Artemis US Select Fund quarterly review, September 2023

Source for all information: Artemis as at 30 September 2023, unless otherwise stated.

Fund objective 

The fund’s objective is to grow capital over a five-year period.

Review of Q3 2023

"Higher for longer"

Investors' focus for much of the quarter was on the prospect of easing inflation and what action the Federal Reserve (Fed) would take on interest rates. As the quarter began, the prevailing sentiment was that a 'soft landing' (a mild economic slowdown) would allow the Fed to start to cut interest rates towards the end of 2023. By the time it drew to a close, however, it had become clear that certain elements of inflation - particularly wage inflation - were proving more persistent than had been hoped. In response, the Fed signalled that rates would need to remain higher for longer, which contributed to the US stockmarket having its worst month of the year during September.

Performance varied across the market, with the sectors that are sensitive to changes in interest rates coming under the greatest pressure. As such, utilities and real estate were the key underperformers. Yet while most sectors ended the quarter lower, energy and communication services rose.

The fund outperformed the market

Over the quarter, the fund returned 2.6% (in sterling terms) while its benchmark the S&P 500 Index¹ returned 0.8%. The IA North America NR, the fund’s comparator benchmark², also returned 0.8%.

For full five-year discrete performance, please see below. Please remember that past performance is not a guide to the future.

Positives

Constellation Energy - This nuclear power/clean energy supplier is one of our biggest holdings. So we were pleased to see it continue to perform well. Good news on profits is being driven by its customers' willingness to pay more given the volatility in energy prices and, perhaps more importantly, by the fact that Constellation is seen as a reliable supplier. Its reliability and focus on clean energy also make it an indirect beneficiary of the AI wave as energy-intensive data centres are being built in the states that Constellation serves.

Meta (formerly Facebook) – Meta announced second-quarter profits that beat expectations. Its recovery story is increasingly well understood by investors. The benefits of last year's cost cutting are clear. The market now appreciates that the slowdown in its revenues was due to its pivot to Reels (a short video format) and a transitory loss of advertising efficacy due to Apple’s privacy changes. We still think the growth potential for Meta from its investment in AI and datacentre infrastructure is underestimated.

Negatives

Dexcom – Dexcom is a pharmaceuticals company that specialises in continuous glucose monitoring systems (CGMs) for diabetes management. Excitement about the potential for novel 'GLP-1' diabetes drugs sent its shares lower. Novo Nordisk and Eli Lilly both have drugs that not only treat Type 2 diabetes but can also be used to treat obesity. The market believed that this would decrease the demand for CGMs and so Dexcom’s share price fell. We take a different view; rather, CGMs have a role to play in helping manage the adoption of these new GLP-1 drugs.

CSX – Shares in rail freight company CSX underperformed over the quarter as weekly shipping volumes failed to show the increase that had been anticipated. In addition, the company announced that its chief operating officer was leaving. This is an important role in this business and the share price was hit on the day of the news. CSX subsequently announced it had hired an experienced replacement to fill the vacancy.

Less-than-truckload holdings receives a boost…

We have held Saia, a 'less-than-truckload' (LTL) freight company, for some time. We recently added more exposure to this subsector with the purchase of TFI International (TFII). For Saia, we have been optimistic for a long time about their ability to work towards being a best-in-class national carrier, which should result in both higher revenue and better profitability. In the case of TFII, we see a major opportunity to improve the profitability of the LTL business it acquired from UPS.

During the third quarter, there was a major change in the less-than-truckload industry. Yellow Corp (formerly a top five carrier by revenue and volume), filed for bankruptcy following years of financial challenges. Yellow's freight is now being shipped by other companies and our holdings have been beneficiaries.

Transactions

We bought Blackstone, a leading alternative asset manager.  We believe there are a number of attractive growth drivers for the private asset industry, and Blackstone's brand and investment track record put it in a very good position.

We sold food producer Kraft Heinz as the pricing power it attained during and after Covid appears to be ebbing away.

Outlook

There are risks on the horizon as the market contemplates higher-for-longer interest rates and their likely impact on economic growth. The US stockmarket has performed well over the year to date, but there has been huge dispersion in share price returns beneath the headline return. We believe this will continue to present active managers with an opportunity to find mispriced businesses. For example, we continue to see value in the life sciences area which has struggled this year because of near-term concerns. When companies next report results, we will be looking closely for signs that order trends for our life sciences companies are improving. We will also be hoping for evidence of improved profitability at our trucking companies following the bankruptcy of Yellow Corp.

Market volatility risk

The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.

Currency risk

The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.

Concentration risk

The fund may have investments concentrated in a limited number of holdings. This can be more risky than holding a wider range of investments.

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