FOCUS: Artemis - Equities

Artemis’ Rosanna Burcheri, Alex Illingworth and Simon Edelsten on how the team’s Global Select Fund takes a defensive approach to equities

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The Artemis Global Select Fund, managed by Simon Edelsten, Alex Illingworth and Rosanna Burcheri, aims to grow real wealth by investing in high-quality stocks worldwide: companies with strong positions in their markets, excellent balance sheets and sustainable pricing power. In this guide we speak to the managers about their “incredibly fussy” selection approach and the risk of recession in 2019. Global Select’s sixty stocks are selected on their potential to grow and prosper, even in periods of economic contraction.

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All the world loves America. The investment world, at least, continues to favour US stocks, with tech firms performing especially strongly of late on the back of positive economic data, including low unemployment and subdued inflation. Simon Edelsten doesn’t demur from this enthusiasm. Slightly over half of the fund he manages alongside Alex Illingworth and Rosanna Burcheri, Artemis Global Select, is currently invested in the US. But he is also open to seeking out promising stocks in markets that are currently sluggish or unloved, such as China and Japan. “We won’t buy into a market that has got economic problems, but we will buy quality stocks in a stable market at a cheap price,” Edelsten explains. “Because we’ve got a long-term view, we can wait for things to get better.” “We do quite a lot of ‘dull but stable’. It’s amazing how adding these things up and compounding the interest can make you good amounts of money.”

market outlook

Variations on a theme: how to pick the world’s best equities

Simon Edelsten, Fund Manager, Artemis

This approach is possible because Edelsten’s team eschews GDP predictions, focusing instead on half a dozen long-term growth themes at any time. Automation and healthcare are among the current crop. A forensic global analysis follows the selection of each theme, including interviews with players in rival markets: “You learn a lot by talking to Japanese robot companies about the weaknesses of their American rivals, and vice versa,” says Edelsten. The team then seeks out the strongest and best-value companies within that theme around the world. This, Edelsten believes, is where active fund managers can prove their worth in a market that offers a wealth of choices for private investors. Buying an ETF is no substitute for global analysis and the capacity to spot cheap stocks at the right time, he suggests: “That’s really where we’re earning our fees – not just by finding a theme, but by making sure we’re investing in an efficient way and that we’re on top of the competitive changes that happen quite rapidly over the long run.”

Global analysis

For the moment, those competitive factors often lead back to America, as far as Edelsten is concerned. He believes US corporates are better positioned than their counterparts elsewhere to face the big technological decisions posed by automation and big data. They are also better placed for growth: “Because European stocks have been under pressure to pay dividends over the whole of the last cycle, their investment levels have generally been lower than American businesses, which have carried on doing more R&D and investing for the future.” While European equities appear to be cheaper, much of that is down to weighting, Edelsten points out. European stockmarkets have far fewer technology companies listed and a heavy weighting in banks, which trade on lower multiples. Which is not to say that there aren’t overvalued stocks in the States – “We think the very biggest companies in America, by and large, are too expensive” – but they are relatively few in number.

Healthy States

Resilient to risk

Edelsten is also less exercised than some about the risk of recession in 2019, seeing little sign of the financial instability or credit overreach that preceded the last crash: “At the moment, financing is pretty rock solid and households haven’t had too much of a spending boom.” In fact, Edelsten is confident that the conservative approach of his fund would help to preserve capital, even if a slump did occur. Artemis Global Select avoids the financial sector almost entirely, and is similarly averse to sectors prone to heavy cyclical shifts, such as oil, mining and automotive. “Even if a recession turned up unexpectedly, our fund should generally do better than the index as a whole,” he predicts. Shaky political economies are also avoided. The fund has been content to sit out Russia’s potential, for instance, on the grounds that “Russia is a very difficult place to feel confident about leaving clients’ money”. Acting within these prudent parameters leaves Edelsten and his team plenty of freedom to be “incredibly fussy” in picking potential winners across the globe. “There are many thousands of stocks around the world, which makes our job of selecting 60 quality companies a lot easier.”

The inflation cycle across key markets

Source: Bloomberg as at 28 February 2019.

Simon Edelsten After graduating from Trinity College, Oxford, he joined Phillips & Drew in 1985 and moved to Dresdner Kleinwort Benson in 1997 as head of European equity sales. From there he went to Taube Hodson Stonex (THS) in 2001: in a five-man team, Simon had joint responsibility for global equities. He joined Artemis in 2011.

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Artemis Global Select Fund

Need to know

Investment approach

fund launch

Regional Focus

Fund size (mid-basis)

16 June 2011

Global

£126.9m

Asset class

Equity

Fund type

Unit Trust

Focus

Capital growth

Regional breakdown*

Source: Artemis as at 28 February 2019. *Does not include cash.

Performance since launch (16 June 2011)

Source: Lipper Limited, class I GBP accumulation units, mid to mid in sterling to 29 March 2019. Data from 16 June 2011. All figures show total returns with dividends reinvested. From 4 February 2019, this fund changed from a dual-priced to single-priced basis; historic performance is unaffected. *Relates to the IA Global Sector.

