Artemis US Smaller Companies: June 2024 fund update

• Cormac Weldon has over 20 years’ experience of investing in the US

• 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 the Artemis US Smaller Companies 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 add diversification 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 Columbia 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 high-quality team of investors around him too, with five dedicated US investors at his disposal. Many of the team moved across from Columbia 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.

In September 2022, Olivia Micklem became co-manager of the fund. Micklem has 15 years’ industry experience, beginning at Columbia Threadneedle as a graduate in 2007. She then joined the US Equity team as an analyst, covering Consumer Staples. Micklem followed Weldon to Artemis in 2014 as an analyst, covering the Consumer Staples and Healthcare sectors. While Micklem is now a named co-manager, the fund continues to be run in the same way, with Weldon remaining the final decision maker.

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 its 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 10% more or less than its weight in the Russell 2000 index. Investments in individual companies are also limited so their weight in the fund isn’t too different from the benchmark. In practice though the fund and benchmark will look different as the fund only invests in 50-70 companies out of the thousands that make up the index. Weldon believes the sector and stock level limits provide ample freedom to reflect his convictions while ensuring a good balance of investments. Holding a smaller number of investments can increase risk, as each has a larger impact on performance.

Over the course of the last 12 months, Weldon has made a number of changes to the fund. Technology company Western Digital was added to the fund and quickly became the funds top holding. It is a key manufacturer of hard disk drives and NAND flash memory. Infrastructure company Core & Main was also added to the fund and is now the second largest holding. It is a leading distributor of water and waste water and has performed above expectations.

On the other hand, Weldon sold transport and logistics company TFI International. It reported weaker earnings in the first quarter of 2024 and despite Weldon liking the long-term potential for the business he felt there were better opportunities elsewhere. Weldon has also been taking profits on names that have been doing well. For example, nVent and Comfort Systems. Weldon has been using these profits to reinvest in other areas that are more appealing,

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.

ESG integration

Investment teams across Artemis are encouraged to think for themselves and invest according to their own style, so approaches to ESG integration across the firm vary.

Artemis has a firm-wide policy to support the aims of international conventions on cluster munitions and antipersonnel mines and therefore the firm will not knowingly invest in companies that produce these weapons.

Artemis votes on all their holdings, unless restricted from doing so, and fund managers engage with firms to develop their understanding, raise issues with management and monitor subsequent developments. The firm provides engagement case studies, and other information about its engagement and voting efforts, in an annual Stewardship report. Artemis also provides a monthly voting summary which includes rationales for votes against management and abstentions. Stewardship activity is carried out in line with the firm’s comprehensive voting and engagement policies

Although this fund is not a sustainable fund, the fund managers integrate the assessment of ESG risks into the process as they believe these can be a long-term risk to an investment.

Cost

This fund has an ongoing annual charge of 0.87%, but we've secured HL clients 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, except in the HL Junior ISA, where no platform fee applies.

Performance

Since joining Artemis to launch the fund in October 2014, Weldon has delivered attractive returns for investors, gaining 254.35%*, compared with 152.73% for the Russell 2000 index and 174.35% for the IA North America Smaller Companies sector average.

Our analysis suggests that Weldon’s astute stock picking has added value for the fund particularly in the Industrials 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 12 months the fund has outperformed the Russell 2000 index. It delivered a return of 28.73% compared to 16.93% of the Russell 2000 index. It also outperformed the IA North America Smaller Companies sector average return of 15.86%.

The fund’s investment in energy company Constellation Energy was the biggest contributor to performance. It produces clean energy which has been in demand from the significant investment in data centres. It also benefits from the inflation reduction act (IRA) which provides tax credits to clean energy facilities such as the one operated by Constellation. Construction company TopBuild also added to performance. It had a strong set of results from their building materials business and they believe this can continue to grow in 2024.

On the other hand, their investment in NextEra Energy Partners was the largest detractor to performance. This has now been sold. Lamb Weston Holdings the French fry business has seen weakening demand which has negatively impacted the share price. Weldon still believes in the business over the long-term though and he continues to invest in it.

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. However, this has not been the case more recently.

This performance profile has led to good long-term returns for investors and we continue to believe that Cormac Weldon is a talented manager. All investments fall as well as rise in value, so investors could get back less than they invest.