Artemis US Smaller Companies: June 2023 fund update

• Cormac Weldon has over 20 years’ experience of investing in the US and has the support of a US team that has recently been enhanced
• He uses a clear, disciplined investment approach, which has served the fund well since launch
• We think this is a great way to invest in smaller companies with high growth potential in one of the world’s most innovative markets
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

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 add diversification 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 high-quality team of investors around him too, with seven dedicated US investors 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.

In September 2022, Olivia Micklem became co-manager of the fund. Micklem has 15 years of industry experience, beginning at Threadneedle as a graduate in 2007. She then joined the US Equity team as an analyst, covering Consumer Staples. Micklem then followed Weldon to Artemis in 2014 as an analyst, covering the Consumer Staples and Healthcare sectors. The fund continues to be run in the same way, with Weldon remaining the final decision maker.

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 50-70 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.

Over the course of the last 12 months, Weldon has decreased the funds exposure to financials and healthcare in favour of technology companies. He believes that interest rates are close to peaking and that the US economy will either enter a mild recession or avoid one all together before entering a growth stage. Over the last 12 months, Weldon has sold the fund’s investment in US regional bank Western Alliance as well as decreasing exposure to LPL Financial and healthcare company Bio-Rad. This has funded new investments in technology companies Okta and Twilio.

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

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. That said, recent meetings with the Artemis teams we back on the Wealth Shortlist suggest ESG is starting to become a more important factor. CIO Matthew Beesley has also made ESG a priority and there is evidence that the firm is levelling up.

Artemis has a firm-wide policy to support the aims of international conventions on cluster munitions and antipersonnel mines and therefore the firm will not knowingly invest in companies which produce these weapons.

The firm also provides helpful ‘responsible investing stamps’ next to each of its funds, which help investors see, at a glance, which forms of responsible investment are incorporated in each fund.

Artemis votes on all their holdings, unless restricted from doing so, and fund managers engage with firms to develop their understanding, raise issues with management and monitor subsequent developments. The firm provides engagement case studies, and other information about its engagement and voting efforts, in an annual Stewardship report. Artemis also provides a monthly voting summary which includes rationales for all votes. Stewardship activity is carried out in line with the firm’s comprehensive voting and engagement policies

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 175.26%*, compared with 116.15% for the Russell 2000 index. Our analysis suggests that Weldon’s astute stock picking has added value for the fund particularly in the healthcare and travel and leisure sectors. 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 return of -7.53% compared with the Russell 2000 index’s loss of -3.07%. Weldon thought inflation wouldn’t be as sticky as it has been. And so the fund’s tilt towards more growth and economically sensitive sectors in 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 biotechnology firm Maravai LifeSciences and regional banks Western Alliance and Pinnacle Financial Partners have been among the biggest detractors from performance. On the other hand, the fund’s investments in Clean Harbors and Axon Enterprise have been the largest contributors to performance over the last 12 months.

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. However, this has not been the case more recently. 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 31/05/2023.

Find out more on Artemis US Smaller Companies, including charges

Artemis US Smaller Companies Key Investor Information