Good investors are not emotional; they remain calm, rational and level-headed, despite the inherent volatility in the stock market. This is much easier said than done. Buying a stock that is well-loved is much easier than buying a stock that has fallen out of favour. Likewise, in uncertain times, the tendency to follow the herd rather than act in a rational manner can lead to poor investment decisions.
Fund managers Peter Saacke, Philip Wolstencroft and Raheel Altaf seek to overcome these behavioural biases. They use an in-house quantitative system called Smart-GARP to scour the market for attractive investment opportunities.
This system has been employed at Artemis since 2001 and will be used by the managers to run the Artemis Global Emerging Markets Fund, which will launch on 8 April 2015. Smart-GARP will screen the 'financial DNA' of 2,000 companies located across the emerging markets. A company's growth, valuation, earnings forecasts and share price momentum will then be objectively assessed using a range of metrics. The model also considers wider economic factors such as inflation, and the pattern of director buying/selling (often a good indication as to the health of a company). In this way the managers aim to identify companies that are cheap compared to their current forecast growth rates.
The managers suggest Smart-GARP will lend itself well to an emerging markets strategy - the wide variety of stocks, sectors and countries across the region means greater valuation dispersion is more apparent than many other markets. As such, Smart-GARP, which seeks undervalued opportunities, could work well here.
At launch, this adventurous fund is expected to have a bias towards countries including Taiwan, particularly in the technology, industrials and financials sectors, as well as India. Although India's stock markets have performed well over the past year, the managers believe valuations are not stretched and they expect the share prices of many companies will be supported by earnings growth. On the other hand, they are currently finding fewer opportunities in countries such as Brazil and South Korea. Overall, the fund is also likely to have greater exposure to higher-risk medium-sized companies than the broader emerging markets benchmark index. The fund managers also have the flexibility to invest in derivatives which is a higher risk approach.
Our view on this fund
A number of Artemis' funds are managed using Smart-GARP, including the Global Growth, European Growth and Capital funds. Prior to the 2008/09 financial crisis this model delivered exceptional returns. However, an investment strategy relying on a quantitative approach will not work in every scenario. During the financial crisis the funds fell much more heavily than their respective peers and benchmarks. These funds have since seen an improvement in performance over the past few years although past performance should not be seen as an indicator of future returns.
The new Artemis Global Emerging Markets Fund will have the backing of an experienced investment team. While the managers have some experience managing higher risk emerging markets equities as part of the aforementioned Global Growth Fund, they do not currently have any verifiable track record in running an emerging markets-focused portfolio. At present, we will not be adding this fund to the Wealth 150 list of our favourite funds across the major sectors, but we will inform investors if our views change.
Investors wishing to invest at launch can place their instruction online or over the telephone with our dealers by 5pm on 7 April.
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