Artemis Strategic Assets Fund update

David Hollis, manager of the Artemis Strategic Assets Fund, reports on the fund over the quarter to 31 December 2024 and his views on the outlook.

David Hollis

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

Market review

The fourth quarter of 2024 was an eventful one. October saw global bonds experiencing their worst monthly performance since September 2022, driven by robust economic data in the US, including a strong jobs report and a six-month high in core CPI. Equities also declined, but rebounded in November following Donald Trump’s emphatic US election win. However, market optimism was tempered by the announcement of proposed tariffs on Mexican, Canadian and Chinese imports.

December continued the trend of market instability, with a more hawkish stance by the Federal Reserve. Despite cutting rates by a cumulative 100bps in 2024, the central bank’s cautious guidance for 2025 triggered a sharp sell-off. European markets also faced headwinds as the European Central Bank’s rate cuts failed to meet dovish expectations, driving sovereign bonds down.

The fund lost 2.6% during the quarter, underperforming the CPI +3% performance target, which was up 1.4%, and its IA Flexible Investment sector, which rose 1.6%.

Positives/negatives

Negative returns were driven by the trend-following Price Based Signals (PBS) portfolio during October. We were hurt by the sell-off in bonds as the non-farm payrolls report in the US changed investors’ view on the near-term direction of rates. While the decline in bonds was driven by US data, non-US bond markets where the portfolio had long positions also sold off.

We had built a long-duration position (predominantly in non-US markets) as the models became more supportive of rate cuts. The fund was positioned for a positive skew event (infrequent but significant), effectively expecting a profound rally in bonds historically associated with a recession.

While it wasn't correct this time, it may be in the future. This is exactly how the model is expected to behave and why the risk premium we’re trying to capture exists. Equally, the model may switch to a short bond position in the future if inflation comes roaring back, which would also represent a positive skew event.

The Market Driver Models (MDM) portfolio also fell slightly. Positive contributions from our fixed income and equity positions were more than offset by negative returns from foreign exchange ones.

The fund continues to demonstrate a low correlation to equities, bonds and commodities, a key objective of the strategy.


 Three months Six months One year Three years Five years
Artemis Strategic Assets -2.6% -1.2% 0.2% 20.0% 8.3%
CPI +3% 1.4%  2.3%  5.2%  27.8%  43.5% 
IA Flexible Investment sector 1.6% 2.7% 9.7% 6.9% 28.1%
Past performance is not a guide to the future. Source: Lipper Limited to 31 December 2024 for class I Acc 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. This class may have charges or a hedging approach different from those in the IA sector benchmark.

Activity

As at quarter end, our most significant positions were:

Short two-year US rates: Our price-based system has built up a short position in two-year US interest rates. Further, our cross-sectional models are holding a short position due to negative carry and value, marginally strong fundamental momentum and positive relative price momentum.

Long Japanese equities: Within price trends, we have a long position based on recent price appreciation. Further, we hold a relative long position against other equity markets within our Market Driver Model. This is due to positive momentum and a relatively cheap valuation.

Short Japanese yen: We established a short position in the Japanese yen versus the pound relative to other G10 currencies in November. Relative carry and negative flows remain supportive of the short, although valuation argues for a long position.

Elsewhere, we reduced our equity exposure to about 7.5%, driven by weakening performance of the asset class and a deteriorating market backdrop. We retain key long positions in emerging market equities. Our aggregate exposure to fixed income moved lower, from 12 years at the beginning of the quarter to two years at the end. In terms of currencies, we remain short the Chinese yuan, but retain long positions in euros and the Swedish krone.

Outlook

Strong US economy unsettling for markets

December saw risk assets slide as the Federal Reserve cut rates, but post-meeting rhetoric was tilted towards the more hawkish side. US economic indicators continue to imply a relatively robust economy, prompting the central bank to express caution on cutting rates beyond December. The prospect of higher fiscal stimulus will continue to weigh on longer-dated US Treasuries, with the yield curve likely to steepen. Trump is inheriting a US economy that has exhibited global exceptionalism supported by monetary easing, but sustaining that may prove difficult. Tariffs and increased fiscal spending risk reigniting inflation and may not be compatible with continued consumer spending and regular new highs in the US stock market.

Federal Reserve to pause cutting cycle

A further decline in inflation becomes more difficult as we approach the 2% level, compounded by the fading tailwind of base effects and expectations of rising goods tariffs. While the Federal Reserve doesn't want to be seen to have misjudged its speed of rate cuts, having done so aggressively and pre-emptively given prevailing activity levels, it's clear government policy under Trump may be more inflationary. Markets expect two or fewer cuts of 0.25% this year, but if inflation fails to decline, the Federal Reserve may remain on an extended pause.

China stimulus ramping up

Recent announcements imply China's government is preparing the economy to weather the greater trade barriers under a Trump administration. The politburo is taking a 'moderately loose' monetary policy position in 2025 and aiming to be more proactive on fiscal policy. After 14 years of a 'prudent strategy' on the former, this marks a significant change. While this can benefit risk sentiment in the region, China’s transition from an export-led economy to one where the domestic consumer drives growth will not be quick.

Europe to cut rates further

Confidence has taken another hit from the prospect of further goods tariffs under a Trump presidency in a region that is barely skirting a recession. With a proxy war with Russia being fought on its border and political uncertainty in the core EU members of France and Germany, the European Central Bank is far more likely to reduce rates in the coming months than the Federal Reserve.

 

Benchmarks: CPI +3%; A widely-used indicator of UK inflation. It acts as a ‘target benchmark’ that the fund aims to outperform by at least 3% per annum over at least five years. IA Flexible Investment NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. It acts as a ‘comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.

David Hollis

Manages:

Multi-asset strategy

David is a fund manager in Artemis’ multi-asset team.

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