Artemis US Smaller Companies Fund quarterly review, September 2023
Cormac Weldon and Olivia Micklem, managers of the Artemis US Smaller Companies Fund, report on the fund over the quarter to 30 September 2023 and their views on the outlook.
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.
Tough environment for US smaller companies…
Investors' focus for much of the period was on inflation and the direction of interest rates. As the quarter began, the prevailing sentiment was that a 'soft landing' (a slowdown that does not lead to a recession) would allow the US central bank to cut interest rates towards the end of 2023. By the end of the quarter, however, it had become clear that certain parts of the economy continued to run too hot. Oil prices were rising, and job growth remained strong. In response, the central bank signalled that rates would need to remain higher for longer.
As is typical at times of heightened economic uncertainty, smaller companies underperformed larger companies. This saw the difference in valuations between large companies and small companies in the US widening to near historic levels. The attractive valuations increased our confidence that, despite higher interest rates, there were opportunities for businesses that had already seen their profits suffer and/or had strong enough fundamentals to weather the storm.
Performance
The fund returned 1.2%, outperforming its benchmark, the Russell 20001 which returned -1.2% (in sterling terms) and the IA North America Smaller Companies Average2, which returned -1.5%.
For full five-year discrete performance, please see below. Please remember that past performance is not a guide to the future.
On the positive side
It was encouraging to see that good performance came from a wide variety of industries.
Constellation Energy - This nuclear power/clean energy supplier is one of our highest-conviction holdings. Its earnings are being driven higher by its customers' willingness to pay more due to 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.
‘Less-than-truckload’ freight companies - We believe the outlook for ‘less-than-truckload’ freight companies is much more positive than that for general trucking. We hold SAIA and TFI International, who both operate in this area. Over the summer there was a major change in the industry as Yellow Corp (formerly a top five carrier by revenue and volume), filed for bankruptcy following years of financial challenges. This gave SAIA and TFI an opportunity to pick up substantial market share.
On the negative side, higher interest rates hit faster-growing stocks….
NextEra Energy - NextEra Energy (power generation) is growing its exposure to renewable energy base and will benefit from the ongoing shift to clean energy. We are reviewing this position after the company cut its profit outlook as higher interest rates have made the financing of wind farms more costly.
Planet Fitness - We sold our holding in Planet Fitness (gym franchise), following the sudden departure of the longstanding chief executive, who held significant relationships with the franchisees. Given the increasing concern about franchisees' ability to fund growth (given higher interest rates), we felt the investment thesis was no longer applicable and we sold the position.
Activity - Buying ELF Beauty and reducing Hostess Brands
We bought ELF Beauty, which offers affordable cosmetics and skincare. While the share price had already done very well year to date, we believe this innovative, high-growth company will continue to gain market share.
We significantly reduced our holding in bakery company Hostess Brands. The company was acquired by a competitor in September.
Outlook
There are risks on the horizon as investors contemplate higher interest rates and their likely impact on economic growth. The Russell 2000 small-cap index has underperformed the large-cap S&P 500 due to fears that slowing economic growth will disproportionately affect smaller companies. We believe this presents us with an opportunity to buy shares in good companies at relatively modest valuations.
For example, we continue to see long-term value in the life sciences area, which has struggled this year. We will be looking out for signs that the downtrend in orders for our life sciences companies is bottoming out and for evidence of improving profitability at our trucking companies following Yellow Corp’s bankruptcy.
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.
| Discrete performance 12 months to 30 September | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| Artemis US Smaller Companies Fund | -3.3% | -15.7% | 36.7% | 9.8% | 2.6% |
| Russell 2000 TR GBP | -0.4% | -7.6% | 41.6% | -4.3% | -3.6% |
| IA North American Smaller Companies NR | -1.4% | -7.5% | 37.3% | 6.1% | 1.8% |
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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