InvestmentsDec 14 2015

Fund Review: Artemis US Smaller Companies

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The aim of this £44m fund, which passed its first anniversary in October, is to achieve long-term capital growth.

Cormac Weldon has managed the vehicle since launch and notes the team seeks growth “by investing in a focused portfolio of our best ideas among US firms, whose market value is less than $10bn [£6.6bn]”. He adds: “We think we’re looking in the right place: the US is home to many of the world’s most innovative, entrepreneurial and fastest-growing smaller companies.”

Mr Weldon notes the investment process used to look for stocks to include in the vehicle “is the same one that underpins every US fund that Artemis manages”. He explains: “The approach is macro-aware and style-agnostic. This means we adapt the portfolio to market conditions, with the aim of outperforming across the economic cycle. In seeking smaller companies we look for stocks that offer an asymmetric risk profile. Put more simply, we want to own stocks where the upside potential outweighs downside risk by a factor of at least two to one.”

The manager says the team, which is made up of seven people who all moved across from Threadneedle in 2014, had developed a “pragmatic, flexible process” at their previous company. But joining Artemis “allowed us to draw on the insight of new colleagues” who can provide useful insights that can be used to the team’s advantage.

The team focuses on picking individual stocks rather than relying on top-down macro factors, although Mr Weldon acknowledges that sometimes “finding the right stocks means understanding what changes in the economic environment will mean for individual companies”.

While the focus is on stocks, the process of generating ideas begins with macro analysis to help understand both the cyclical and longer-term trends that are shaping the US economy.

The fund has returned a healthy 23.7 per cent since launch to December 2 2015, outperforming both the Russell 2000 index’s gain of 16.4 per cent and the Investment Association North American Smaller Companies sector average of 15.6 per cent, data from FE Analytics shows.

The manager notes one of the biggest contributions to performance this year came from a stock that was held for a relatively brief period – healthcare firm Abiomed. He explains: “It possesses a combination of the characteristics we would like to find in every stock we own: an innovative product that solves a genuine need, strong growth from sales and a good management team. We met the company in June, realised it was attractive and initiated a position almost immediately. This resulted in the company’s share price rising quite sharply, and by August it had hit our target price, prompting us to sell.”

Other contributors to performance have been quite diverse, ranging from a chain of beauty stores based in Illinois, called Ulta Salon, to payments-processing firm Global Payments.

While the positives have generally outweighed the negatives, Mr Weldon acknowledges “some disappointments are inevitable”. He cites LDR Holding Corporation as this year’s biggest drag on performance as it reported revenues “that were very slightly below the market’s expectations”. He adds: “This drove the stock down significantly; share prices across the healthcare sector have been volatile ever since Hillary Clinton’s attack on drug pricing. We used the fall as an opportunity to add to our position.”

Recent changes to the portfolio include an increased exposure to the technology sector as a result of stock selection. The manager explains: “We bought Qorvo, which makes the radio chips found inside smartphones. Earlier in 2015 an inventory glut in the radio chip market in China caused some of Qorvo’s customers to stop placing orders. Its share price halved, [but] this sell-off improved the ‘up/down’ in the stock [a measure of where the balance between upside potential and downside risk lies] and so presented us with an opportunity.”

Looking ahead, the manager suggests the outlook for the US economy in 2016 “is okay, but no more than that”, with growth of between 2 and 3 per cent. He adds: “Firms that depend on capital expenditure by the energy sector may continue to struggle. This means it will be important for us to focus on good companies in those areas of the economy that are doing well.”

EXPERT VIEW

Lena Tsymbaluk, manager and research analyst, Morningstar

We are positive on Cormac Weldon, who is a well-known name in the UK in terms of US equity investing. Mr Weldon built a strong record running a similar smaller-cap mandate at his previous house, Threadneedle, from 2005 until 2012 and did so with lower than average volatility. This fund is managed according to the same strategy, investing with conviction in the team’s best ideas, which are smaller rather than small companies as the manager aims for $1bn to $10bn market-cap range. The approach is dynamic and the manager aims to be responsive to the prevailing environment with a view to generating a strong performance across the investment cycle.