When we launched the Artemis Global Select Fund five years ago, we hoped it would give our investors steady returns. Equity markets tend not to perform in a consistent fashion and the many different parts of the index are bound to rise and fall with the economic cycle. To achieve more reliable returns, we have tried to avoid ‘playing the cycle’. Instead we have invested mainly in companies prospering within longer-term themes where growth is good.
The fund’s performance over the last five years has been led by two investment themes: the rapidly ageing population in developed countries; and the rapid growth of the workforces of most emerging economies.
In emerging markets we targeted principally the growth of consumption by the middle classes in Asia. This meant that we avoided commodity stocks and saw no need to invest in emerging markets such as Russia, South Africa and much of Latin America which relied on high commodity prices. Five years ago valuations allowed us to invest directly in companies such as Thai Beverage, one of southeast Asia’s largest beverage companies, and FEMSA, Mexico’s biggest Coke bottler. More recently it has been more attractive to invest in western companies seeing strong growth from emerging market consumers: L’Oreal, Colgate and Essilor, the world leader in eyeglasses, are examples. Valuations in China are the exception and our investments there continue to perform as we hoped, despite hysterical headlines.
Our theme of ‘Retiree spending power’ focuses on companies seeing growing demand from the ageing, wealthy populations of developed countries. Between 2015 and 2035, the population of over 65 year-olds in the US will grow from 48 million to 78 million, a rate of over 3% per annum. In Europe this figure is around 2% per annum*. Not surprisingly, our analysis of ‘grey dollar’ spending is focused on healthcare, but also on outdoor sport and leisure. In healthcare, while the rising demands are clear to all, we felt the market may underestimate the challenges: limited budgets and an increased focus on the cost-effectiveness, as well as medical-effectiveness, of new drugs.
Where did we find opportunity? The US Sporting Goods Association helpfully produces data on changes in sports by the over 55 year-olds. This data shows rising participation in running and cycling, but also shows that golf has reached saturation. Investing in companies such as Shimano, the leader in cycle brakes and gears, and Nike has given us the sort of returns we seek. However, few companies are exposed only to the themes where we want to invest. So within this theme we also invested in Cabala’s, the retailer of outdoor sporting and recreational goods. Rising demand for hunting and fishing equipment initially helped our investment, but politics around gun control later led to more volatile returns.
Looking ahead …
Markets can be slow to identify new themes and new trends. The intriguing opportunity for us is how many steady, if modestly growing, sectors seem overlooked.
Over the last year we have developed a new theme we call ‘Low carbon world’. Following President Obama’s announcements at the Paris summit on climate change last year, many countries are now closing coal power stations and accelerating renewable electricity production. This change means that electricity is produced in diverse parts of a country and at variable times of day – solar during the day and wind more at night. The electric grid companies, therefore, are reaching agreements with regulators to invest substantially over the next decade; and in most countries, the earnings of these companies rises roughly in line with their invested capital (or “regulated asset base”). In the case of Eversource, the main transmission company in Massachusetts and Connecticut and a company we’ve invested in, this should lead to around 6% growth per annum for the next five years. Yet Eversource trades on 18.7x earnings and pays a 3.2% yield.
Another new theme is what we call ‘robo-saving’. Individuals who prefer not to pay for tailored investment advice must make their own asset allocation and fund selection or look for help from ‘robo-advisors’. How successful this new model will be, time will tell. But these growing platforms increase demand for analysis of funds and financial data. Companies such as Morningstar, S&P Global and MSCI, who provide this data, stand to benefit. All three are companies we have recently taken a stake in.
Even in a world of low growth, it is pleasing to see companies and countries investing in research. Over the last year we have selected a number of investments in scientific and testing equipment makers. Typical of these is PerkinElmer, a world leader in equipment for diagnostics, new-born baby screening and food analysis and a leader in mass spectrometers. Recently the company announced yet another year of 7% growth in revenue, raising earnings by 15% – seemingly unaffected by slower economic growth.
One advantage of investing globally is that one sees, over many years, many economic cycles, banking crises and economic remedies. Unfortunately, watching European economic policy over the last five years has repeatedly reminded us of quantitative easing in Japan between 2003 and 2006. Interest rates can be lowered and lowered, but if demand remains subdued, companies will not invest whatever the cost of borrowing. Hoping that vigorous macro-economic recovery will drive returns to our investors seems unwise. So we continue to seek out growth which relies less on the cycle. Prominent examples of that in our fund are the rise of the grey dollar, growth in tourism, streaming media content, online advertising and other services, savings growth in emerging markets and growing demand for scientific equipment. These selected areas within the huge range of global equities seem to us to offer reliable growth, good barriers to entry and reasonable valuations for patient investors. Whilst there are no guarantees, we believe that these companies will continue to provide good returns to shareholders over the next few years; and so allow the Artemis Global Select Fund to continue to reward its unit holders.
* Source: BofA Merrill Lynch Global Research, US Census Bureau, Euromonitor.
Important information
To ensure you understand whether this fund is suitable for you, please read the Key Investor Information Document, which is available, along with the fund’s Prospectus, from artemis.co.uk. The value of any investment, and any income from it, can rise and fall with movements in stockmarkets, currencies and interest rates. These can move irrationally and can be affected unpredictably by diverse factors, including political and economic events. This could mean that you won’t get back the amount you originally invested. The fund’s past performance should not be considered a guide to future returns.The fund may have a concentrated portfolio of investments. This can be more risky than spreading investments over a larger number of companies. The fund may invest in emerging markets, which can involve greater risk than investing in developed markets. In particular, more volatility (sharper rises and falls in unit prices) can be expected. Investors may be subject to tax on the distribution payments that they receive.Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
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