Artemis US Smaller Companies Fund update
Cormac Weldon and Olivia Micklem, managers of the Artemis US Smaller Companies Fund, report on the fund over the quarter to 30 June 2024 and their views on the outlook.
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.
TThe fund returned -5.0% over the quarter, underperforming its benchmark, the Russell 2000 index1, which returned -3.3%, and its second benchmark, the IA North American Smaller Companies sector2, which returned -3.5% (all in sterling terms).
For five-year annualised performance, see below. Please remember that past performance is not a guide to the future.
The quarter started with a degree of fear around inflation and its persistence. We also saw positive economic data and robust jobs growth, which forced the Federal Reserve (‘Fed’ - the US central bank), to delay the prospect of interest rate cuts to later in the year. May proved to be a more supportive month from an economic perspective. Fed Chair Powell dismissed the notion that further interest rate hikes were on the table and core inflation came in cooler than previous months. There was also some easing in the geopolitical situation in the Middle East which calmed markets to a degree. June ushered in a series of interest-rate cuts by other central banks, namely the ECB and the Bank of Canada. While the Fed stood firm, the market became increasingly confident that there would be one cut before year end. This notion was given further support when CPI came in at its slowest growth rate since August 2021.
Whilst the macroeconomic environment might have been cause for optimism, this was not reflected in the smaller companies index, the Russell 2000, which returned -3.3% over the quarter. From a sector perspective, energy and consumer discretionary were the weakest areas of the market, with consumer staples and telecoms the strongest.
In this environment the fund underperformed the index, returning -5.0%. Year to date the fund is well ahead of the index, returning 10.3% vs. the Russell 2000's 2.6%, but please remember that past performance is not a guide to the future. Over the quarter, and after a strong run, our industrial holdings held back performance. Our holdings in technology and consumer discretionary partially offset some of this weakness.
On the negative side, building materials company Builders FirstSource was weak on deteriorating housing start data. French fry business Lamb Weston was impacted by weaker than expected volumes. The company also implemented a new software system that hampered its ability to fulfil volumes. We sold the holding. Trucking business Saia also held back performance because of weak tonnage at the start of the year. The company later announced a pick-up in mid-quarter tonnage and the stock started to recover.
On the positive side, a good contribution came from Coherent, a leader in networking cabling and lasers, which stands to benefit from the significant investment in datacentres. Restaurant group CAVA also contributed positively, underpinned by impressive profits despite the more widespread weakness in consumer sentiment.
Activity
We sold our position in TFI International, another trucking business, when it announced weak results. Despite our long-term belief in the trajectory of the business, we believe our clients’ capital is best used elsewhere.
We reduced some of our housing-related names such as Builders FirstSource, AZEK, and TopBuild on deterioration in housing data, as outlined above. We also took profits in stocks that have done well, including nVent, Comfort Systems and Western Digital, reallocating capital to areas with more appealing risk returns.
On the purchases side, we added to financials, buying Jefferies (investment bank) and Jones Lang Lasalle (real estate broker). We have also added to industrials, buying Regal Rexnord (electronic equipment), APi Group (construction), and Bloom Energy (industrial engineering) to name a few. Elsewhere we have introduced Kinsale Capital, a property & casualty insurance business that has a low-cost business which uses technology to evaluate insurance opportunities. We have also added Confluent, a software company, and Shift4 Payments, whose technology enables ecommerce.
Outlook
Whilst the long-awaited US smaller companies rally is yet to materialise, our optimism in the asset class has not waned. It seems many investors are waiting for the first interest rate cut to get behind the asset class. While this would create an easier funding environment for smaller companies, we can still find plenty of businesses can thrive in the meantime because they have unique market positions and strong balance sheets.
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.
| Annualised performance 12 months to 30 June | 2024 | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|---|
| Artemis US Smaller Companies Fund | 23.1% | 5.9% | -19.8% | 37.3% | 7.2% |
| Russell 2000 TR GBP | 10.7% | 7.3% | -14.9% | 44.9% | -3.8% |
| IA North American Smaller Companies NR | 10.5% | 7.9% | -13.3% | 42.1% | 3.4% |