Artemis Positive Future Fund update

Source for all information: Artemis as at 31 March 2025, unless otherwise stated.

Market review

The theme of US exceptionalism finally ran out of steam during the quarter after turbo-charging global equities for years. Firstly, the S&P 500 fell as news broke of AI model DeepSeek, a Chinese competitor to ChatGPT that was allegedly developed at a lower cost and capex intensity. 

Then, the announcement and implementation of tariffs on some of the US’s largest trading partners caused soft economic data to deteriorate and inflation expectations to hit a 30-year high. 

The gold price rose 15% (its largest quarterly gain in 40 years), reflecting investors' concerns around the global economy. Meanwhile, Europe saw the most significant quarterly outperformance of the US for a decade, with aerospace & defence in particular rallying on Germany’s decision to unlock up to €800 billion for spending in this area. The rush to safety saw defensive sectors outperform: telecoms, utilities, energy and consumer staples were all positive in the quarter. Our avoidance of negative impact (such as tobacco and alcohol) precluded us from holding most stocks in these and other outperforming sectors (particularly weapons and oil & gas). 
 
Technology companies, which have dominated global equity markets for many years, de-rated sharply, with the S&P 500 Information Technology index falling more than 15%. Our overweight to this area was the largest performance detractor from a sector-allocation standpoint, although our stock selection was mixed within that: strongly positive in software and negative in semiconductors. 

Over the quarter, the Artemis Positive Future Fund returned -8.9%, compared with -3.4% from its benchmark (as of 1 February 2025, the benchmark changed to MSCI ACWI Mid Cap NR; returns up to 1 February 2025 reflect those of MSCI ACWI NR) and -4.6% from its IA peer group.

Detractors

Our biggest detractor, US-based digital storage company NetApp, reported disappointing results that raised concerns over its capacity to execute consistently. While 15x for high single-digit EPS (earnings per share) growth is hardly an expensive multiple to pay, the disappointment was a catalyst that led the shares to de-rate strongly to about 10x. We have reviewed our investment thesis for NetApp and remain convinced in the key tenets of quality (return on invested capital of more than 37% and net cash on the balance sheet), prolific cashflow generation (with a free-cashflow margin of more than 20%) and consistent EPS growth helped by buybacks. In this context, the shares look very cheap. With the macro environment becoming more uncertain, however, and potentially affecting enterprise spend decisions, we are holding off from adding to the position just yet.

Electrical connection and protection manufacturer nVent fell in the DeepSeek sell-off as it derives about a fifth of its revenue from data centres; however, it remains well placed to benefit from the buildout in AI infrastructure. We believe sentiment turned too negative and its relatively small exposure to data centres should continue to be accretive to growth. Meanwhile, management's capital-allocation decisions remain value accretive and the growth potential in the rest of the business looks undervalued. We switched part of our sale from Vertiv, another AI play, into nVent in January.

Elsewhere, semiconductor manufacturer onsemi sold off after Q4 earnings fell short of expectations as management signalled worsening conditions in its automotive and industrials end markets when they were broadly expected to bottom out. While we think sentiment has become too negative and therefore the shares too cheap, we are biding our time before adding meaningfully to the position and would ideally like to see evidence of a recovery – or at least less of a worsening in end markets – before adding.

Contributors

The top contributor during the quarter was Japanese insurer Sompo, which rallied in line with Japanese financials. Better corporate governance in the country and the Bank of Japan's abandonment of its negative interest rate policy acted as tailwinds for the sector, while Sompo has improved operational quality.

Specialist US insurer Palomar reported strong results across the board, while Italian-based fitness equipment manufacturer Technogym performed well in an uncertain environment. Specialist insurer Beazley comfortably beat its return-on-equity target and increased dividends per share by 76%, sending a powerful signal that profits are here to stay.

Our lack of exposure to the Magnificent Seven and mega-cap technology contributed positively to relative returns. Avoiding Nvidia and Apple proved especially useful: the first suffered badly in the correction post-DeepSeek, losing around $465 billion of market value in a single trading day as it fell almost 17%. The latter was regarded as likely to be one of the biggest victims of swingeing tariffs until smartphones and computers were exempted after the end of the quarter.

Purchases

UK-listed bank Standard Chartered was our biggest new position during the quarter. Like many other banks, it has spent 10-plus years re-capitalising and rebuilding after the Global Financial Crisis and is now distributing a significant proportion of its profits to shareholders in the form of dividends and buybacks. In addition, Standard Chartered has attractive exposure to numerous emerging markets (particularly in Asia) with robust economic growth. Even though the shares have nearly doubled in value over the past year, at less than 0.9x price to book the valuation does not look stretched.

