Artemis Global Select Fund update

Source for all information: Artemis as at 30 June 2024, unless otherwise stated. 

The fund’s objective is to grow capital over a five-year period. The Artemis Global Select Fund returned 0.5% in the quarter, underperforming its benchmarks the MSCI All Country World index¹, which returned 2.8%, and its Investment Association Global sector² average, which returned 1.0%.  

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

US shares climbed during this period, as monthly core inflation (which excludes volatile food and energy sectors) for June rose below expectations and provided further evidence that high interest rates are subduing economic growth. Consumer spending appears to be slowing, while manufacturing and building activity has flatlined. The S&P 500³ was led by the technology sector.

There was renewed interest in Chinese shares, with the Hang Seng index (a Hong Kong based stockmarket made up of Chinese companies) up nearly 9% (in local-currency terms). In addition to improving manufacturing data reported earlier this year, China’s first-quarter 2024 economic growth figures exceeded expectations⁴, driven mostly by a rebound in global export demand, infrastructure spending and manufacturing capital expenditure⁵.

India's stockmarket, where 4% of our fund is invested, made strong gains. It recovered after Narendra Modi’s BJP failed to secure a majority in the recent election and had to enter a coalition. Initial concerns that the results could lead to a slowdown in economic growth have since abated, with smaller regional parties likely to receive more funding in return for supporting Prime Minister Modi’s nationwide economic policy.

Japanese shares were broadly flat. The yen has continued to weaken, which will likely increase inflationary pressures by making imports more expensive, while wage growth remains strong⁶. A Bank of Japan board member indicated during the quarter that interest rates may rise further, given inflationary pressures on consumer confidence and spending. Higher interest rates are generally negative for shares as they make other financial assets such as government bonds and cash savings accounts look more attractive.

In Europe, central bankers announced the first interest rate cut in eight years, while political uncertainty led to some volatility in stockmarkets.

The fund benefited from strong returns across semiconductor holdings, as the generative AI (artificial intelligence) demand boom feeds through to the supporting hardware supply chain. On the negative side, there was a notably volatile reaction to profit reports over the results season, which affected some of our holdings. In such circumstances, we reassess and test our original investment theses, which may lead to us to take advantage of short-term weakness.

Positives

The following shares were among those that made the biggest contribution to the fund’s returns during the quarter.

• Taiwan Semiconductor Manufacturing Company (TSMC) returned 22.5%. The world's leading semiconductor manufacturer is seeing its sales and profits grow meaningfully as its clients attempt to meet surging demand for AI chips, while its dominant market position allows it to raise prices, expanding profit margins. Healthy free cashflow (the money left over after all liabilities have been met) can also be reinvested into building capacity for the next generation of semiconductor chips, widening the technological advantage over its competitors.
• HDFC Bank returned 17.4% on renewed interest following the Indian election, due to the likelihood of higher government spending and improving liquidity conditions.
• Eicher Motors, the manufacturer of the Royal Enfield motorcycle, rose 17.7%. We only recently added Eicher to our portfolio, due to expectations of volume recovery in India's premium motorcycle sector where the company has a 45% market share.

Negatives

The following shares were among those that detracted the most from the fund’s returns during the quarter.

• Cosmetics company Estée Lauder fell 30.5%. The business has gone through a turbulent period, driven by weakness in China as post-lockdown consumer demand remains weak and distributors work through high stock levels. While the share price reflects a short-term slowdown, our meetings with the company, industry experts and competitors have highlighted the strength of its product portfolio and the beauty sector’s long-term growth prospects. Further, management’s cost-cutting programme means an expected sales recovery should be accompanied by an expansion in profit margins.
• Ryanair fell 19.8% after its chief executive warned of customer resistance to further above-inflation price increases. However, the airline has consistently taken market share across Europe by passing cost savings on to passengers and remains significantly cheaper than competitors. It could be about to increase cashflows following a period of intense investment in new planes.
• Bank Grupo Financiero Banorte dropped, along with other Mexican shares, after Claudia Sheinbaum won a landslide election victory. Initial market concerns over the potential for business-unfriendly policies appear unfounded. Sheinbaum has already met with some of the largest companies in Mexico, where she emphasised a collaborative approach, and Banorte’s management appears optimistic about the political backdrop.

