Artemis US Smaller Companies Fund quarterly review, December 2023
Cormac Weldon and Olivia Micklem, managers of the Artemis US Smaller Companies Fund, report on the fund over the quarter to 31 December 2023 and their views on the outlook.
Source for all information: Artemis as at 31 December 2023, unless otherwise stated.
Fund objective
The fund’s objective is to grow capital over a five-year period.
Performance
The fund returned 10.3% over the quarter, outperforming its benchmark, the Russell 2000 index1, which returned 9.2%, and its second benchmark, the IA North American Smaller Companies sector2, which returned 9.1% (all in sterling terms).
For full five-year discrete performance, please see below. Please remember that past performance is not a guide to the future.
Inflation in check?
As had been the case for most of the year, markets were fixated on inflation and the likely path the Federal Reserve (the US central bank) would take in terms of interest rates. At the start of the quarter, it was widely accepted by the market that interest rates would remain higher for longer to combat stubborn inflation.
As the quarter progressed, it became clear that inflation was trending lower towards the Federal Reserve’s target of 2%, supported by falling demand for goods and services and a more balanced employment market. The central bank confirmed the market's expectations at its meeting in December when it signalled a pause in interest rate hikes, and went further, forecasting three interest rate cuts of 0.25% in 2024.
US smaller companies did well in this environment, especially in December, when the Russell 2000 rose by 11.4% (in sterling terms)3.
Housing exposure drives performance
If you have read or listened to us talk about our holdings in the fund, you will have heard us discuss our belief in the US housing sector.
There are multiple reasons for our positive view. Broadly, there is a shortage of housing in the US. Higher interest rates have also had an effect. Most mortgages in the US are not portable and so moving home would result in a higher mortgage rate. As a result, not many houses are changing hands, while growing demand is being met with new buildings. We are investing in this trend by buying housebuilders and suppliers of building materials.
Our holdings in this area include Builders FirstSource (a distributor of homebuilding products), Eagle Materials, which manufactures cement and wallboard, and Meritage, a housebuilder.
Cosmetics add a glow
Our holding in e.l.f. Beauty, the cosmetics business, did well over the quarter. The company reported good results, showing strong growth in sales, and the share price responded positively.
Weakness in Lattice Semiconductors
Our position in Lattice Semiconductor performed poorly over the period. The semiconductor industry is going through a period of weak demand, but we believe this is short term and remain confident in the long-term outlook for the company.
Outlook – Positive trends for smaller companies
Smaller companies in the US tend to be more sensitive than larger companies to any improvement in the economy, so we are optimistic about their prospects in 2024.
We expect a continuation of strong performance in our housing-related holdings as well as the companies which will benefit from growth in spending on infrastructure. We also think that there will be a strong recovery in a couple of sectors which in 2023 were still suffering from the distorting impact of Covid. In particular we would highlight healthcare and life sciences, where we see demand returning to normal, and our holdings in Avantor and Repligen stand to benefit.
2IA North American Smaller Companies 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 this benchmark.
3 Source: Lipper Limited, mid to mid in sterling.
| Discrete performance 12 months to 31 December | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| Artemis US Smaller Companies Fund | 12.7% | -19.4% | 17.7% | 24.6% | 25.3% |
| Russell 2000 TR GBP | 10.3% | -10.4% | 15.9% | 16.3% | 20.7% |
| IA North American Smaller Companies NR | 10.9% | -12.5% | 17.4% | 24.7% | 25.7% |
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.
Smaller companies risk
Investing in small and medium-sized companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.
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