Artemis SmartGARP UK Equity Fund update
Philip Wolstencroft, manager of the Artemis SmartGARP UK Equity Fund, reports 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 UK Equity Fund had a relatively poor fourth quarter, rising by 2.1% while its FTSE All-Share benchmark returned 3.2%. While our gains of 3.6% over the course of 2023 were also behind the 7.9% made by the index, we are comfortably ahead over three years: we have made 44.1% over this time compared with 28.1% from the index and 13.9% from the average IA UK All Companies fund.
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 will 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 UK market has compounded at about 6.4% per annum, compared with market returns of 5.3% – which broadly makes sense. The income plus EPS for our fund compounded at 12.4% (after fees), while returns have been closer to 7.4% per annum, which seems too low.
The fund has done well, but not as well as it deserves given the growth in fundamentals. 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. This has been the case for most of the past three years as 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 Standard Chartered, 4imprint and Repsol were among our biggest detractors in the final quarter of 2023.
When the facts change, the portfolio changes
In the cases of 4imprint and Repsol, our inclination was to treat their poor share price performance as ‘noise’ as the fundamentals remain solid. For Standard Chartered, analysts started to cut their profit forecasts, which undermined our motivation for owning the stock. In a similar vein, we also cut positions in the likes of Hargreaves Lansdown and AIB (Allied Irish Banks). We added stocks such as Marks & Spencer, Whitbread and Tesco, 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 and so the range of valuations has 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 last quarter of 2023. This provides (albeit uncomfortable) opportunities for active investors like us.
The table below shows higher growth rates are associated with higher P/E multiples. Many people argue that the UK market is undeservedly cheap. This may be so, but it is understandable given the poor track record of growth.
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% |
| FTSE All-Share | 11.2 | 6.40% | 5.30% |
| Artemis SmartGARP UK Equity Fund | 6.5 | 12.40% | 7.40% |
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.
Source: Lipper Limited/Artemis from 31 March 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: FTSE All-Share Index TR; A widely-used indicator of the performance of the UK stockmarket, in which the fund invests. IA UK All Companies 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.