (transporting relatively small amounts of freight) company, has gone from strength to strength. We originally bought in on the prospect of expansion into the northwestern states, as well as building out nationwide coverage. What we have seen since then is the business develop into an almost best-in-class carrier. There has also been a significant restructuring in the industry with the collapse of Yellow (another less-than-truckload carrier), which has allowed Saia to pick up distribution terminals and some of Yellow’s volumes.
Construction and materials holdings continue to perform strongly
Our holdings in Builders FirstSource, TopBuild, Eagle Materials and AZEK all supply materials and parts to the construction industry, in particular to the housing sector. They are experiencing a significant increase in demand for new builds that are being specifically tailored to new household formations. We see this support continuing as the US is currently short of housing and the existing housing stock is ageing.
Other contributors of note
Other top contributors were Constellation Energy (independent power producer), Comfort Systems (specialist contracting services), e.l.f. Beauty (cosmetics), nVent Electric (electrical equipment) and Core & Main (drainage systems).
On the negative side…
Dynatrace, an application monitoring business, suffered over the quarter when it lowered its forecasts for sales. MarketAxess, the electronic trading platform for bonds, also saw a fall in its share price despite reporting strong profits. There were concerns about market share loss in high-yield bonds which is an important market for it. Calix, the telecoms business, reported profits that were ahead of expectations but a more cautious outlook, due to government support for broadband services causing a delay in demand for its appliances.
Activity
We trimmed some positions that have performed well, including Eagle Materials, e.l.f. Beauty, TopBuild, and Clean Harbors. We recycled the proceeds into Hyatt (the hotel chain), Core & Main (the drainage supplier) and Jones Lang Lasalle (the real estate broker). We also bought Shockwave Medical, a medical device company. Its share price had fallen in 2023 and we saw it as an attractive entry point for a business where there is a significant revenue growth opportunity.
Outlook
After a strong period of relative and absolute performance, we are sometimes asked whether the opportunity remains the same both for smaller companies in general and for the fund. Smaller companies' valuation discount relative to larger companies is a well-known phenomenon and remains intact. For the fund, we are not struggling to find opportunities, in fact quite the opposite. We are seeing a range of sectors still trading at depressed levels and we see many companies with unique drivers to their growth that we believe will persist.
2IA North American Smaller Companies NR. A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. 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.
| Annualised performance 12 months to 31 March | 2024 | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|---|
| Artemis US Smaller Companies Fund | 32.6% | -15.7% | 1.4% | 69.1% | -9.8% |
| Russell 2000 TR GBP | 17.2% | -5.9% | -1.3% | 75.1% | -20.1% |
| IA North American Smaller Companies NR | 18.0% | -7.4% | 1.8% | 73.5% | -13.4% |