Artemis SmartGARP Global Emerging Markets Equity Fund update

Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity Fund, reports on the fund over the quarter to 30 June 2024.

Raheel Altaf

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

  • Emerging market stocks remain cheap and unloved, with abundant growth and income opportunities
  • Value bias in the fund remains substantial, 37% discount to MSCI EM…
  • …with favourable quality and growth characteristics compared to the market
12m forward P/E ROE1 Dividend yield
Fund 7.7x 14.9% 5.1%
Benchmark 12.3x 14.4% 2.9%
Relative -37% 0.6% 78%
Source: Artemis, Bloomberg, MSCI as at 30 June 2024. ROE is a blend of 3-year trailing and 2-year forward.

Performance – upturn in emerging markets on improving sentiment

Optimism around easing of monetary policy and encouraging economic data from around the world were supportive tailwinds for stocks. With diminishing signs of recessionary concerns, particularly in the US, risk appetite seems to have picked up. Economic data continues to improve, against a backdrop of benign inflation.

Technology and cyclical areas of the market led, as traditional defensives such as healthcare and consumer staples lagged.

Shareholder reforms in Korea and China aimed to emulate Japan’s success at improving capital management and companies manufacturing component parts for AI surged. Improved sentiment is supportive to EM, given the pessimism reflected in investor positioning.

  • Q2 relative performance +4.2%. Fund +9.1% vs MSCI EM 4.9% (in GBP)
  • YTD relative performance +7.3%. Fund +16.3% vs MSCI EM +8.4% (in GBP) 
  • Performance in top decile vs IA GEM sector for one, three and five years and no.1 fund in sector since launch (April 2015)

Three months Six months One year Three years  Since launch*
Artemis SmartGARP Global Emerging Markets Equity Fund 9.1% 16.3% 24.3% 25.9% 110.4%
MSCI EM NR GBP 4.9% 8.4% 13.2% -6.5% 57.4%
IA Global Emerging Markets NR 4.1% 7.5% 11.6% -5.8% 63.0%

Past performance is not a guide to the future. Source: Lipper Limited from *8 April 2015 to 30 June 2024. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. This class may have charges or a hedging approach different from those in the IA sector benchmark. 

Attribution – favourable tailwinds for our holdings

A diverse group of companies contributed to performance in the quarter, reflecting several positive tailwinds developing across our holdings. Top contributors in the second quarter were:

  • Amara Raja (batteries)
  • Cosco Shipping (transportation)
  • Indus Towers (telecoms)
  • CNOOC (energy)
  • Coca Cola Icecek (beverages)

AI-themed stocks in Taiwan also performed well – our holdings in Wiwynn and Hon Hai featured amongst top contributors.

On the negative side, weaker sentiment towards Brazil was a drag. Softer commodity prices created headwinds to our positions in the sector, with Lao Feng Xiang and Usiminas amongst detractors. Despite the setbacks, the fund delivered strong outperformance in the quarter.

Activity – continue to rotate towards cyclicals, adding to industrials

As manufacturing data continues to signal a broad recovery in Asia, the corporate newsflow for more cyclical areas of the market has also been improving. Asia has beneficiaries amongst commodities and supply chain winners to the AI theme. We selectively rotated towards the opportunities during the quarter, funding them with sales where fundamental prospects have diminished.

Additions

  • China recovery – Tencent, Jiangxi Copper, Shenzhen New Energy (renewables), Cosco Shipping
  • Pharmaceuticals – Richter (Hungary, drug producer)

Reductions

  • China rotation – Alibaba, PICC, Netease and Lao Feng Xiang

The result of these changes is that the fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. We remain overweight China, Brazil and Korea and underweight India, Taiwan and Saudi Arabia. At the sector level, financials, consumer discretionary and industrials feature as the largest overweights. Materials, technology and consumer staples the largest underweights.

We remain positioned for a rotation into value stocks

The fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. The fund is trading around book value, and it offers a forward P/E of 7.7 vs 12.3 for the index (37% discount).

To put this valuation into context, the fund trades on half the valuation of developed markets (2x book value) and a third of US stocks (3x book value).

We think our discipline around valuations is likely to be a rewarding strategy as we progress through 2024 and for the years ahead. Typically, significant exposure to value stocks coincides with distressed balance sheets and volatile earnings.

This doesn’t appear to be the case today, the fund offers favourable quality and growth characteristics. For instance, our net debt/EBITDA is low, and our free cash flow yield is much higher than the market. We can achieve these compelling financial characteristics because of some behavioural biases that have caused over valuations in some parts of the market, leaving others under appreciated.

EM – Pessimism well reflected in prices; cyclical upturn presents opportunity

There are many reasons for poor sentiment towards EM today. The Chinese economic recovery has so far been underwhelming. Geopolitics creates uncertainty: election results in India, Mexico and South Africa could signal policy changes and the US election looms.

On the positive side, potential for stimulus measures and reasonable levels of interest rates offer support. Chinese stocks have struggled for over a decade and their share prices are well reflective of the risks highlighted. Positive catalysts such as reforms and growth initiatives have the potential to surprise investors. More broadly, EM stocks are trading on multi-decade valuation lows against developed markets across a range of metrics.

When times are bad, risk aversion can lead to indiscriminate selling. We believe this creates opportunities for disciplined investors and our process has been designed to look for the companies where the fundamentals are signalling good news, yet share prices are not reflecting this optimism.

Our focus on fundamentals continues

We continue to believe that a focus on companies’ fundamentals, such as earnings and cash flow growth, combined with a strict discipline around valuations, offers the best way to navigate markets in the months ahead. Despite the last three years being very disappointing for passive EM investors, there has been no shortage of companies performing well. The compelling financial characteristics of our fund give us confidence that regardless of the direction markets take, we can continue to deliver good outcomes.

Benchmarks: MSCI EM NR GBP; A widely-used indicator of the performance of emerging markets stockmarkets, in which the fund invests. IA Global Emerging Markets NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. These benchmarks act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.

Raheel Altaf

Manages:

‘Global emerging markets equity‘, 'Global equity' strategies

Raheel joined Artemis in 2014 and has managed Artemis‘ ‘global emerging markets equity‘ and ‘global equity’ strategies since launch in April 2015 and since April 2022, respectively.

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