Positioning

The fund has an overweight (higher than average) position in: healthcare, consumer-focused industries and information technology. The largest overweight is now to industrials, following the recent addition of toll road and airport operator VINCI to the portfolio. We retain an underweight (lower than average) position in oil & gas, utilities and financials, as well as telecoms and media.

In terms of geographic positioning, the fund is overweight Europe and underweight the US. This is not due to any economic view, but because of where opportunities in individual companies have taken us. We remain overweight emerging markets (less economically developed countries), with holdings in Mexico and China, which look relatively cheap, and India. Our weighting to Japan has also increased moderately with new positions added earlier this year.

Activity

We initiated new positions in the following companies during the quarter:

• MTU Aero Engines – a well-managed airplane engine manufacturer and MRO (maintenance, repair and overhaul) provider. As well as benefiting from the growth of global travel and the trend for more efficient engines, its shares (relative to profits) look cheaper than those of its competitors.
• VINCI – a French business that operates toll roads and airports, the income from which is well protected against inflation. Recent political risk in France led its shares to trade below the value of existing assets.
• Following a team member’s research trip in March, we identified a number of Japanese companies that should benefit from growth trends as well as shareholder-friendly reforms. These included: Fujifilm, which now generates more than a third of its sales from healthcare; Shoei, the world’s leading manufacturer of premium motorcycle helmets; and Toppan, whose exposure to semiconductor demand through its electronics division is obscured from the market by its many other businesses.

Sales

We sold out of the following companies during the quarter:

• Rio Tinto – after a strong run, we switched our holding in Rio Tinto to another miner, Anglo American, as the latter looked cheaper relative to the value of its assets. M&A (merger & acquisition) activity across the industry may provide a catalyst for this value to be recognised.
• Nike – a poor set of quarterly results suggests the sportswear giant will take longer to recover.
• We took profits in bank Mitsubishi UFJ Financial, financial exchange operator Intercontinental Exchange and social media company Meta.

Outlook

The MSCI All Country World index has demonstrated a high level of concentration this year, with the information technology (IT) sector contributing nearly half of returns and just five companies responsible for more than 40% of gains – Nvidia, Microsoft, Amazon, Meta and Eli Lilly⁷. However, this concentration has been backed by a proportionate contribution to profits.

Economic issues have constrained profit growth across a number of sectors. Notably, some consumer categories have pushed up prices to their limit in the inflationary post-pandemic period and are now seeing consumers opting for cheaper alternatives while volume growth remains low.

In healthcare, the biotechnology industry has been affected by higher borrowing costs.

The energy sector also faces a tough period following a boost to profits in 2022 and 2023. Meanwhile, housing markets have stalled, particularly in the US, as higher mortgage rates make property less affordable.

With inflation normalising across Europe, the UK and the US, we are now more likely to see interest rate cuts than rises (Europe has already made a start). In our view, further government stimulus measures in China should lead to stabilisation and eventually a return to growth. An expected increase in profits across non-IT sectors can therefore support a broadening of returns across the stockmarket.

While the fund’s performance this year has also been driven by the technology giants and strong share selection across the semiconductor supply chain, we have found many opportunities to buy quality companies trading at attractive valuations that are well-placed to recover along with their end markets.

These include alcoholic drinks maker Campari, which has a stellar track record of growth, but has been held back as consumers seek cheaper alternatives; healthcare companies Thermo Fisher and Revvity, which have seen flat sales growth on constrained global biotechnology funding and capital expenditure in Chinese laboratories; and Estée Lauder and travel website Trip.com, which are poised to benefit from the recovery in the Chinese consumer.