- The case for investing in US small caps via a fund that has consistently done well
- How Artemis US Smaller Companies might fit into an investment portfolio
Robust investment process
Highly experienced manager
Consistent outperformance
Flexible approach
Smaller companies are higher risk
Potential volatility
Making investment decisions based solely on political events is rarely advised. Forecasting the exact outcome of an election vote is not easy and even if you do correctly predict the result, you may fail to anticipate how markets will react to it. As we noted in the Big Theme in 16 October issue – Look beyond the US election for long-term growth – doing this should be more effective than attempting to call next month's election.
But uncertainty in the US for reasons including a possible tightening of regulation on technology companies and the continued trade war with China may prompt some investors to review and diversify their allocations. And with the S&P 500 index’s gains still led by a handful of tech stocks you may achieve greater diversification by also having exposure to smaller companies.
US smaller companies have recently lagged, with the Russell 2000 index trailing the S&P 500’s sterling returns over one, three, five and 10 years. But some active funds, such as Artemis US Smaller Companies (GB00BMMV5766), have successfully bucked this trend.
This fund’s manager, Cormac Weldon, argues that the US is home to many of the world’s “most innovative, entrepreneurial and fastest-growing” small companies. He also thinks that a paucity of analyst coverage in this space enables experienced investors to find the leading businesses of tomorrow before they gain wider recognition.
He carries out extensive research, assessing the state of the US economy to identify attractive sectors and trends before carrying out bottom-up analysis of any potential holdings. Mr Weldon uses multiple sources of information when assessing stocks, including external research and techniques such as data mining.
This investment process has a level of flexibility that may be helpful during uncertain times for the US economy, as it takes into account wider economic trends as well as an individual company’s characteristics. Mr Weldon can also take an unconstrained investment approach as he is not required to invest in line with the fund’s benchmark, the Russell 2000 index.
The fund’s biggest sector exposures at the end of September were industrials, consumer services, consumer goods and technology, and Mr Weldon has recently been focusing closely on how coronavirus-related trends have affected the portfolio.
Pool (US:POOL), which supplies products such as filters and chemicals for residential swimming pools, was the fund’s biggest holding at the end of September. Mr Weldon notes that while the company has always had a strong market position, it has recently benefited from consumers feeling prepared to invest more money in upgrading their homes.
Another trend that Mr Weldon and his team have been focusing on is that some companies and industries have low levels of inventory as demand for their products grows – something that can support prices. So they recently added to their holding in BRP (CAN:DOO), a Canadian manufacturer of snowmobiles and recreational vehicles that is benefiting from this trend.
They have also recently added image sharing and social media platform Pinterest (US:PINS). The company only listed its shares last year and is seeking to attract more advertisers to its social media platform. Mr Weldon and his team first bought Pinterest before the coronavirus crisis and have since topped up.
Smaller companies are arguably higher risk than larger companies because they may be less financially able to withstand difficult periods, such as at present. They can also be highly volatile. And a fund such as this does not provide exposure to core US markets or companies.
However, Mr Weldon and his team have demonstrated their ability to pick successful smaller companies, and Artemis US Smaller Companies has consistently outperformed both the Russell 2000 and S&P 500 indices. The fund could be held as a either a compliment to mainstream US exposure or as a growth holding in its own right.
So if you have a high risk appetite and long-term investment horizon, and want to tap into US companies with growth potential, Artemis US Smaller Companies looks like a good way to do it. Buy. DB
Artemis US Smaller Companies Fund |
Price | 289.24p | Sharpe ratio | 0.73 |
IA Sector | North American Smaller Companies | Standard deviation | 21.11% |
Fund type | Open-ended investment company | Ongoing charge | 0.89% |
Fund size | £549.9m | Yield | 0.02% |
No of holdings | 66* | More details | artemisfunds.com |
Set-up date | 27 October 2014 | ||
Manager start date | 27 October 2014 |
Source: Morningstar, 21/10/20, *FE, 30/09/20 |
Performance |
Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
Artemis US Smaller Companies | 20.64 | 54.55 | 148.45 | |
Russell 2000 index | 5.36 | 11.71 | 73.42 | 209.11 |
S&P 500 index | 14.75 | 36.04 | 102.23 | 257.45 |
IA North American Smaller Companies sector average | 15.48 | 33.84 | 104.73 | 264.86 |
Source: FE Analytics, 20/10/20 |
Top 10 holdings (%) |
Pool | 5.1% |
Fortune Brands Home | 3.5% |
Booz Allen Hamilton | 3.5% |
Yamana Gold | 3.3% |
Servicemaster Gold | 3.1% |
LPL Financial | 2.8% |
Bio-Rad Laboratories | 2.5% |
Nextera Energy Partners | 2.3% |
Kornit Digital | 2.2% |
Clean Harbors | 2.2% |
Source: Artemis, 30/09/20 |
Sector weightings (%) |
Industrials | 24.2% |
Consumer services | 14.8% |
Consumer goods | 14.7% |
Technology | 12.5% |
Healthcare | 12.0% |
Financials | 11.8% |
Basic materials | 3.9% |
Utilities | 3.1% |
Telecommunications | 1.7% |
Source: Artemis, 30/09/2020 |