Artemis Positive Future Fund update

Review of the quarter to 30 June 2023

• During the quarter, we published the fund’s annual Impact Report, which analyses and measures the (positive) impact our holdings are making.
• In a market led higher by a handful of mega-cap technology stocks, our pronounced bias towards mid-caps weighed on relative returns.
• Recent multi-billion-dollar legal settlements have highlighted the financial opportunity for companies with the expertise needed to clean up PFAs (so-called ‘forever chemicals’).

Impact

During the quarter, we published the Artemis Positive Future strategy’s 2022 Impact Report. It demonstrates the ‘real-world’ impact our investments made in 2022 on a range of measures, from reduced emissions and cleaner water, through to better health and wider access to education.

You can read the full report (including independent, third-party quantification of strategy’s impact from the Upright Project) on our website, but the headline findings are that, for each £1 million pounds invested in our fund :

• 1,100 tonnes of carbon dioxide emissions were saved, avoided or captured.
• 40,000 litres of water were treated, saved or re-used.
• 450,000 beverage containers were recycled.

In addition to the top-down view these headline impact statistics provide, this year’s report also explains how every company in our portfolio is contributing to building a positive future by providing a detailed appraisal of its impact, ESG performance and investment thesis.

The fund fell by 1.6% over the quarter…

… and so lagged a return of 3.3% from the benchmark MSCI AC World Index. In part, this was because a narrow group of mega-caps had an outsized influence on US market returns, with Nvidia, Meta, Apple and Microsoft outperforming significantly.

In addition, a number of style factors, most notably the significant underperformance of US small- and mid-caps, represented a significant headwind for our portfolio relative to the index and the peer group.

Strong returns from companies that can address pollution by ‘forever chemicals’.

We have written about the emerging pollution problem associated with PFAs (so-called ‘forever chemicals’) in Positive Sum, our impact investing blog (see The problem with PFAs for more details). During the quarter, two multi-billion-dollar legal settlements relating to contamination of drinking water by the manufacturers of PFAs drew fresh attention to the problem. DuPont, Chemours and Corteva came to a $1.85bn settlement; 3M reached a $10.3billion settlement. Both settlements related to just one application of PFAs: fire suppressants.

We believe this highlights the scale of the opportunity for PFA-remediation specialists such as Montrose Environmental Group, whose shares moved 15% higher in sterling terms on the quarter. Shares in engineering company Tetra Tech, which is also active in PFA clean up, ended the quarter 8% higher after it secured a large order from the US Army Corps of Engineers.

DISCO and Aehr Test Systems performed well.

Japan’s DISCO, whose tools and consumables are used for cutting, grinding and polishing semiconductors, returned 32% in sterling terms and made the single largest contribution to returns over the quarter. In part, that was a result of AI-related enthusiasm for semiconductor names and signs that consumer semiconductor market was bottoming out. Aehr Test, which makes equipment for testing a new generation of silicon carbide-based semiconductors, was also helped by increased appetite for semiconductor-related names and by strength in demand for electric vehicles.

Set against that, our renewable energy-related stocks saw (short-term) weakness.

Lower electricity prices and excess supply of solar panels from China weighed on the European market and on the share prices of some of our clean-energy related holdings including First Solar (down 15% in sterling terms) and SolarEdge (down 14%).

Earnings guidance from Alfen (down 18%) came in towards the low end of expectations due, in part, to a temporary slowdown in its EV charging business, which posed a (short-term) challenge to its valuation.

We established a new position in Motorola Solutions.

Motorola is the global leader in public safety systems and enterprise security solutions. Its land mobile radio network (LMR) offers a failsafe communication network for first responders during emergencies. Those systems are difficult to replicate or replace, giving Motorola a natural monopoly. Its long-term contracts with the US Federal government underpin its free cashflows, giving it capital to invest in reinforcing its position in the public-safety space.

We also added a new holding in Valmont.

Weather-related events are responsible for around 78% of major power outages in the US power system. Grid failures have huge social impacts, e.g. lack of access to potable water which fall most on low-income, uninsured individuals. Meanwhile, connecting renewables to the grid will be critical if the full potential of the Inflation Reduction Act (IRA) is to be realised. A 60% increase in transmission capacity will be required by 2030 to support clean energy development. US-listed Valmont is well-placed to profit; 40% of its sales are derived from electricity-grid infrastructure products. It is also seeing growing demand for its precision irrigation equipment and associated technologies in both the US and overseas (30% of sales).

We sold our holdings in Tesla, Vitasoy and STAAR Surgical.

Tesla was a beneficiary of a rally in consumer discretionary areas and AI-related speculation had created a valuation challenge. This, combined with the long-term risks to Tesla’s brand posed by Elon Musk’s increasingly erratic pronouncements, resulted in a full sale.

In the case of Vitasoy, results highlighted that its attempts to re-capturing lost market share in China are probably going to be a longer-term challenge than had been anticipated. We also sold Staar Surgical, the launch of whose implantable lens product in the US is now expected to be more challenging than previously expected, leading to higher sales and marketing costs – and slower revenue growth – over the coming quarters.