Global select’s risk/return ratio has performed in the top 10% since launch*

Sector breakdown

Artemis Global Select Fund

fund snapshot

49.6%

25.6%

11.9%

4.4%

2.7%

146.1%

125.4%

105.8%

Alex: Quite simply, we aim for consistent outperformance, whatever the economic environment, in order to grow the money of our investors in real terms. Our approach is a conservative one, meaning that relative to our peers, we tend to be more defensive. The fund’s 60 stocks tend not to have much UK exposure. In a way, it serves as a one-stop shop for people’s non-UK holdings. At its most basic, it’s designed to keep up in bull phases and build in some capital preservation for the more difficult periods.

What is the Artemis Global Select Fund designed to do?

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Whilst conservative, the fund isn’t boring

Rosanna Burcheri and Alex Illingworth, Fund Managers at Artemis

Fund Q&A

Rosanna: We’re looking for long-term growth trends. For example, the growth in tourism around the world or the move to reduce healthcare costs. When the three of us agree that we’ve found a sustainable long-term growth trend, we look for the best companies to express this trend and we put them on our shopping list. Locating high quality companies is the best way to exploit these long-term trends and only then do we look at the valuation. For companies to make it into the portfolio, they will need to fulfil our requirements of value: are they asset-backed and do they have a good cash flow?

Do you have a common investment philosophy across the range?

Rosanna: If you look at the history of the fund, our risk-return has been excellent. The way we have been able to achieve this is through diversification. Despite holding around only 60 stocks, the fund is well balanced, with each position taking up 1-3% of the fund. One characteristic of the fund compared to other global funds is that we have a 12% exposure to Japan where there are companies currently trading below asset value with excellent growth. One other way we try to get real diversification is by looking at the correlation of stocks within the portfolio. We aim to ensure that they are spread across different investment themes, thereby adding to the diversification. Alex: I think the difference is a combination of factors. Our list of around 60 stocks allows us to be nimble and diverse, incorporating a combination of upside potential yet risk and correlation control. This is augmented by our valuation techniques, which, in addition to cashflow metrics, analyse the Asset Value of the business from the balance sheet. Finally, there is our combined experience. This is a team of three individuals and I have the least amount of experience but have now been running global equity funds for over 21 years. Together this combination gives us confidence that we can grow real wealth and guide investors through an economic cycle.

What is the fund’s risk-return point of difference compared to other global equity funds?

Alex: One area we are particularly interested in is automation. The ever-decreasing cost of a robot means the ever-greater ubiquity of robots within general manufacturing. On top of that, there are a number of new industries which benefit from investment in robotics, from food production to surgery to self-driving vehicles. There are also further branches of robotics. There is this concept of ‘cobots’, which are collaborative robots. They are cheaper than employing somebody to do relatively menial tasks. Then there’s laser cutting and warehouse automation. There are a whole host of areas that, regardless of GDP, require investment. So we’re particularly interested in this area of automation and most of the best robotic companies are based in Japan. Given the current economic environment, we think it’s increasingly important to find companies that are not just piggy-backing on GDP growth.

Which ‘clusters’ or themes look more attractive at the moment?

Rosanna: For a simple reason: Japan has an older population so the country has to look for a structural way to improve productivity with fewer human bodies around. They invested to solve the problem early on. What’s more, in certain areas of the world we see companies at the onset of wage inflation which can create a problem if you don’t have pricing power. So the solution for these companies is to invest and automate their production line as much as possible. Alex: One of our largest positions in automation is Daifuku, which started its life in baggage reclaim. It’s now a global leader in factory warehouse automation.

It’s interesting. We assume that the US lead the world in automation because of Silicon Valley and so on, but on that specific area of robotics it’s not the US

The objective of the fund is to achieve long-term growth primarily from a portfolio of global equities that the managers’ consider to demonstrate leading positions in their sectors.

The Fund’s aim

Daifuku in Japan: A core Artemis Global Select holding

Alex: We’ve designed a fund for all seasons, a fund where we can get you through an economic cycle, and one which pays very strong adherence to valuation and understands balance sheet value as well as cashflow value. Rosanna: Whilst conservative, the fund isn’t boring. It’s very much skewed to medium-size companies rather than the large caps that everybody knows. You will find names in there that are different to our peers. Like Daifuku, that you won’t find in a lot of other global funds. Alex: I would add that we are later in the economic cycle and live in volatile times. So we believe that you increasingly need companies that can look after themselves. We continue to find plenty of companies whose growth or asset backing justify their valuation. We have exposure to some of the strongest global growth trends but we also naturally build in some defensiveness to the portfolio. As such, we have a process, and in particular a set of valuation tools, that can deal with the changing demands of an economic cycle.

Finally, why do you think an adviser should consider this fund at this point in the cycle?

Alex Illingworth After graduating from Durham, Alex began his career in 1997 running global funds at Rothschild Asset Management. Here, as part of a 3 person fund management team he had responsibility for global long-only and absolute return funds. He also had sole responsibility for 3 ethical and environmental mandates which he ran for 7 years. In 2003 he was appointed a director of global equity at Insight Investment, responsible for long-only, ethical and absolute return funds. He joined Artemis in 2011. Rosanna Burcheri After graduating in economics from Bocconi University in 1996, she joined Paribas Asset Management as a junior fund manager. In 2000, she moved to M&G as a fund manager and director responsible for pan-European equity portfolios. As a senior European portfolio manager at Shell Pension Management Service from 2004, she controlled £710m of assets. Then, in 2006, Rosanna became a partner and pan-European fund manager for FrontPoint Management (UK). She joined Artemis in 2011.

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