Artemis SmartGARP Global Emerging Markets Equity Fund update

Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity Fund, reports on the fund over the quarter to 30 September 2024.

Raheel Altaf

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

Performance 

  • Q3 relative performance -4.5%. Fund -2% vs MSCI EM +2.5% (in sterling terms)
  • Year-to-date relative performance +2.9%. Fund +14% vs MSCI EM +11.1% (in sterling)
  • Performance in top quartile vs IA GEM sector for 1,3,5 years and since launch (Apr 2015)

Summary

Market review

The period started in volatile fashion. Softer economic data, muted liquidity and a rapid unwinding of yen carry trades led to sharp downward moves in markets in July. Yet, this malaise proved short-lived, as optimism around easing of monetary policy around the world took hold. By the end of September, the Federal Reserve had initiated its first interest rate cut in years and China stepped in with significant and co-ordinated stimulus measures to support the economy. These events proved supportive for stocks globally, although the significant market reversals in the period were less helpful to our holdings.

Attribution – Previous strong performers fall back

A sharp reversal in strong year-to-date performers and muted returns from EM 'value' stocks (those that trade on below-average valuations) held the fund's performance back during the quarter. We ended the period down 2.0% (in sterling terms) compared to the market rising 2.5%. There were some bright spots. Our holdings in China gained traction in September, with JD.com, Geely, Midea Group and Gree Electric all featuring amongst our top contributors. Elsewhere, more defensive segments such as utilities and telecoms featured positively. Indian Indus Towers and Hungarian Richter all amongst the top contributors.

These were more than offset by losses amongst cyclicals. Cosco Shipping, Amara Raja, Kia and Wiwynn were the biggest detractors to performance. leading the fund to give back some of the strong gains and outperformance it had made over the course of this year.

Three months Six months One year Three years Since launch
Artemis SmartGARP Global Emerging Markets Equity Fund -2.0% 7.0% 17.5% 18.6%  106.2% 
MSCI EM NR GBP 2.5% 7.5% 14.7% 1.7%  61.3% 
IA Global Emerging Markets NR 1.4% 5.5% 12.7% -0.5%  65.2% 
Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 30 September 2024 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.

Activity – Adding to Chinese holdings

Our investment process is designed to deal with volatile market conditions. At times, however, sudden bouts of volatility can hold back performance. We think in these environments it is important to stick to our process and selectively look for opportunities in stocks which have been sold off indiscriminately, rather than make broad changes to the portfolio.

We have had an overweight position in China for several years. Although Chinese stocks have performed poorly overall, our stock selection has been positive. In the last few months, pessimism reached extreme levels and with low investor positioning we felt the risk/reward had become extremely favourable and increased the position. There remains a clear disconnect between share prices and financial performance of businesses in China. As investors remain sceptical about conditions in the economy improving, we believe a disciplined value approach can help unearth great opportunities.

Recent purchases include Alibaba and JD.com. Not long ago, these were consumer darlings and acted as mainstays of many GEM investors' portfolios – today they are heavily out of favour. Yet, in both instances we are seeing catalysts for recovery. In both cases we see superior cash generation and shareholder return policies that are attractive. We also added to our positions in Geely (parent company to Volvo) and drug producer Sino Biopharmaceutical among others.

The result of these changes is that the fund continues to offer an attractive combination of extremely low valuations and attractive growth prospects. As the table below shows, the margin of safety reflected in our China holdings' valuations is significant. Renewed optimism towards the market, should create a favourable support for these positions in future months, yet it will no doubt be a volatile journey. At the end of the quarter, our weighting to China was 34%, compared to the benchmark's 27.8%.

Financial characteristics of our China positions

Dividend yield 12m forward P/E ROE1 3m change in earnings
Artemis GEM (China positions) 5.9% 8.1x 10.7% 3.3%
MSCI China 2.1% 16.1x 10.8% 1.5%
Relative 2.8x -49.7% -0.1% +1.8%

Alongside our China overweight, in aggregate we remain overweight Brazil, Korea and UAE and underweight India, Taiwan and Saudi Arabia. At the sector level, financials, consumer discretionary, utilities and industrials feature as the largest overweights. Materials, technology and consumer staples the largest underweights.

We remain heavily biased towards value stocks

The fund offers a forward P/E of 7.7 vs 12.4 for the index (a 38% discount). We think our discipline around valuations is likely to be a rewarding strategy for the years ahead. Whilst value stocks in EM have recovered from depressed levels in recent years, the gap in valuations between cheap and expensive stocks remains stretched. This suggests, the opportunity remains. Typically, significant exposure to value stocks coincides with distressed balance sheets and volatile earnings. This doesn’t appear to be the case today, the fund offers favourable quality and growth characteristics. For instance, our net debt/EBITDA is low, and our free cash flow yield is much higher than the market.

EM – Pessimism well reflected in prices; cyclical upturn presents opportunity.

The Chinese economic recovery has so far been underwhelming. Geopolitics creates uncertainty and the US election looms. On the positive side, potential for stimulus measures and reasonable levels of interest rates offer support.

When times are bad, risk aversion can lead to indiscriminate selling. We believe this creates opportunities for disciplined investors and our process has been designed to look for the companies where the fundamentals are signalling good news, yet share prices are not reflecting this optimism.

Chinese stocks have struggled for over a decade and their share prices are well reflective of the risks highlighted. The actions the government has taken recently to provide support to the economy are substantial. Furthermore, this comes at a time where the global economy is not in a bad state. Returns to equities, particularly those in riskier areas could be super charged against this backdrop. We see inflationary pressures and potential upside for commodities and other economically sensitive areas of the market. We believe our holdings stand to benefit significantly in this environment and remain optimistic about the opportunity in the years ahead.

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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