Partner Content: Emerging Markets – A SmartGARP view

Artemis’ Raheel Altaf reveals how he is buying high-quality companies on a discount to the market.

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? 

The Artemis SmartGARP Global Emerging Markets Equity Fund aims to grow capital over a five year period by selecting the best stocks from an investment universe of over 3,000 companies, seeking those whose prospects for growth are currently undervalued. 

SmartGARP®, Artemis' proprietary tool, highlights stocks with financial characteristics that tend to be good predictors of above-average future returns. Among other things, it looks for stocks that are enjoying strong growth in earnings, seeing consistent upgrades to their forecast profits and that are benefiting from macroeconomic trends yet which are (temporarily) unpopular and so trade on below average valuations.

If stocks satisfy the SmartGARP screen, the fund managers apply their due diligence. Their objective is to establish whether there is substance behind the attractive characteristics SmartGARP has identified. For example, acquisitions, disposals or accounting changes might have distorted a company's financial characteristics. An even smaller subset of companies pass the two steps, resulting in a portfolio of typically 80-120 stocks diversified by sectors, countries and investment styles.

The fund has been managed since launch in 2015 by Raheel Altaf.

How are you currently positioning your portfolio? 

The fund offers an attractive combination of extremely low valuations and good growth prospects. It is overweight China, Brazil and Korea and underweight India, Taiwan and Saudi Arabia. At the sector level, financials, consumer discretionary and industrials feature as the largest overweights. Materials, technology and consumer staples the largest underweights. 

For some time the fund has been biased towards value. As at the end of March 2024, the forward price/book ratio of the fund is 1 and it offers a forward P/E of 7.3 vs 12.2 for the index (a 41% discount). We think our discipline around valuations is likely to be a rewarding strategy as we progress through 2024 and for the years ahead. Typically, significant exposure to value stocks coincides with distressed balance sheets and volatile earnings. This doesn't appear to be the case today: the fund offers favourable quality and growth characteristics. For instance, our net debt/EBITDA is significantly lower than the market and our free cash flow yield is also much higher than the market.

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.

Investors tend to focus on China's headline growth figures, which have been disappointing. This means they miss how the country is trying to reform its capital markets in part to encourage sensible investing at home and attract global capital. 

One little-noticed theme is how the government is reforming state-owned enterprises, setting new performance targets often focused on return on equity, including requirements to return set proportions of cashflow in dividends. This has resulted in some favourable outcomes for shareholders. 

One example that we hold is Sinotrans, one of the largest logistics companies in China. Sinotrans played a key role in China's ‘Belt and Road' initiative by providing international rail freight connections across routes as widespread as China-Germany and China-Laos.

Korea has seen some interesting developments. Signs of progressive shareholder return policies have created some enthusiasm towards the beaten down areas of the market. Korea's finance minister vowed to narrow the ‘Korean discount', encouraging companies to boost stock valuations. On the corporate side, buybacks and dividends are surprisingly positive. One example among our holdings is leading carmaker Kia Corporation.

Raheel Altaf is a Fund Manager at Artemis Fund Managers

Find out more about Artemis SmartGARP Global Emerging Markets Equity Fund here 

 

Important information

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS. This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus, available in English, and KIID/KID, available in English and in your local language depending on local country registration, from www.artemisfunds.com or www.fundinfo.com. CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.

Currency risk: The fund's assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.

Emerging markets risk: Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.

China risk: The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.

Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

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