Artemis SmartGARP Global Emerging Markets Equity Fund update

Raheel Altaf and Peter Saacke, managers of the Artemis SmartGARP Global Emerging Markets Equity Fund, report on the fund over the quarter to 31 December 2023.

Raheel Altaf

Source for all information: Artemis as at 31 December 2023, unless otherwise stated.

Summary

  • 2023 relative return +8.4%. Fund +12.4% versus MSCI EM index +3.6% (in sterling terms)
  • Q4 relative return -0.3%. Fund +3% vs. index +3.3% (in sterling terms)
  • Performance in top quartile vs. IA emerging markets sector for 1,3,5 years and since inception
  • Value bias in the fund remains substantial, 45% discount to the market…
  • …with a history of delivering good growth. Fundamental value per share of our holdings has outgrown the market by 9% per annum since launch (April 2015

Performance – favourable tailwinds for our holdings

The promise of emerging markets disappointed in 2023. Despite a rebound in sentiment in the last quarter, emerging market stocks ended the year well behind developed markets. Against this challenging backdrop, our active approach performed well, ending the year up 12.4% (in sterling terms) compared to the index at +3.6%. It is also pleasing to report that we have achieved this while also providing diversification against more popular growth driven approaches in the sector.

Attribution – in line performance during the quarter

Performance in the quarter was broadly in line with the benchmark index. Banks made a strong contribution, PKO in Poland, Banco do Brasil in Brazil and JB Financial in Korea all featured among the top contributors. Elsewhere, signs of a cyclical recovery in Asia were supportive to Novatek Microelectronics, Wiwynn and Kia Motors. These were offset by weakness in China, where Alibaba, PICC, Miniso Group and Foxconn were all detractors.

Activity – adding to mega cap exposure

Additions – improving fundamental trends

Signs of a bottoming in the tech hardware cycle encouraged us to reduce our underweight exposure to the sector somewhat.

  • Mega caps - TSMC, Samsung, Tencent and NetEase
  • Cyclicals – Star Bulk Carriers, Hankook Tire and Copa

Reductions - deteriorating fundamentals

  • Alibaba, Hello Group, PICC and Ping An
  • Food and beverages – ITC and Grupo Bimbo

The result of these changes is that the fund continues to offer an attractive combination of extremely low valuations and good 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, media and entertainment and software and services the largest underweights.

We remain positioned for a rotation into value stocks

We have commented for years about our gradual transition towards value parts of the market because of their attractive characteristics. Despite the outperformance of value stocks over their growth counterparts in the last few years, our valuation discount to the market has not changed materially. The fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. The forward price/book ratio of the fund is 0.9 and it offers a forward P/E of 6.6 vs. 12 for the index (45% discount). We think our discipline around valuations is likely to be a rewarding strategy as we progress through 2024 and for the years ahead.

Emerging markets – cheap and unloved, but pessimism well reflected in prices

For much of 2023, Chinese equity markets suffered from weaker sentiment. The Chinese economic recovery has so far been underwhelming. 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. EM economies are ahead of the cycle and have started easing. More flexibility around monetary and fiscal policies is causing diverging policy paths with the west and supporting economic growth prospects ahead.

Our focus on fundamentals remains persistent

For several years speculative behaviour, on the back of surging share prices, has reduced investors’ focus on fundamentals. This has created excessively high valuations in parts of the market that have now started to unwind. We think this unwind has further to run. We see less risk in companies that trade on low valuations and so prefer to have more of our capital allocated to this part of the market.

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.

Past performance is not a guide to the future.
Source: Lipper Limited/Artemis from 31 March 2023 to 31 December 2023 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: 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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