Fund spotlight: Artemis US Smaller Companies

interactive investor's analysts give an update and view on the Artemis US Smaller Companies fund.

Despite investor concerns about growth and valuations, the US equity market is hard to ignore for investors. The Investment Association North American Smaller Companies sector has been the best performer year to date, with the average fund returning an impressive 24.8%. 

Not many investors realise that the US smaller companies market is much larger and offers much wider opportunities than the UK market. US smaller companies are also not so small, as the Russell 2000 index includes stocks with a market cap of up to $10 billion.  

The US is home to a huge number of the world's most innovative, entrepreneurial and fastest-growing small companies. While the S&P 500 is dominated by large global businesses, US smaller companies are more likely to have a domestic focus. Investors can therefore benefit more directly from the dynamism of the largest economy in the world. 

The fund

Artemis US Smaller Companies fund aims to achieve long-term capital growth by investing in smaller American companies. The fund is managed by Cormac Weldon who is Head of the US Equity team at Artemis and has an excellent long-term track record of delivering performance throughout different market cycles. 

As smaller companies receive less attention from analysts than their larger peers, there is scope for experienced managers such as Weldon to take advantage of this and generate strong returns. The manager aims to identify high quality stocks that can grow in all market conditions, through a combination of both macro-economic analysis and fundamental company research.

What's in it? 

The fund is a high conviction, concentrated portfolio of around 60 companies with a market value mostly below $10 billion. It has a significant level of exposure to consumer-related companies such as Planet Fitness, an affordable gym and equipment provider, Five Below, a retailer which sells products for five dollars or less to teen and pre-teen customers and Pool Corporation, which distributes the chemicals and parts used to maintain residential swimming pools. 

The top sector allocation is industrials at 20.7%, followed by consumer services then goods, which combined give 31.3%, and financials at 11.8%.  The fund is very underweight banks, as US smaller, regional banks cannot compete with larger counterparts on the level of spending in technology and are likely to suffer as a result. 
The fund is manged with a style agnostic mindset, but as we are coming to the end of the economic cycle and, with market valuations looking rich, the manager is biased to higher-quality stocks in order to manage the downside risk. 

How does it perform?

Over the long run, the fund has delivered strong outperformance relative to the index and peer group. The manager believes that the Russell 2000 index is a poor gauge of smaller companies' performance, due to its heavy, 30% exposure to loss-making and heavily indebted companies. The fund's consistent outperformance demonstrates that highly skilled active investors can avoid these structural flaws of the index, focus on profitable, high-quality businesses and deliver strong risk adjusted returns. 

Source: Morningstar Direct as at 31st August 2019. Total returns in GBP

ii view

Artemis US Smaller Companies Fund is included in the ii Super 60 list of high-conviction investment ideas as a US Equities, Smaller Cap recommendation. The fund provides investors with exposure to the best of America's innovative, entrepreneurial and fast-growing small companies picked by a highly experienced fund manager. 

With a focus on long-term capital growth, investing in US smaller companies is a great choice for longer-term investors. Due to the fund's unconstrained, concentrated nature and focus on smaller companies, its return profile is likely to be more volatile, making it higher-risk and a satellite holding in a well-diversified portfolio.

• Find out why this fund is on the ii Super 60 investments list
• Click here for more information on this fund, including price, yield and charges

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