Artemis Positive Future Fund update

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

• The fund’s benchmark, the MSCI AC World Index, gained 2.8% in sterling terms over the quarter. The Artemis Positive Future Fund was broadly flat, returning 0.5%.
• Returns from the benchmark index over the quarter were largely driven by outsized gains for mega caps. The mid-sized companies on which our strategy focuses continued to languish . 
• A busy quarter for activity saw the fund continuing to transition to its new investment approach following the appointment of a new lead manager in March.

Market review and performance

The fund’s benchmark, the MSCI AC World Index, gained 2.8% in sterling terms over the quarter. The Artemis Positive Future Fund was broadly flat, returning 0.5% .

A large part of the return from global indices, particularly in the second part of the quarter, rested on the outsized returns generated by a handful of US mega caps. One proxy for large US technology stocks, the Nasdaq 100 index, rallied by more than 14% from mid-April through to the end of June.

Meanwhile, ‘growth’ stocks more broadly (up 6.0%) outperformed ‘value’ stocks (down 0.8%) . Within that, the strong returns from growth stocks tended to be driven by gains for the market’s largest companies; small and mid-cap growth stocks actually fell by 2.1%. The Artemis Positive Future strategy has an inherent bias towards mid-caps and away from mega caps, so that dynamic was unhelpful for its relative returns.

The fund’s asset allocation over the quarter, meanwhile, was also slightly negative:

1. An overweight to industrials was unhelpful. Share prices across the sector retreated after delivering strong returns in the first quarter.
2. An overweight to healthcare also weighed on relative returns. Although we have been reducing the fund’s exposure to this part of the market, we still see excellent opportunities in the sector and remain overweight here.

Stock level-detractors

IDEX (down 17%)

Results from applied engineering solutions provider IDEX showed it beating estimates for earnings per share in the first quarter. Despite this strong start, however, it did not increase its guidance for full-year earnings, disappointing investors. Given the high valuation on which its shares trade (23x forward earnings) and in the absence of any deep conviction in investment thesis, we sold the position.

DexCom (down 19%)

Coming into the quarter, investors had high expectations for blood glucose monitoring system provider DexCom. So, when its revenue growth came in at 25% year-on-year in the first quarter, they were disappointed. We tended to share their disappointment. In view of its valuation multiple (its shares traded on 57x forward earnings at the end of the quarter) and our reduced conviction in the investment thesis, we significantly reduced the size of the position.

Banorte (down 23%)

Shares in this Mexican bank sold off sharply when a landslide victory for the left-wing Morena party in Mexico’s presidential elections sent share prices across the country’s stockmarket lower. While politically inspired volatility may persist in the short term, we regard Banorte as a high-quality, diversified financial with structural support from strong demographics and from the Mexican population’s ongoing adoption of banking services. Loan growth has been strong, with Banorte an indirect beneficiary from the nearshoring of production by US manufacturers and an associated boom in manufacturing activity and commodity exports.

Contributors

First Solar (up 32%)

As the building out of AI infrastructure and data-centre capacity continues to gather pace, First Solar is a likely beneficiary of the exponential growth in demand for low-carbon power. Although China has hitherto been the dominant player in solar energy, efforts by the US government to ‘decouple’ its critical industries from Beijing could represent a further tailwind for demand for this US-focused producer. So, although we took advantage of a strong rally in the shares to trim the position, we still see merits to the investment case and retain the position.

Tetra Tech (up 11%)

Consulting and engineering services provider Tetra Tech’s first-quarter earnings saw it beating analysts’ earnings per share estimates by around 10%. At an inaugural investor day in May, meanwhile, its management revealed an ambitious target of doubling revenues from $5 billion to $10 billion by 2030. This illustrates the structural growth anticipated by companies with the expertise to address an array of sustainability concerns in complex projects around the world. Given the strength of its share-price performance and the rising political risks that a victory for Donald Trump in November might present, we marginally trimmed our allocation over the quarter.

Prysmian (up 20%)

High voltage cable manufacturer Prysmian beat earnings per share estimates by more than 20%. Its power grid business is benefitting from the vast investment in data centres that will be needed to support AI. This is feeding through to huge commitments to build the infrastructure required to connect these power-hungry data centres to the grid and a growing order backlog for Prysmian. Its recent acquisition of Encore Wire further strengthens Prysmian’s competitive position in manufacturing the most advanced and highest-voltage cables.

Engagement activity: discussing emission targets and the circular economy with Graphic Packaging

During the quarter, we met the Chief Sustainability Officer of paper and cardboard packaging provider Graphic Packaging (GPK). We discussed the company’s ‘circular economy’ plans and its goals for reducing carbon emissions, both of which are of material importance to the investment case.

In our view, GPK is still in the early stages of its sustainability journey: for example, the CSO still sits within the company’s legal department. GPK has set credible shorter-term targets for reducing emissions, which we welcome. But it has yet to make a longer-term commitment to reaching net zero. The point we made to the company is that such a commitment would be well received by investors.

