Artemis US Extended Alpha Fund update
Adrian Brass, James Dudgeon and William Warren, managers of the Artemis US Extended Alpha Fund, report on the fund over the quarter to 30 September 2024 and the outlook.
Source for all information: Artemis as at 30 September 2024, unless otherwise stated.
The S&P 500 finished the quarter broadly flat (-0.2%) in sterling terms, while up 5.9% in US dollar terms. There was considerable volatility during the period. The quarter began with a surprising moderation in U.S. Consumer Price Index (CPI) figures, which catalysed a sharp decline in US Treasury yields and ignited a rotation from mega-cap technology stocks into smaller and mid-cap companies, bond proxies and defensive sectors. This volatility continued into August with the Bank of Japan raising rates by 25bps. This called into question the Japanese Yen carry trade whereby investors borrow in the Yen as a low-yielding currency and invest in higher-yielding currencies.
Moving into September, on greater confidence about the path of inflation and the focus turning to employment, the Federal Reserve cut rates by 50 basis points, marking the beginning of a new interest rate cycle. This provided a strong lift to sentiment, particularly in cyclical areas such as commodities and consumer discretionary sectors. Outside of the US, China’s announcement of a substantial fiscal and monetary stimulus program fuelled a rally in global markets. These combined measures from the two largest economies triggered a “risk-on” environment, benefitting more defensive sectors like utilities and energy. However, an opposing trend was observed with rising US 10-year Treasury yields, a key factor to monitor going forward as it could counterbalance the stimulative effects of rate cuts
It would also be remiss of us not to mention the developments in the US presidential election. Biden removed himself from the race in July, with Harris quickly becoming the candidate to face Trump in November. In terms of stocks and sectors, we don’t currently have any large positions dependent on the election outcome. Policy detail has this far been thin from both candidates, but according to the rhetoric Trump remains committed to raising tariffs and dismantling part of the Inflation Reduction Act, whilst Harris is focused on redistributive tax policies, supporting the poor and increasing taxes for corporates and the wealthy.
Performance attribution
The fund returned -3.4% in sterling terms, lagging the broader S&P 500 index which returned -0.2%. Year to date that leaves the fund up 15.8% vs 16.0% for the benchmark index (in sterling) and 12.3% for the IA North American average. The portfolio’s exposure to technology and consumer stocks dampened performance, with holdings in financials and utilities marginally offsetting the weakness.
| Three months | Six months | One year | Three years | Five years | |
|---|---|---|---|---|---|
| Artemis Funds (Lux) – US Extended Alpha | -3.4% | -1.3% | 22.9% | 33.9% | 81.5% |
| S&P 500 NR | -0.2% | 4.0% | 24.1% | 40.9% | 92.8% |
| IA North America Average | -0.5% | 1.4% | 20.3% | 26.8% | 75.1% |
Our top contributor over the period was TransUnion, the credit reporting agency which delivered strong results during the quarter, benefitting from a continued recovery in consumer credit markets and demand for its risk management solutions.
Apple remained a positive contributor to the portfolio as its expansion into AI-enabled technologies and resilient consumer demand supported its share price despite a challenging macro environment.
Avantor, the life sciences company saw a significant rerating following reassuring results that confirmed its recovery from a cyclical downturn. Avantor’s performance was bolstered by its positioning in the growing life sciences sector.
Within our utilities exposure, Constellation Energy soared following its transformative nuclear power deal with Microsoft, positioning itself as a key player in the AI infrastructure build-out. Hyperscalers, such as Microsoft, are particularly interested in nuclear as a power source given its ‘always on’ nature and the fact that it does not produce greenhouse gases.
On the negative side, ICON Lab, despite being a leader in contract research services, struggled during the quarter due to concerns over a potential slowdown in orders from smaller biotech clients.
Within our exposure to AI-related holdings, Intel faced significant challenges as its turnaround efforts failed to meet expectations, leading to its exit from the portfolio. The company’s weak earnings and competitive pressures in the semiconductor space drove its underperformance. Western Digital also detracted from performance on scares around the quantum of AI spend. We don’t share the same fears, seeing AI capex continuing to be of paramount importance for the largest companies in the world.
Within energy, despite the favourable macro environment for energy stocks, Occidental Petroleum underperformed due to a combination of weaker-than-expected earnings and concerns over its capital allocation strategy. The energy sector, in general, was volatile throughout the quarter, further adding to the stock's struggles.
The short book had a difficult month in July, having had very strong alpha generation earlier in the year. This was due to the broadening out of market performance (the majority of stocks therefore outperformed the S&P500), but also thematically due to many lower-quality and highly indebted stocks bouncing strongly.
Changes to the fund
We made a number of changes over the quarter. We added Formula 1, a discounted compounder that offers idiosyncratic growth drivers largely insulated from macroeconomic fluctuations. With its unique franchise model, it stands to benefit from upcoming US media rights negotiations and sponsorship revenue growth. We also added to our AI exposure through Broadcom. The company's expertise in networking and customised silicon makes it a key beneficiary of data center investments. Starbucks entered the portfolio following a substantial management change. The expectation is that the new leadership will drive operational improvements.
To fund these purchases, we sold out of GE Vernova. The stock reached the fund’s price target far earlier than anticipated due to the AI power generation narrative, leading to an exit from this position. We sold out of McKesson given the company’s deteriorating outlook having been reducing the position over the period.
Outlook
Although there has been some activity as outlined above, the portfolio's overall shape is broadly unchanged. Net position is 93%. Themes running through the long book include attractively valued healthcare in both life sciences and health insurance, diversified financials whether it be payments, banking software or exchanges, parts of the semiconductor value chain exposed to favourable trends in AI and data centres as well as plenty of idiosyncratic stories across consumer, utilities and industrials. After a swathe of meetings and corporate updates during the quarter, we have been increasing positions in stocks where we have most conviction. On the short side, we continue to find a broad array of expensive darlings, value traps and cyclicals trading at peak valuations on peak margins.