Artemis SmartGARP European Equity quarterly review, December 2023
Philip Wolstencroft and Peter Saacke, managers of the Artemis SmartGARP European Equity Fund, report on the fund over the quarter to 31 December 2023.
Source for all information: Artemis as at 31 December 2023, unless otherwise stated.
Fund objective
The fund’s objective is to grow capital over a five-year period.
Performance
The fund returned 2.5% in the fourth quarter, behind its FTSE World Europe ex UK benchmark1 which made 7.6%. This was also behind its second benchmark, the IA’s Europe ex-UK2 sector, which was up 8.1%.
For full five-year discrete performance, please see below. Please remember that past performance is not a guide to the future.
Share price returns are broadly correlated with business performance. Companies that are profitable and grow deliver great returns, while companies without these characteristics will deliver lousy ones. We spend our time making sure that your fund owns the former.
In the past decade, the income plus earnings per share (EPS – a key measure of profitability) growth for the European market has compounded at about 8% a year, compared with total returns of 8.3% – which broadly makes sense. The income plus EPS for our fund compounded at 12.4% (after fees), while returns have been closer to 7% a year, which seems too low.
The fund has done well, but not as well as it deserves given the performance of the underlying businesses it holds. These divergences tend not to last forever – either share prices rise sharply or business performance deteriorates. Our focus on improving companies means the former scenario is more likely. This has been the case for most of the past three years when the fund has done well.
In the past quarter, optimism broke out in the wider market and investors sold growing companies with low valuations to find some room for expensive companies that had fallen in the previous year.
Top contributors to performance were:
- Austria’s Raiffeisen Bank
- Swiss food & beverage company Nestlé and French pharmaceutical Sanofi, which we don’t own
- Car maker Stellantis
The biggest negatives for performance were:
- Travel company Betsson
- Spanish energy company Repsol
- Insurer SCOR
- French car maker Renault
- Turkish bank Türkiye İş Bankası
Activity
Betsson, Repsol, SCOR, Türkiye İş Bankası and Renault trade on an average prospective price-to-earnings (P/E – a key measure of valuation) ratio of 4.1, which is less than a third of the European market at 13. Yet they have recently upgraded profit forecasts and the underlying businesses outperformed the market over the previous year.
Our inclination was to treat their poor total returns as unwarranted as the underlying businesses continue to do well. If this performance starts to deteriorate, we sell; if not, we sit tight. As a result, the shares mentioned above still feature prominently in the portfolio.
We bought the following companies, which have received analyst upgrades following strong trading updates, yet remain cheap:
- Italian energy producer Enel
- French engineer Bouygues
- Dutch investment company Prosus
We sold the following companies, where growth appears to be slowing and analysts have cut profit forecasts:
- French/Italian semiconductor company STMicroelectronics
- German car maker Mercedes-Benz
- French glass maker Verallia
Outlook
Markets have a habit of extrapolating recent trends and assuming they will go on forever. In the past decade or so, share prices have exaggerated these trends by more than is typical and so the range of valuations has become extreme.
US technology shares have delivered high EPS growth, but even higher total returns, so P/E ratios have expanded. This means any reversal in profit trends is likely to be met with violent share price reactions. Investors had started to worry about this problem in 2022, but seemed to have forgotten about it by the last quarter of 2023. This provides (albeit uncomfortable) opportunities for active investors like us.
Whereas US technology companies have seen P/E multiples rise as share prices have outpaced EPS, our fund has seen P/E multiples shrink despite strong EPS growth. As such, I believe that our future long-term total returns are likely to be significantly higher than those of many other funds and markets. The combination of high growth and healthy income generation is a good predictor of future returns, helping to explain why I remain so positive.
| Discrete performance 12 months to 31 December | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| Artemis SmartGARP European Equity Fund, class I accumulation GBP | -15.1% | 2.0% | 19.5% | -5.6% | 21.2% |
| FTSE World Europe ex UK TR | -15.7% | -7.0% | 17.4% | 8.6% | 20.4% |
| IA Europe Excluding UK NR | -13.5% | -9.2% | 15.7% | 10.7% | 20.1% |
2IA Europe Excluding UK 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.
Market volatility risk
The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
Currency risk
The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
THIS IS A MARKETING COMMUNICATION. BEFORE MAKING ANY FINAL INVESTMENT DECISIONS, REFER TO THE FUND PROSPECTUS, AVAILABLE IN ENGLISH, AND KIID/KID, AVAILABLE IN ENGLISH AND IN YOUR LOCAL LANGUAGE DEPENDING ON LOCAL COUNTRY REGISTRATION, FROM WWW.ARTEMISFUNDS.COM OR WWW.FUNDINFO.COM.
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Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.
Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.
For information on sustainability-related aspects of a fund, visit www.artemisfunds.com.