Artemis US Smaller Companies: June 2022 fund update

How it fits in a portfolio

We think the Artemis US Smaller Companies fund is a great way to invest in smaller companies with high growth potential in the US, one of the world's most innovative markets. The fund aims to deliver long-term growth by investing in smaller companies based in the US. Smaller businesses are often among the most innovative and offer lots of growth potential, but they're higher risk than their larger counterparts. We think the fund could be a good addition to a portfolio with little invested in the US, or could work well alongside other US funds focused on larger companies.

Manager

Cormac Weldon leads the US equity team at Artemis and has been manager of the fund since launch in October 2014. He joined the company from Threadneedle, where he was head of the North America team. He has plenty of experience investing in the US market, having managed funds investing there since 2001, and is a manager we rate highly.

Weldon has the support of a good-quality team of investors around him too, with five dedicated US analysts at his disposal. Many of the team moved across from Threadneedle to join Artemis at the same time as Weldon, so they’ve worked together for a long time. They all follow the same investment process and are specialists in their respective sectors.

Artemis also recently announced that Adrian Brass and James Dudgeon will join the business from Liontrust. The duo will report to Cormac Weldon and begin work in July. Brass has 23 years investment experience and previously managed US funds at Fidelity and Majedie (recently acquired by Liontrust). Though Brass and Dudgeon will manage other US-focused funds at Artemis, they will add to the research capabilities Weldon can draw upon.

Process

Weldon looks to invest in companies that he thinks have a 2:1 ratio of upside potential versus downside risk from the current market price. He does this by identifying what really drives the company. His team then spend time modelling what could happen to its profitability and growth over time, as they are likely to have the greatest impact on its valuation in the future. He then builds the portfolio with these ratios in mind, with the companies where upside potential significantly outweighs the downside risk likely to justify larger position sizes in the fund.

Regularly meeting company management is important to Weldon and his team. They think this is one of the best ways to deepen their understanding of the business model and assess the quality of the management team.

Weldon also considers how the US economy is performing to identify sectors that are benefiting from trends, as well as the areas that are finding things tough. This can help him decide how much to invest in a sector, although he won't invest 10% more or less than its weight in the Russell 2000 index. Investments in individual companies are also limited so their weight in the fund isn’t too different from the benchmark. In practice though the fund and benchmark will look different as the fund only invests in 40-60 companies out of the thousands that make up the index. Weldon believes the sector and stock level limits provide ample freedom to reflect his convictions while ensuring a good balance of investments. Holding a smaller number of investments can increase risk, as each has a larger impact on performance.

In light of the slowing US economy, Weldon has increased the fund’s exposure to healthcare, consumer staple and utility stocks on the basis of their greater earnings stability than the rest of the market. He’s also added to the fund’s oil exposure through multi-basin producer Ovintiv after its progress in strengthening its balance sheet and the prospect of increasing returns to shareholders. To help fund these positions, Weldon has sold investments in some financials stocks like Jefferies and Ally Financial.

Culture

Weldon is a partner at Artemis, which is a private company. We think this structure is a good thing for investors, as both manager and firm are focused on the long-term and can run funds without distractions from short-term shareholder demands. Artemis provides an attractive environment for fund managers, allowing them the freedom to run money how they see fit without imposing a ‘house view’ on them. It’s also a collegiate atmosphere, with managers supporting and challenging each other. Fund managers at Artemis are required to invest their own money into their funds, so they benefit when their investors do.

ESG integration

Weldon believes that analysing environmental, social and governance (ESG) factors as part of the investment case helps to identify risks to and opportunities for a business. He thinks these factors are increasingly impacting stock valuations and so integrates this analysis into the investment process.

Investment teams at Artemis are encouraged to think for themselves and invest according to their own style, so the quality of ESG integration across the firm varies. Artemis does have a firm-wide policy to support the aims of international conventions on cluster munitions and anti-personnel mines and therefore the firm will not knowingly invest in companies which produce these weapons.

Artemis votes on all its holdings, unless restricted from doing so, and fund managers engage with firms to develop their understanding, raise issues with management and monitor developments. Artemis produces a monthly voting summary, and these summaries include rationales for some of the more controversial votes. Engagement case studies can be found in the firm’s annual Stewardship Report.

Cost

This fund has an ongoing annual charge of 0.87%, but we've secured HL clients an ongoing saving of 0.09%. This means you pay a net ongoing charge of 0.78%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Since joining Artemis to launch the fund in October 2014, Weldon has delivered attractive returns for investors, gaining 197.67%*, compared with 123.00% for the Russell 2000 index. Our analysis suggests that Weldon’s astute stock picking has added value for the fund particularly in the consumer discretionary sector. We think his disciplined process application has played an important role in this. Please remember past performance isn't a guide to the future.

Over the last year the fund has underperformed the Russell 2000 index. It delivered a negative return of 11.11% compared with the Russell 2000 index’s loss of 6.56%. The fund’s tilt towards more economically sensitive sectors at the beginning of 2022 held back performance with more persistent than expected inflation, rising interest rates and tight supply chains. Over the year, our analysis suggests that the fund’s investments in investment firm LPL Financial Holdings and animal food manufacturer Darling Ingredients have been among the biggest contributors to performance.

Over the longer term, funds managed by Weldon have tended to hold up better than the broader market when it falls. But they haven’t kept up quite as quickly when the market has risen. This performance profile has led to good long-term returns for investors and we continue to believe that Cormac Weldon is a talented manager. All investments fall as well as rise in value, so investors could get back less than they invest.

Annual percentage growth (%)

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2022

Find out more on Artemis US Smaller Companies, including charges

Artemis US Smaller Companies Key Investor Information