22 Jun 2021
The Artemis Global Select Fund is celebrating its 10th Anniversary. Simon Edelsten looks back at how its themes have performed over the last decade.
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On 16 June 2011, Artemis launched the Global Select Fund. It set out to:
Ten years gives enough data to assess the effectiveness of the approach and our ability to deliver on the objectives.
Since inception the fund has returned 245.28% net compared with the MSCI AC World NR GBP index which returned 205.75%.1 That is 13.18% per annum, rather more than we expected; and is of course a return net of all fees and charges. Furthermore, considerably less risk had been taken than the index contains: the standard deviation of the fund over 3 years has been 12.2 versus 14 for the index, giving an Information Ratio of 0.42.
Looking solely at capital protection, the fund has outperformed in 72%3 of periods when the market fell, while only beating the market in 48% of periods when it rose4. Given how strong equity markets have been over the last decade, the fund’s returns would have been stronger if we had taken more risk. But we feel returns have been more than adequate; and that such bull market conditions are unlikely to last for ever.
Over the decade we have invested in 15 themes in all, the portfolio normally containing about nine themes chosen to provide diversification. We review and update all the themes annually as even the longest-term plans soon get out of date – conditions change and technologies develop rapidly these days. Of course, running a global fund gives us an enormous advantage when seeking to identify and populate successful investment themes – it gives us a world of opportunities often unavailable to country-specific managers. The thematic approach has influenced geographical asset allocation, helping to make the fund distinctive. For instance, we have generally had a higher weighting in Asia than most global funds and this has added to performance and diversification.
Our best performing theme has been Emerging market consumer – in other words, investing in companies that benefit from the growth in consumption from emerging markets. A decade ago, demographic data showed developing societies to be ageing, while the younger societies in Asia and Latin America were seeing steady growth in their labour markets. These trends have developed much as expected, but are now slowing with China, in particular, facing an ageing demographic and birth rates falling in many countries including India.
Although, as a consequence, demand for mass market consumer goods, such as soap powder, has faltered, demand for luxury items continues to grow rapidly. Our stock selection within this theme today, concentrated in Louis Vuitton, Richemont (the owner of Cartier) and Hermes, is seeing remarkably strong growth: Hermes’ first quarter sales announced this March saw sales 44% higher than 2020 (and 33% higher than the 2019 first quarter, showing this is not just a post-lockdown bounce-back).
Other themes that have worked well for our unit-holders include Online services – giving exposure to the US technology stocks that have dominated markets this decade – and Healthcare costs and Scientific equipment. Within these our best performing stocks have been Thermo Fisher, world leader in scientific equipment and, recently, Covid-testing machines; and Boston Scientific, a leader in coronary stents.
It is notable that both these stocks and their sectors are currently trading at relative lows against the index, seen as ‘last year’s stories’ which offer no potential for recovery. In the case of Covid-testing companies, no doubt there will be less testing in future than in the recent past. But we suspect the future of public health will see a permanent shift towards higher levels of testing for a range of diseases; and many tests performed at home or at work and school, not just to identify infectious diseases but also to detect cancer earlier.
Though we sold Boston Scientific in late 2019 when the valuation was looking stretched (an illustration of us applying our valuation process), we recently invested in it for a second time. It has underperformed Wall Street by over 20% in the last year. As hospitals return to normal operating rotas and as patients start to see their GPs again, it appears that the level of cardiovascular disease has risen – in some instances, no doubt, the result of a year of ‘lockdown lifestyles’. Boston Scientific’s stents are used to keep open the major arteries. As stents get smaller, they can also be used in peripheral and smaller arteries, such as in the upper leg. Also, this highly effective procedure for treating arterial problems is becoming affordable for the billions outside the developed world who may need it.
Relative to the index, the fund has also benefitted from avoiding certain sectors, not least oil & gas. When we review our themes, we try to assess an industry on a long-term view, both in terms of the factors leading to growth and any risks arising – these covering environmental, social and governance matters. This approach has led us away since launch from industries such as tobacco, oil & gas and weapons manufacture; in May 2019 we sold the holdings in our Tourism theme on rising environmental concerns around mass market air travel given a greater voice after the European elections. So, concentrating the portfolio on high-quality companies in sustainable sectors has kept us out of trouble.
We see (and always have seen) sustainability as integral to selecting themes for our portfolio, but note that this is a dynamic area where predicting future issues is more important than looking at historic scoring data. For instance, we now feel that the food manufacturing industries will face multiple issues raising their standards to the level consumers are coming to demand. We therefore seek to avoid these stocks in the portfolio.
What have we learnt and what does this mean for the future of the fund? Firstly, that the thematic approach has worked. The bulk of our returns have come from stock selection, so that will remain our core concentration. Secondly, it has encouraged us to incorporate sustainability factors within our judgement and helped us avoid weaker investment areas. We believe sustainability issues will continue to rise and become more clearly defined. So we will increase our attention to these factors to help our overall investment returns.
We are currently reviewing the themes and expect to share details of changes in the autumn.
Lastly, we will continue to take a disciplined approach to valuation. The past decade has seen equity markets supported by ever lower bond yields, and that period may be ending. If we are moving towards a more normal phase with periods of inflation and interest rates sometimes going up rather than just down, looking for ‘value for money’ will play a rather larger role in active equity fund management.
The prospects for returns still seem excellent to us. Balance sheets are strong and our selected companies continue to invest and innovate. New technologies help them develop new products, better solutions and often to raise productivity. Household financial positions are generally strong, as are the finances of listed companies. The debt is with governments and with private companies. There is a lot of it, but at least it is in the best (or least bad) place.
Equities still seem to us the best asset for savers. Leading equities, having coped with last year’s extraordinary conditions extraordinarily well, generally offer higher yields than bonds. They are also able to cope with modest changes in inflation, which no doubt will come as markets re-open. Over the past 10 years many investors have joined our list of unit holders, especially those looking for actively managed exposure to global growth themes and who are prepared to be patient. We look forward to the next decade with confidence.
To find out more about the Artemis Global Select Fund and its positioning visit the fund page at www.artemisfunds.com.
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