We started a holding in US-based water industrial Xylem. This former ESG darling had fallen out of favour for a variety of reasons, including the ill-timed acquisition of Evoqua and a delay in investment decisions from clients ahead of the US presidential election. Since then, a new management team is focusing more on value creation and sensible capital allocation.

Another new addition, animal pharmaceuticals company Zoetis, is a standout beneficiary of structural growth in pet ownership and the standard of care in the US, particularly post-pandemic.

We also started a position in Vulcan Materials, the largest supplier of aggregates (basic materials used in construction) in the US. Demand here should be underpinned by bipartisan support for a multi-year plan to improve infrastructure.

Sales

Our purchase of Vulcan Materials was funded by selling Clean Harbors, which has re-rated considerably of late and is clouded by uncertainty over the future of Safety-Kleen, which it acquired in 2012.

We sold US safety equipment manufacturer MSA Safety, which was one of our few remaining legacy positions and one of our weaker theses due to a high multiple.

Intensifying competition in China and a 'full' valuation led us to sell Japanese industrial automation company SMC.

We also exited US health insurer Elevance after industry behemoth UnitedHealth’s results pointed to a deterioration in utilisation rates, with the future course of US policy around health insurance still ambiguous at this stage.

Engagement activity

We recorded the following engagement milestones over the quarter:

• US data firm Verisk Analytics publicly disclosed its commitment to ethical and responsible AI after we twice engaged with it on the topic last year.
• Insurer Sompo added a ‘net zero by 2050’ plan for its fossil fuel underwriting/investments, along with a renewed human rights policy, to its public website. We had engaged with the company on these issues late last year.
• Environmental consultant WSP set a target to reduce voluntary turnover by 150bps by 2027 and ensure that 75% of executive leadership roles would be filled internally. We previously engaged with WSP to discuss its human capital management strategy, in part because its employee turnover rate appeared higher than that of peers.

We also engaged with the following holdings:

• New position Vulcan Materials, encouraging haste in setting up targets relating to the company's biodiversity impacts (an unavoidable aspect of its business model).
• UK specialist insurance provider Beazley, following the release of its inaugural transition plan – this is comprehensive but we feel it could be improved by more detail on the specifics.
• UK-based Graphic Packaging Holding Company (GPK) on its decarbonisation strategy, which has become integral to its business agreements.
• Senior US-based housing REIT Ventas, following up on its ability to leverage relationships with operators to improve workforce management.
• Roper Technologies, a diversified industrial products and software company, following up on previous engagement about its responsible AI approach.
• US-based data management and storage company NetApp, where we initiated dialogue about areas such as regulatory readiness and emissions reduction.
• Prysmian, the leading European cable manufacturer, on the biodiversity impacts of its land and marine cable installations.
• Wolters Kluwer, a global provider of information services, on its responsible AI approach and succession planning after its long-term chief executive announced plans to retire.

Outlook

March saw huge de-risking and since ‘Liberation Day’ equity markets have lurched even lower. Some stock price moves are reminiscent of the early days of Covid as investors pivot from attempting to reconcile the effects of sweeping US tariffs on the majority of its trading partners to gauging the probability of a global recession or financial crisis.

Today’s market moves are therefore rooted in exogenous shocks that defy typical forecasting tools, but we believe mounting pressure on the current US administration will continue to cause a de-escalation – since the end of the quarter, the most extreme reciprocal tariffs have been paused. Yet with battle lines having been drawn with China it is clear we are not going back to a pre-tariff world. Even at reduced levels, tariffs will effectively act as a tax on the US consumer with further-reaching global impacts. From speaking to some of our investee companies, we think a pause in activity is likely amid all this uncertainty, making planning ahead difficult if not impossible as regards capex, investment and discretionary spend.

A recent shift towards deglobalisation also poses new challenges for sustainability efforts because green supply chains have traditionally been reliant on Chinese inputs and have thrived on the ability to source materials and technologies from the most efficient and cost-effective regions. Nonetheless, reprioritising domestic supply chains could create opportunities for cost-effective, efficient and reliable domestic solutions.

The current rapid global shifts and developments are creating extremely high levels of uncertainty and unpredictability, and although we cannot predict the future, the indiscriminate nature of the sell-off in the short term has created market dislocations that we feel should be exploited. As active investors and bottom-up stockpickers, we still believe that over the long term, undervalued earnings and free cashflow streams will be the main determinants of our returns.

With the erosion of US exceptionalism, we as global investors also believe the opportunity set extends beyond the US. We are therefore now more than ever focusing on applying a disciplined, dispassionate assessment of portfolio holdings and potential opportunities in order to deliver attractive longer-term returns for our clients alongside positive non-financial outcomes.