Artemis SmartGARP European Equity Fund update
Philip Wolstencroft and Peter Saacke, managers of the Artemis SmartGARP European Equity Fund, report on the fund over the quarter to 31 December 2023 and the outlook.
Source for all information: Artemis as at 31 December 2023, unless otherwise stated.
Strong three-year numbers despite poor final quarter
The Artemis SmartGARP European Equity fund had a relatively poor fourth quarter, rising by 2.5% while its FTSE World Europe ex UK benchmark made 7.6%. This meant that having been ahead for much of the year, our return of 15.1% for the 12-month period ended up behind the index's gain of 15.7%. Yet the fund has made 40.3% over the past three years, compared with 26.3% from the index and 19.2% from its IA Europe ex UK sector average.
Delirium hasn’t broken out, but…
Share price returns are broadly correlated with business performance. Companies that are profitable and grow deliver great returns, while companies without these characteristics deliver lousy ones. We spend our time making sure that your fund owns the former.
In the past decade, the dividend yield plus earnings per share (EPS) growth for the European market has compounded at about 8% per annum, compared with market returns of 8.3% – which makes sense. Our fund's income plus EPS compounded at 12.4% (after fees), while returns have been closer to 7% – which seems too low. In effect, investors did their best to ignore strong business fundamentals and have focused on hope among other stocks rather than evidence from those in our portfolio.
These divergences tend not to last forever – either share prices rise sharply or fundamentals deteriorate. Our focus on stocks with good newsflow means the former scenario is more likely. For much of the past three years, share prices have begun to remember that reality exists and the fund has done well.
In the past quarter, optimism broke out in the wider market and investors decided they needed to sell growing companies with low ratings to find some room for highly rated stocks that had fallen in the previous year. As an example, our holdings in Betsson, Repsol, SCOR, Türkiye İş Bankası and Renault were among the biggest detractors in Q4 – yet they trade on an average prospective price-to-earnings (P/E) ratio of 4.1, have received upgrades to profit forecasts and outperformed the market over the previous year.
When the facts change, the portfolio changes
Our inclination has been to treat this poor share price performance as ‘noise’ and focus our attention on the developing fundamentals: if these start to deteriorate, we sell; if not, we sit tight. As a result, the stocks mentioned above still feature prominently in the portfolio. In contrast, we sold positions in STMicroelectronics, Mercedes-Benz and Verallia, where growth appears to be slowing and analysts have cut profit forecasts. We added Enel, Bouygues and Prosus, which have received analyst upgrades following strong trading updates, yet remain lowly valued.
High yields + good growth = strong prospective returns
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, causing the range of valuations to become extreme. US tech stocks have delivered high EPS growth, but even higher total returns, so price-to-earnings (P/E) multiples 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 final quarter of 2023. This provides (albeit uncomfortable) opportunities for active investors such as ourselves.
The table below shows higher growth rates are associated with higher P/E multiples. In general, Europe has grown less rapidly, while multiples are lower, too.
Growth rates vs valuations
| Name | Prospective P/E | 10-year annualised growth rate in EPS + dividends reinvested (£, %) | 10-year annualised returns (%) |
|---|---|---|---|
| MSCI US Technology | 26 | 16.10% | 23.10% |
| S&P 500 | 19.7 | 11.50% | 14.30% |
| MSCI AC World | 15.5 |
9.00% |
10.40% |
| MSCI Europe ex UK | 13 | 7.80% | 8.20% |
| Artemis SmartGARP European Equity Fund | 6.3 | 12.40 | 6.90% |
The outlier among this little group appears to be our fund – we seem to have a system that alights on growing companies, but we are getting that growth at much lower multiples. Whereas US tech stocks have seen P/E multiples rise as share prices outpace EPS, our fund has seen P/E multiples shrink despite strong EPS growth. As such, I believe that our future long-term 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.
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: FTSE World Europe ex UK TR; A widely-used indicator of the performance of European stockmarkets, in which the fund invests. IA 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. These act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.