Artemis Strategic Assets: May 2021 fund update

Tom Mills | Thu 20 May 2021

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• This fund invests across a range of assets, including global company shares, bonds, commodities and currencies
• Kartik Kumar took over sole responsibility for managing the fund in January 2021 after William Littlewood recently retired
• Performance in recent years has fallen short of the fund’s objectives. Kumar has implemented some process changes that could improve returns – but there are no guarantees
• This fund is not on our Wealth Shortlist. You can find the funds chosen by our analysts for their long-term performance potential here

How it fits in a portfolio

This fund spreads risk by investing in a range of different investments, including shares, bonds, commodities, and cash. It aims to provide some long-term growth, but also experience less ups and downs than the stock market. We think the fund could bring diversification to an investment portfolio, given its range of investments, and could provide a slightly more conservative element to a portfolio focused on shares. That said, we view it as a more adventurous mixed-asset fund, and don't expect it to hold up as well as others at times.

Manager

Kartik Kumar took over sole responsibility for the Artemis Strategic Assets fund in January 2021, following the retirement of William Littlewood, who had managed the fund since its launch in 2009. Kumar joined Artemis in 2012 and spent time with the bond, UK equities and global equities teams, before moving in 2013 to help Littlewood with research and analysis for this fund. Kumar was appointed co-manager of Artemis Strategic Assets alongside Littlewood in 2017. He also currently manages a UK-focused investment trust, which he began managing in 2018.

Littlewood was a seasoned investor, working on mixed-asset strategies at Artemis since 2005 and setting up the Artemis Strategic Assets Fund in 2009. Prior to joining Artemis he worked at Jupiter Asset Management, where he built an impressive record running a UK equity income fund. We liked how he and Kumar brought different perspectives to the fund.

While he is now the sole decision-maker, and will no longer work with the experienced Littlewood, Kumar is now supported by two analysts and could benefit from the research and analysis of various global equity and fixed income managers, whom he works alongside.

Kumar has a shorter track record, and we typically prefer fund managers with longer records, who have managed funds throughout a variety of market conditions. That said, he is highly regarded at Artemis, and we view him as a committed and enthusiastic investor.

While we think Kumar has the experience and skills to manage this strategy, we currently have greater conviction in other mixed-asset funds.

Process

The overall aim of this fund is to grow investors' capital by more than 3% above the Consumer Price Index (a measure of UK inflation) over the long term. Kumar has lots of flexibility with this fund in order to try to achieve this.

While the core of the investment process remains the same, the manager has recently made changes to the process with the aim of improving returns. Kumar will maintain the fund’s longer-term investment philosophy – to provide long-term growth, while offering some shelter to investors’ capital in poor market conditions. He’ll continue to do this by investing across a range of assets, including shares (equities), bonds, commodities and cash.

Kumar believes it's difficult to time the market and, as equities are expected to provide most long-term growth, the amount invested in shares will vary less than in the past. On a net basis (adjusting for any ‘short’ positions) this is expected to be between 60%-80% of the portfolio.

He also focuses on only his highest-conviction ideas, while limiting the number of smaller positions that have less of an impact on performance. He continues to look for undervalued companies with longer-term growth potential. These companies are often out of favour with many investors, leading to a lower share price, but Kumar only invests if he thinks the company can improve in future. He looks for competitive advantages and the ability to produce high returns on capital, hallmarks of better-quality companies.

The rest of the fund invests in bonds, including higher-risk high-yield bonds, commodities and cash. Importantly, this part of the fund should perform differently from the equities portion, offering diversification. For example, if stock markets go through a tough patch and share prices fall, the other assets in the fund should be expected to offset this to a degree, and provide some shelter from volatility. The manager has made some changes to this part of the fund to try to ensure that’s the case.

Foreign currencies are still held in the fund, but with the aim of reducing foreign currency risk, rather than aiming to generate additional returns. Commodities such as gold are still held to help diversification, but make up less of the fund.

Shorting also continues to play a role but with some changes. The manager uses derivatives to take 'short' positions, which means they could benefit if the price of a particular asset falls in value, but it could also work the other way if prices rise. This use of derivatives increases risk.

The recent process changes are intended to ensure that short positions are complementary to the fund's long equity positions, helping to offset risks rather than add extra risks to the fund. The manager takes short positions in both shares and bonds.

The fund has had large short positions in bonds since its launch. This is because the manager thinks national debt levels are unsustainable, and many economies will eventually end with high rates of inflation, while many companies could default. That's why the fund has held bond 'shorts' which should make money if bond prices fall. In the past, this position was focused on Japanese government bonds, but is now more diversified and includes UK, French and German government bonds.

The manager has the flexibility to invest in smaller companies, emerging markets and high yield bonds. These are higher-risk areas.

Culture

Artemis 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 best 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.

Cost

The fund has an annual ongoing charge of 0.87%, but through HL you can secure 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

While the fund launched in 2009, we think the most relevant timeframe to measure its performance is since Kumar became co-manager in May 2017. Since then it's grown by 3.8%*, while the FTSE All-Share increased by 16.5%, and the CPI plus 3% benchmark by 19.1%. Past performance isn’t a guide to future returns.

The fund’s performance over this period has been disappointing overall. Over the past 12 months it grew by 24.5%, mostly thanks to long positions in shares, as markets recovered from the impact of Covid-19 in early 2020. This followed negative returns over the prior two years. Short positions in equities have been costly over recent years, particularly that in Telsa due to the company’s strong share price.

Like most funds that invest in shares, this one experienced losses in the first part of 2020. As expected, the long equity positions lost money, but so did short positions in equities, that might have been expected to provide protection. Positions in currencies also detracted, but commodities provided a positive contribution.

Short bond positions also haven't helped, acting as a drag on performance since the fund's launch. They could benefit performance if bond markets fall, as happened in the first quarter of 2021, but on the whole bond prices continued to rise (and yields fall) over the past decade. Ultimately the manager thinks investors will be rewarded for their patience and when bond prices fall, but this part of the fund won't help returns when bond prices rise.

In addition to the fund's main aim of long-term growth, it also aims to offer some shelter in weaker markets. However, this won't happen every time, and we view this as a more adventurous option compared to others with the same aim of sheltering capital.

Overall, the fund has been through a disappointing period, but view it as a good thing that Artemis has taken action to try to improve the fund’s performance. This may help to improve returns, but of course there are no guarantees.

Past performance isn’t a guide to the future. Source: *Lipper IM to 30 April 2021

Find out more about Artemis Strategic Assets, including charges

Artemis Strategic Assets Key Investor Information