Artemis US Smaller Companies; June 2021 fund update

Joseph Hill | Wed 30 June 2021

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• Cormac Weldon has almost 20 years’ experience of investing in the US and has the support of a strong team of analysts
• He uses a clear, disciplined investment approach, which has served the fund well since launch
• We think this is a great way to invest in smaller companies with high growth potential in one of the world’s most innovative markets
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

We think this fund is a great way to invest in smaller companies with high growth potential in the US, one of the world's most innovative markets. The fund aims to deliver long-term growth by investing in smaller companies based in the US. Smaller businesses are often among the most innovative and offer lots of growth potential, but they're higher risk than their larger counterparts. We think the fund could be a good addition to a portfolio with little invested in the US, or could work well alongside other US funds focused on larger companies.

Manager

Cormac Weldon leads the US equity team at Artemis and has been manager of the fund since launch in October 2014. He joined the company from Threadneedle, where he was head of the North America team. He has plenty of experience investing in the US market, having managed funds investing there since 2001, and is a manager we rate highly.

Weldon has the support of a good-quality team of investors around him too, with six dedicated US analysts at his disposal. Many of the team moved across from Threadneedle to join Artemis at the same time as Weldon, so they’ve worked together for a long time. They all follow the same investment process and are specialists in their respective sectors.

Process

Weldon looks to invest in companies that he thinks have a 2:1 ratio of upside potential versus downside risk from the current market price. He does this by identifying what really drives the company. His team then spend time modelling what could happen to their profitability and growth over time, as they are likely to have the greatest impact on its valuation in the future. He then builds the portfolio with these ratios in mind, with the companies where upside potential significantly outweighs the downside risk likely to justify larger position sizes in the fund.

Regularly meeting company management is important to Weldon and his team. They think this is one of the best ways to deepen their understanding of the business model and assess the quality of the management team.

Weldon also considers how the US economy is performing to identify sectors that are benefiting from trends, as well as the areas that are finding things tough. This can help him decide how much to invest in a sector, although he won't invest beyond 10% more or 10% less than its weight in the Russell 2000 index. Single investments are also limited so their weight in the portfolio doesn't differ too much from their weight in the benchmark. In practice though the fund and the benchmark will look different as the fund only invests in 40-60 companies out of the thousands that make up the index. Weldon believes the sector and stock level limits provide him ample freedom to reflect his convictions whilst also ensuring a good balance of investments. Holding a smaller number of investments can increase risk, as each has a larger impact on performance.

As we entered the final quarter of 2020, the economic outlook changed markedly for the better as Pfizer’s highly effective vaccination against Covid-19 was announced. This meant some economically sensitive ‘cyclical’ companies enjoyed a rebound. Around this time Weldon was reducing the fund’s holdings in some of the companies that had done very well over the lockdown period and were trading at higher valuations. These companies included DocuSign and Teladoc. He used the proceeds to invest in companies that were likely to benefit from the re-opening of the economy, particularly in the industrial and consumer sectors.

More recently, Weldon sold the fund’s position in Booz Allen Hamilton, the government IT contractor. The stock had previously been a top position in the fund but its modest growth rate, lack of sensitivity to economic growth and its valuation all convinced Weldon to sell and move on.

In terms of purchases, life insurer Equitable Holdings was added to the fund, increasing exposure to financials. Weldon thinks the company will benefit from rising interest rates as well as its exposure to financial markets via the company’s shareholding in Investment Bank Sanford Bernstein

Culture

Weldon is a partner at Artemis, which 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 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

This fund has an ongoing annual charge of 0.89%, but we've secured HL clients an ongoing saving of 0.09%. This means you pay a net ongoing charge of 0.80%. 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

Since joining Artemis to launch the fund in October 2014, Weldon has delivered attractive returns for investors, gaining 234.9%* compared with 138.6% for the Russell 2000 index over the same period. Our analysis suggests Weldon’s astute stock picking has added value for the fund, particularly in the consumer discretionary sector. We think his disciplined process application has played an important role in this. Please remember past performance isn't a guide to the future.

Over the last year, the fund has underperformed the Russell 2000 index, by 6.4% despite delivering a strong return of 37.1%. This is a short timeframe to compare performance over though.

The positive news on coronavirus vaccines in late 2020 meant many economically sensitive ‘cyclical’ companies enjoyed a rebound after previously being out of favour. The particularly strong run these kind of stocks enjoyed in this period caused the fund to fall behind its index. The fund does have some investments in cyclical companies but Weldon decided to maintain a higher quality portfolio rather than further increasing exposure to cyclicals.

Despite lagging the index over this short period, some investments have delivered strong returns. Social media company Pinterest and steel company Stelco holdings have been among the fund’s top performers over the last 12 months.

Over the longer term funds managed by Weldon have tended to hold up better than the broader market when it falls. But they haven’t kept up quite as quickly when the market has risen. This profile has led to good long-term returns and we continue to believe Cormac Weldon is a talented manager. All investments fall as well as rise in value, so investors could get back less than they invest.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2021.

Find out more on Artemis US Smaller Companies, including charges

Artemis US Smaller Companies Key Investor Information