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

Main changes to the fund

• Early in the period we started to add to ‘early cyclical’ areas where we thought recession was already priced in. Examples included Burlington Stores (off price retail), Restoration Hardware (home furnishings), Azek (composite decking) and Ferguson (distributor). Later we added Topbuild (insulation).
• We made some changes to our healthcare positioning, selling out of Zoetis and Pfizer where we struggle to make the case for an attractive risk/reward and instead initiating a position in Avantor. Avantor is a leading life sciences distribution business with highly recurring revenues and a good growth outlook backed by a large exposure to biopharma.
• Short ideas included companies that we think are still significantly over earning compared to pre 2020 but also a number of industrial and consumer cyclicals where the share prices were not reflecting the reality of falling activity levels.

Explaining the fund’s performance

• The fund returned 6.7%, behind the S&P 500’s return of 8.6%¹. Among the 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. Our other holding in the banking sector, Wells Fargo, also saw its share price weaken.
• Nvidia: Nvidia underweight dampened returns in 2023 as the market rotated out of banks and into technology shares. We established a position in Nvidia to correct this.
• Constellation Energy: Underperformed due 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).

The wider context

• 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.

Looking ahead

• The economic backdrop is one of increased risk and uncertainty, but one we believe offers substantial opportunity. We have positioned the fund for the economic slowdown to continue working its way through the economy from early to late cycle sectors. This positioning has started to pay off but we believe there is further to go. The majority of the fund on the long side is invested in discounted compounders. These are secular growth companies with relatively low economic sensitivity. The overall positioning of the fund is moderately defensive with an overall net exposure of 97%.