Artemis Funds (Lux) – US Select fund review of the year to 30 April 2023

Main changes to the fund

• We reduced some of our defensive holdings which had performed well and were trading at historically rich valuations. Specifically we sold our holding in Coca-Cola and use the proceeds to buy other defensive stocks which we believe offered greater risk reward, such as pharmaceutical company Merck and IT consulting company Gartner.

• We added semiconductor exposure, increasing our position in Advanced Micro Devices, who we believe are likely to continue to gain share in the key data centre market at the expense of Intel. We started a new position in Lam Research, who we believe should be a key beneficiary of long-term increases in semiconductor manufacturing. We also added Nvidia, the global leader in artificial intelligence computing.

• We reduced our positions in Darling Ingredients and Willis Towers Watson, two very different companies, for the same reason: operational performance was worse than we expected.

Explaining the fund’s performance

• The fund returned 2.5% over the period, behind the S&P 500 index’s return of 8.6%[1].
• The failure of Silicon Valley Bank at the start of March led to fears of contagion to the rest of the banking sector and a deposit run on other smaller banks. The situation with the banks led to a marked rotation in the market out of financials and into technology shares. The three biggest detractors from performance were:

• First Republic: When Silicon Valley Bank started to experience problems, the market focused on other banks with uninsured deposits. We sold First Republic, but the share price had already suffered.
• Constellation Energy: our largest position underperformed. This was exclusively down to profit-taking after the stock performed very well last year. We remain very optimistic about the long-term prospects for Constellation, as it should benefit from the Inflation Reduction Act (IRA). We used the share price weakness to add to our position. We believe the opportunities which will arise from the IRA will emerge in the medium and long term and so the portfolio is positioned accordingly.
• Nvidia: Nvidia underweight dampened returns YTD as the market rotated out of banks and into technology shares. We established a position in Nvidia to correct this.

The wider context

• The impact of Covid has been to produce recessionary conditions in a number of sectors of the economy, without a recession actually incurring. We would include consumer durables, social media, parts of healthcare, semiconductors and transportation as examples of sectors most of whom experienced a boom during lockdown and are now experiencing in some cases severe slowdown. In addition we have obviously seen quite severe valuation compression in growth stocks no longer buoyed by zero interest rates. We think these dynamics have produced exceptional opportunities.

Looking ahead

• We do not believe interest rates will return to the extreme lows of the pandemic era. As such, companies that can demonstrate growth, while also generating healthy cashflow and earnings should be able to beat the market. We believe this will benefit our portfolio’s bias to quality stocks – those with predictable, growing earnings and high free cashflows.