Artemis Funds (Lux) – US Select update

Source for all information: Artemis as at 31 March 2024 unless otherwise stated.

The fund returned 16.5% in US dollar terms, outperforming its benchmark, the S&P 500 index, which returned 10.6% and its peer group (the IA North America average), which returned 11.0%.

Ignoring the speedbumps…

The S&P 500 was remarkably resilient over the first quarter of 2024, shrugging off a shift in monetary policy stance brought about by elements of inflation that were more stubborn and an economy that was performing well. We also saw a regional banking scare and an increase in geopolitical tensions.

The index shrugged off these fears, posting 22 new all times highs and was only the eighth time since 1950 that it achieved back-to-back quarters of over 10% returns. Strength was supported by technology shares, in particular Nvidia which achieved an over 80% return (in US dollar) over the 3-month period, taking its market cap to $2.6trn. It is worth mentioning that we saw a broader contribution to returns than in 2023, with 10 out of 11 sectors being positive over the quarter¹.

Stock selection drives outperformance:

As is our aim, the fund’s performance over the period was driven by stock selection, with sector allocation marginally detracting. Positive stock selection came from within technology, industrials, and consumer discretionary.

A poisoned Apple?

We maintained an underweight position in Apple over the period.

Our thesis on Apple is driven by what we see as a company that has meagre growth prospects and that are overly reliant on one product, the iPhone. It is therefore sensitive to a softening in demand which of late has come from China, where Apple is experiencing an increase in competition from the likes of Huawei, and a general hostility towards Western companies.

Despite the fundamental performance of Apple stalling, the company still holds a lofty valuation of around 26x P/E. Our underweight in the company proved to be our top relative contributor to performance over the period.

Meta continues to deliver

In contrast to Apple, we are overweight Meta, where we see a company that has reengineered its business through cost discipline and bolstered by the integration of AI within its advertising business. Following Apple’s adjustment of its privacy settings on its operating system in 2021, Meta’s ad revenue significantly declined due to its reduced ability to target users. What few realised was that Meta owned one of the fastest supercomputers ever built (the AI Research SuperCluster²) which was perfectly suited to regaining most of its signal and targeting ability through the use of AI. This acted as a significant support to the share price as ad revenue recovered.

The rest...

Regular names in our quarterly commentaries continued to perform well which include Saia (the less than truckload company), Constellation Energy (the independent power producer), Western Digital (memory technology), and Eagle Materials (cement & wall boarding).

On the negative side

On the negative side there was nothing over the quarter that truly stood out. There was some weakness in two of our healthcare names, Zoetis and Humana. Zoetis is the animal health company where we see a long-term growth story underpinned by the recent launch of Librela, a pain medication for dogs. Humana was tracking towards our downside thesis, and we sold out of the position over the period. PG&E was our main detractor over the period.

Activity – Adding Norfolk Southern, Allstate and Core & Main

We added Norfolk Southern, the rail freight business, where we see a cyclical recovery combined with revenue growth, margin harmonisation, and share buy backs. We have also initiated a position in Allstate, the insurance business, which stands to benefit from a very positive auto insurance pricing market.

We continued to add to our position in Core & Main. The company distributes pipes and fittings used in water and waste-water applications to municipal customers and companies involved in residential and non-residential construction. Water infrastructure in the US has been underinvested in for years and has started to receive funding, including from the infrastructure bill. In addition, we have a long-term bullish view on both residential and non-residential construction which should support a robust volume outlook for the company. The company has also been able to allocate capital to make accretive acquisitions and we expect this to continue.

Taking profits in strong performers

On the sell side, we have trimmed some of our better performing stocks such as TFI International, the trucking company, and Eagle Materials, the cement business.

Outlook – Still finding attractive opportunities

Despite the strong performance of the index and the fund at the start of 2024, we remain optimistic about the prospects as we move into the second quarter of the year. The economy looks to be in fine shape, despite at the margin there being some signs of fraying. We are aware that the interest rate picture remains uncertain, and we are therefore not wedded to a particular economic outcome. We focus on the microeconomics of companies to find opportunities, and as we see It, there is still a very healthy pipeline of ideas coming from a wide range of sectors.