Artemis US Smaller Companies Fund update

Source for all information: Artemis as at 31 March 2025, unless otherwise stated. 

Fund objective

The fund’s objective is to grow capital over a five-year period. 

Performance 

The fund lost 18.4% over the quarter, underperforming its benchmark the Russell 2000 index¹, which lost 12.2%, and its second benchmark, the IA North American Smaller Companies sector², which lost 13.2% (all in sterling terms). 

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

Market review

In the year so far, US shares have largely been affected by two forces: tariffs (a tax on imports, which we will address in detail in the Outlook section) and the introduction of Chinese AI (artificial intelligence) company DeepSeek.

Some of the largest US companies were expected to benefit most from AI, meaning their shares also fell the most after the January arrival of DeepSeek, which announced it had created an efficient and complex AI programme using cheaper and less advanced equipment than its competitors³.

This led to a belief that US companies would cut their spending on AI, so many investors sold out of this area. However, we felt this was misguided as there was no hard evidence of a reduction in spending.

Comfort Systems represents a good example of why we felt this view was wrong. We added to the company after the share price fell early in the year. Comfort Systems is a supplier of skilled labour, which is in particularly high demand at present as US President Donald Trump’s immigration policies are narrowing available supply. Also, the company’s ability to build data centres (buildings that house computing systems) should mean that it stands to benefit from Trump’s aim to invest in the US. We therefore think that the huge decline in the company’s share price since January seems unwarranted.

When it comes to our fund, our shares in industrial companies proved to be the most damaging to performance during the quarter, followed by those in financial companies. This is because both sectors are reliant on a more predictable outlook for the economy. We have therefore continued to move towards buying shares that carry less risk.

We recognise that we were too optimistic in buying shares in companies that we thought would benefit from economic growth, so we have since reduced exposure to this area.

Negatives

Shares in global investment bank and financial services company Jefferies fell significantly during the quarter. However, we believe the US financial services sector should receive a boost from Trump’s deregulation policies and a potential increase in M&A (merger & acquisition) activity in the next few years.

Boot Barn is a retail chain specialising in Western and work-related apparel, including cowboy boots, jeans and outdoor gear. It caters to both rural and suburban consumers, with a strong presence in the American west and south. The business was particularly hard hit by the reaction to Trump’s tariffs because of the drop in consumer confidence, but we continue to believe in the company and added to our holding while the shares were trading at a lower price.

Equipment rental business Herc fell after it announced the planned purchase of its smaller rival H&E. We actually think this makes good business sense, but we sold out due to concerns about Herc’s debt levels⁴.

We bought luxury home furnishings company Restoration Hardware on the belief that consumers of luxury goods would spend more under Trump’s presidency. However, we decided to sell out after consumer confidence began to deteriorate. This proved to be the right call, with the company’s shares falling significantly after it made a pessimistic prediction about this year’s profits.

Positives

Palomar Holdings is a specialty insurance company that uses data to set prices for niche events underserved by the major providers, such as earthquakes, hurricanes and floods. It published a strong set of financial results during the middle of the quarter, beating profit estimates.

Another specialty insurance firm, Ryan Specialty, also made a positive contribution to the fund’s performance. This recent addition to the portfolio acts as a wholesale broker helping retail brokers access specialty insurance products for complex or hard-to-place risks.

Although Planet Fitness fell, it made a positive contribution to performance in relative terms. Shares in the fitness centre franchise, one of the largest in the US, held up relatively well, in part thanks to the new management team, which plans to increase the number of gyms across the US.

Activity

Before Trump’s ‘Liberation Day’ tariff announcements, we reduced our exposure to consumer businesses that are significant importers from Asian countries. This included our sale of product design and technology company SharkNinja and luxury home furnishings company Restoration Hardware.

We also reduced our position in trucking company Saia, cement producer Eagle Materials and investment bank Jefferies due to their sensitivity to the US economy.

We also increased protection for the portfolio by adding to service providers which we think will be less affected by Trump’s tariffs. We therefore added to Planet Fitness, Palomar Holdings and financial services provider CBIZ.

Outlook

Just after the end of the first quarter came a series of monumental announcements by President Trump about tariffs. Those few days at the start of April will likely live in investors’ memories for some time. We believe that Trump is serious about implementing tariffs as a way of generating revenue for tax cuts. This is important because it suggests that despite his temporary pause, he is unlikely to completely change his mind, meaning tariffs are probably here to stay.

Recent weeks have been especially painful for larger US companies because they tend to have supply chains that are spread across a wider range of countries and receive more of their revenue from outside the US, making them more exposed to the effects of a trade war.

Yet smaller companies in the US are perceived to be more sensitive to the domestic economy given they get more of their revenues from the US itself.

The tariffs have led to lower predictions for economic growth, while US consumers are expected to have to pay higher prices for products. Businesses are not spending as much either, due to a lack of certainty about the result of Trump’s policies.

Since the announcement of the tariffs, investors have therefore been selling out of companies that are reliant on a robust US economy and investing in areas that are deemed to be safer.

Energy companies, technology companies and consumer discretionary (non-essential but desirable goods and services) businesses suffered the worst share price declines. However, sectors such as utilities and consumer staples (everyday consumer goods) have held up slightly better.

It is almost impossible to predict what could occur over the next weeks and months, but in the short term we think it sensible to take a more cautious approach until things become clearer. We have therefore adjusted the portfolio in light of this more uncertain outlook for the US, reducing exposure to companies whose profits are more sensitive to changes in the economy. We have instead invested in companies that are more likely to offer predictable returns and plan to take advantage of falling share prices where we have a high conviction in the company.