Artemis Strategic Assets Fund update
David Hollis, manager of the Artemis Strategic Assets Fund, reports on the fund over the quarter to 30 September 2023 and his views on the outlook.
Review of the quarter to 30 September 2023
It was a disappointing quarter for financial markets, with the majority of assets that we track ending the month in negative territory. Equities were weak, with the Nasdaq and S&P 500 both down more than 3% and, while emerging market and European equities outperformed, they were down in absolute terms.
Market Direction Models (MDMs) saw a significant deterioration in the outlook for bond markets relative to equity markets, with yields across the globe moving to multi-year highs: in the US, the 10-year Treasury yield ended the quarter up +73.5bps at 4.57%. Yields moved up across the curve, but there was a significant amount of steepening, which our MDMs indicate is likely to continue in both the US and Europe.
A key driver of market weakness was the increased conviction that central banks globally would keep rates higher for longer, a view enhanced by the sharp rise in the oil price, up $20 a barrel. On the plus side, this meant commodities were a bright spot, but high energy prices further depressed sentiment, which was already weakened by concerns over consumer resilience and a potential US government shutdown. Our MDMs suggest the outperformance of defensives versus cyclicals.
Performance
The volatility and lack of direction in markets continues to prove challenging from an absolute performance perspective, with the fund declining -0.9% during the quarter, behind its IA Flexible Investment sector's return of -0.1% and the target (CPI +3%) of 0.4%. The fund’s disappointing performance was driven by a -0.8% fall in September. Year to date, the fund is up 3.6%, behind the performance target of 5.3%, but ahead of the 2.2% rise from its sector.
Our European steepener position – which benefits from a widening spread between short- and long-term yields – was the standout positive contributor over the quarter, but gave back some performance late in the period and hit our stop loss. We re-established the position late in the month and initiated a similar position in the US. Our models are supportive of such positions and we feel they offer good asymmetry.
Now that quantitative easing has switched to quantitative tightening, the term premium should be restored, resulting in longer-term yields rising more than shorter-term ones. Should the US enter recession, ordinarily the yield curve ‘bear steepens’ as short-term rates are cut to stimulate the economy.
The gains from our European steepener were offset by negative returns from our equity positions, notably European sector trades and the long European equities versus short UK equities position. Relative shorts in US and European energy represented a headwind as the oil price rose, leading us to close both positions as they hit our stop loss. The shorts in financials and long in European telecoms also detracted from performance. Both positions hit our downside target and we cut them entirely – in line with our strict stop-loss policy.
Outlook
The market environment remains volatile. While inflation is falling on a year-on-year basis, the recent rise in the oil price has led markets to anticipate higher rates for longer and should the Federal Reserve continue to reduce the size of its balance sheet, this will only add to the effect. All of this means curves should continue steepening, especially in Europe.
Sentiment surveys indicate activity in the US manufacturing sector is already weak, but the services sector is holding up well. This means that company earnings may not fall significantly, and equity markets could even appreciate, but not until we have a clearer signal that the Federal Reserve has finished hiking rates.
In Europe, the picture is even worse due to the sensitivity to China and the growing risk of stagflation.
The tightening of monetary policy tends to take 12 to 18 months before its impact is felt on the economy, which is probably why US data has been so robust up until now. Should this start to deteriorate, we expect credit spreads to begin widening and equity markets to come under pressure. This may happen earlier in Europe and would represent an opportunity to take long positions in Bunds
Source: Lipper Limited/Artemis from 30 June to 30 September for class I accumulation GBP.
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.
Classes may have charges or a hedging approach different from those in the IA sector benchmark.
Benchmarks: CPI +3%; A widely-used indicator of UK inflation. It acts as a ‘target benchmark’ that the fund aims to outperform by at least 3% per annum over at least five years. IA Flexible Investment 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 these benchmarks.