We also discussed the circular economy, which is one of our key engagement themes. The transition to a more circular business model will require a change mindset not just from GPK but also from its customers. Its initiatives around paper cups at quick-service restaurants are an encouraging sign, but these products represent less than 1% of its revenues. We will be pushing for further progress on circularity in our future dialogue with the company.

Activity: reducing valuation risk and increasing quality

A busy quarter saw the fund continuing to transition to its new investment approach following the appointment of a new lead manager in March. That new approach places more emphasis on investor contribution. From a portfolio construction point of view, meanwhile, there is now increased focus on risk-adjusted returns.

As such, we have exercised greater discipline around valuations and margins of safety and have been ruthless in exiting positions where valuations are unsupportive or where our investment theses have weakened. We believe the result is a more robust and more balanced portfolio – one that should deliver returns with less volatility than in the past.

The headline changes in the fund’s financial fundamental characteristics since the appointment of a new lead manager in March 2024 are summarised in the table.

Purchases

Fiserv

We believe this e-commerce and payments processing service provider is a ‘quality compounder’ in a structurally growing market.

NetApp

A storage and data-management solutions provider. It is transitioning to a software-centric model which should support higher margins and underpin more predictable cashflows.

ON Semiconductor

A supplier of semiconductors used in a range of applications, including power management. While its exposure to the auto industry has weighed on its share price, there are signs that the auto market is troughing. On a stock-specific basis, meanwhile, we believe the company has levers to pull that will structurally improve its margins.

Saint Gobain

A manufacturer of glass and other construction materials, Saint Gobain is exposed to a number of growing end markets.

GE Healthcare

This medical technology company is in the process of being turned around after being spun off from GE and has plenty of room to improve its financial performance through ‘self help’.

Veralto

This business (spun off from Danaher) provides water purification and quality control systems. It is seeing structural growth in its end markets and already demonstrates strong cash conversion.

Shoei

A manufacturer of motorcycle safety equipment such as helmets. This company’s quality has yet to be fully recognised by the market.

Clean Harbors

Environmental and industrial waste management.

Revvity

A health science technology business.

Sompo Holdings

This Japanese insurer benefits from the end of negative interest rates and from improvements in corporate governance – particularly from the unwinding of a complex web of cross shareholdings.

NXP Semiconductor

A semiconductor manufacturer active across automotive and other industries led by a strong management team.

Enovis

A medical technology company focused on orthopaedics, with fast growth in extremities and a strong record of making accretive bolt-on acquisitions.

Banorte

A high-quality bank seeing structural growth as a result of favourable demographics, a largely ‘unbanked’ population and the nearshoring of US supply chains to Mexico.

Sales

Shimano

After a period of strong performance, Shimano’s valuation appeared less attractive than it once did.

IDEX

The valuation multiple appeared high and our conviction in the investment thesis was low.

Veeva

We had concerns about growing competition and dwindling conviction in the investment thesis.

PowerSchool

We sold after the shares rallied in response to BAIN Capital’s announcement of a $5.6 billion takeover.

Penumbra

The valuation multiple appeared high given the weakness of its cashflows.

Carrier Global

The risks facing some parts of this business are building.

Valmont Industries

We had concerns over short-term trends in the irrigation market and could see no immediate catalyst for the shares to be re-rated.

Terumo

We had some concerns over Terumo’s growth prospects. Selling the holding was also part of our effort to reduce the fund’s substantial overweight to the healthcare sector.

Veracyte

The valuation multiple appeared high and our conviction in the investment thesis had faded.

Doximity

We had concerns around short-term weakness in Doximity’s end markets.

Montrose Environmental

We sold after a period of strong performance following good results, which had pushed its share price to level with which we were no longer comfortable.

Outlook

We continue to adjust the fund’s sectoral and risk exposures as we transition the portfolio to reflect our new approach to impact investing, one that focuses on delivering impact through our investor contribution and by prioritising engagement over exclusions. Turnover within the portfolio is therefore likely to stay relatively high for some time.

More broadly, the outlook remains uncertain and markets are likely to remain volatile. Shifts in sentiment around inflation and interest rates are likely to dominate over the short term, and elevated geopolitical tensions and stretched government balance sheets in developed markets remain a potential cause of volatility. While the next move in interest rates is likely to be lower in most Western economies, a return to the ultra-low interest rates and easy money seen in the between the global financial crisis and the pandemic looks unlikely.

This ‘new normal’ could bring significant dispersion in share prices and so plentiful opportunity for stockpickers. To build an ‘all-weather’ portfolio that is equipped with the characteristics needed to navigate a challenging economic and market backdrop, we will focus on identifying resilient companies with strong cashflows while keeping a watchful eye on their valuations.