Artemis Strategic Assets Fund update

Source for all information: Artemis as at 31 March 2024, unless otherwise stated.

Markets generally performed well in the first quarter thanks to strong economic data (US employment, ISM etc) and solid company earnings, particularly from AI related names. The US S&P 500 and the European STOXX 600 both ended the period at record highs. Positive sentiment was consistent across asset classes with high-yield credit spreads tightening, oil prices rising and crypto rallying.

Inflation, although moderating, continued to be above central banks' targets. This caused investors to push out expectations of interest rate cuts and US and European bond yields rose. The US dollar consequently rose against most currencies.

Performance

The fund continues to demonstrate low correlation to traditional assets, a key objective of the strategy. Since the change in fund manager, the fund has shown a low correlation to equities, bonds, and commodities.

The fund returned 2.3% over the quarter, outperforming the performance target (CPI +3% p.a.), which returned 0.75%. Performance was driven by our Market Driver Models (MDM) and the trend following Price Based Signals (PBS). Strategic trades also added value while the FX portfolio detracted.

Our FX positions made a negative contribution. Short Czech Krona and Australian Dollar exposures were unable to offset the negative contribution elsewhere in the book. The long Yen position detracted as the currency weakened despite the end of negative rates in Japan. Long positions in NOK and SEK vs GBP both dragged. We have been reducing the size of these positions given their volatility.

Both PBS and MDM have a risk-on bias currently, with outright long positions in US and Japanese equities. We are generally short the shorter maturity bonds in the portfolio, due to negative carry and deteriorating price signals as rate cuts are pushed out further. This positioning was positive given the market backdrop.

Positioning

As at quarter end, our most significant positions were:

• Short Czech Koruna, long Norwegian Krone. Our FX models are positive on the Norwegian currency versus sterling, and negative on the Czech currency. We reduced the long position in Swedish krona.
• Long European and US equities. Within the MDM portfolio we retain a broadly pro-risk positioning with outright longs in European and US equities plus a long in European equities vs. German bunds.
• Long Swiss Government bonds. In the rates portfolio we have a long position in Swiss government bonds. The position was driven by relative fundamentals supporting a cut in Swiss interest rates before other major developed economies. The position performed well as the Swiss central bank did indeed cut rates.

Outlook

Economic activity in the US has been stronger than the Federal Reserve had expected and the decline in inflation has stalled. This has led some Federal Reserve members to take a more 'hawkish' view and vote to keep interest rates higher for longer. Should markets price the first rate cut further into the future in response to this, equity markets can muddle through or even move higher. Bond markets, in contrast, particularly in shorter maturities where we are presently short, will come under severe pressure.

If this status quo continues there is no need to rush into rate cuts, this will cause bond markets to deliver negative returns, and could ultimately see equity markets decline as monetary conditions will become relatively tighter. However, once rates start to be cut, then equities and bonds typically appreciate in price terms.

Beyond this, if economic growth begins to slow significantly, company earnings will decline and stocks may fall as the economy moves into recession. This may happen sometime in late 2024.

European equities should benefit from a clearer signal from the European Central Bank that interest rates will be eased soon, which is increasingly likely to be before a move by the US Federal Reserve. European bonds will benefit too, but given their historical correlation to US government bonds, they may only outperform on a relative basis. Moreover, the region faces structural headwinds in the automotive and manufacturing sectors due to trade links with China, and the region’s energy costs remain highly susceptible to unpredictable geopolitical events.