This value tilt is reflected in regional allocation, such as the overweight in China, but also in the fund’s sector allocation. The fund is overweight unfashionable areas such as banks, insurance, construction and energy and underweight technology, retail, healthcare and industrials.
Following the SmartGARP process meant that the fund did not chase the highly rated growth (particularly technology) stocks that drove the market over the last few years. This obviously held back performance at the time. But it also insulated the fund from the big sell-off in these types of stocks this year. Meanwhile, as growth stocks continue to derate, if their fundamentals remain sound they may look increasingly attractive on the SmartGARP screen and start to come back into the portfolio in greater numbers.
Looking ahead…
For the medium term, the backdrop of high inflation, its associated monetary tightening by developed market central banks and persistent geopolitical risk suggest caution. Against this backdrop, our fund’s bias towards cheaply valued, relatively stable businesses continues to be warranted.
Fundamentally, we make money for clients by investing in companies whose earnings grow faster than those of the market average. Valuation changes can act as headwinds or tailwinds in the short to medium term, but in the end superior growth of company fundamentals such as earnings, cash flows, book values etc will win through.
While the outlook for equity indices may be muted, however, we continue to believe that there are some segments in the global stock market where the gap between low valuations and strongly improving fundamentals remains wide and exceptional opportunities exist.
Our investment process, SmartGARP, has been designed to bring to our attention instances when companies’ share prices and their fundamentals diverge. As highlighted above, these opportunities are at present concentrated especially in emerging markets, where, in a number of countries (notably China) inflation is much more contained than in developed markets.
The upshot from this is that even if global equities struggle to make progress the opportunities to generate outperformance remain, in our opinion, unusually plentiful.
Peter Saacke, manager of the Artemis SmartGARP Global Equity Fund
* FactSet as at July 31 2022.