Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
I manage the Artemis UK Select Fund, a multi-cap ‘best ideas' portfolio, with my colleague Ambrose Faulks. Our aim is simply to maximise long-term capital growth and our approach is straightforward. We seek stocks where we anticipate a growing stream of earnings and where the valuation multiple applied to those earnings has the potential to rise over time. In other words, we seek undervalued growth.
We are macro-aware. Our views on the economy act as a lens through which we view bottom-up investment opportunities. To a greater or lesser extent, all industries are cyclical. Crucially, however, they do not all follow the same cycle - and nor are they all influenced by the cycle to the same extent. The fund's largest holdings are in stocks where there is a positive alignment between the stock-specific investment thesis and our macroeconomic views.
We run a concentrated portfolio and are agnostic about a company's index weighting. Returns from the FTSE All-Share index are heavily tilted towards the performance of its largest constituents. By contrast, the composition of our portfolio solely reflects the strength of the investment thesis underpinning our holdings. Any references to the index are used solely to explain the fund's relative performance - never to justify an investment.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
One notable feature of our fund today is the prominence of consumer-discretionary stocks. We have a number of holdings in industries such as short-haul airlines and hospitality, where supply contracted significantly during the pandemic, allowing the survivors to gain market share. We are surprised that we have not yet seen a re-rating of these stocks. We expect this to change in 2024 as investors' focus moves to rising real wages, lower interest rates and, at some stage, the potential for a re-boot of the UK economic narrative under a new government.
Domestic banks such as NatWest and Barclays form another important part of our portfolio. The prospect of interest-rate cuts may be weighing on sentiment towards banks in the short term but the banks themselves view the ‘sweet spot' for interest rates as being between 2.5%-4% range. At these levels, they can make money on both sides of their balance sheets, impairments are likely to remain benign and - for the first time since pandemic - they should start to see some loan growth. Even if there remains little investor appetite for the sector at present, distribution yields (dividend yields plus share buybacks) in the mid-to-high teens should underpin an attractive return from the banks while we wait for sentiment to turn.
Looking ahead to 2024 and beyond, where are the biggest opportunities and risks for your strategy?
The UK market is cheap and under-owned. Clearly, then, the biggest opportunity for our strategy is the potential for a reappraisal of its attractions, particularly on the part of overseas investors. Capital outflows since 2016 mean that companies listed in the UK are cheap in absolute terms, relative to their own history and compared to other developed markets. We don't believe that discount is justified - and we don't believe it will persist.
As investors begin to look to 2024, they will see the potential for a turn in monetary policy and an economy that has proven far more resilient than once feared. Compared to other countries facing elections the UK has one where the outcome feels easier to call and it is possible to see the UK market becoming one of the more attractive destinations for global capital. We believe our strategy is well positioned to benefit from that turn in sentiment. We are overweight in domestic earnings versus the market and have exposure to interest-rate sensitive sectors that should do well as UK monetary policy starts to ease.
As for the biggest risk? We have little exposure to consumer staples and ‘quality growth' stocks, so a rally here could weigh on our relative returns. But we see little immediate prospect of that. In fact, we are currently making relative money from this positioning for the first time in seven years as the QE-driven re-rating of these stocks starts to unwind, accelerated by a growing list of earnings disappointments.
Ed Legget is a Fund Manager at Artemis Fund Managers
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