This fund takes a “systematic” approach to picking stocks. Its computer model trawls through thousands of data points to find the best opportunities, then a human team overseas the buying and selling of shares. Co-managed by Raheel Altaf, the Artemis SmartGARP Global Equity fund, which appears in interactive investor’s Super 60 list of investment ideas, invests globally but currently has a bias towards emerging markets and value shares.
Altaf explains why position sizes are kept small but the fund still manages to look very different from the index, and why cheap valuations do not have to signal slow-growing companies. He also goes into detail about their overweight to UK shares and which companies they like there, as well as other markets and sectors the fund is invested in.
Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Raheel Altaf, manager of the Artemis SmartGARP Global Equity fund. Raheel, thanks for coming into the studio.
Raheel Altaf, manager of the Artemis SmartGARP Global Equity fund: Thanks for having me. It's good to see you.
Sam Benstead: You're running a systematic strategy, so computers help you generate trade ideas. You also have an active element in there as well. So, what is the process for you making a change in the portfolio?
Raheel Altaf: The way we think about trading, it's ultimately about conviction and confidence. So, we find a company we like, we do the due diligence and we're ready to invest in the company. We'll typically start with quite a small position size, and that position would then gradually build up in the weeks ahead, as there's more confirmation that the opportunity is there.
Why are we doing it in this gradual way? It's basically to make sure that we're not messing up on market timing, but also to give greater weightings to those companies that have persistently looked attractive. So, if you look at the capital allocation, the way it moves around in the fund through time, we're basically shifting money into the best opportunities in a gradual but very persistent fashion. And then the other side of that is if the catalyst that we've identified doesn't follow through in a company or we start to see deteriorating corporate news flow, for instance, we're quite disciplined about cutting our positions. We're happy to go elsewhere and find the new opportunities. And so that's really the way the capital allocation works, and that's what triggers turnover in the portfolio.
Sam Benstead: And how many stocks do you typically own, and what is the turnover like? How often are you trading over an annual period perhaps?
Raheel Altaf: In an ideal world, the stocks that we hold, we hold them for a very long time. And so there's a portion of the portfolio that we have held for a number of years, and we do tend to run our winners. But as I mentioned about the discipline, about cutting your losses or cutting those that aren't following through with catalysts, there's a bigger tail of the portfolio that might be smaller where we're just much more aggressive about turning it over.
If you look on average, the typical holding period is between six and nine months. But that really masks the fact that there is a big portion of the portfolio that's been around for quite a long time. And there's more tinkering with the tail of the portfolio where you're really trying to get it right and you don't have the confidence yet. So, it's just an incremental process where you're building confidence to time, adapting to the market environment as it changes.
Sam Benstead: And how many stocks are there typically and why is position size so small? The top holding is about 1.4% of the portfolio.
Raheel Altaf: If you speak to a typical fund manager, they will give you great insights about an individual company and they might be making decisions about whether Exxon is better than Shell let's say, or whether AstraZeneca is a better investment than GSK. Our approach is slightly different. We have slightly less conviction on that differentiation between the two companies. But what we have high confidence in is companies that share similar attractive characteristics stand to do well. For example, if you look at the companies that are delivering increases in profit forecast, let's say, or dividend forecasts, or that are generating more cash than others, or you focus on companies that have made consistently good investments with their capital, that gives you a group of companies that you can invest in.
And there we have quite high confidence that if you invest in that group of companies, you are going to deliver good returns through time. And so, yes, the approach is much more diversified than a more concentrated offering. But as you've seen with the fund, it's also high active share and has little overlap with the benchmark index. So, position sizes are rarely determined by the opportunity.
And I'd also say when we have less exposure to some of the larger companies in the market then the top position sizes can be a little bit smaller. The active share’s in excess of 80% typically, so it's around 86% at the moment. So that means very little overlap with the benchmark index. And, typically, in terms of the number of stocks it's more than 100. So, we've got about 120 or so now, so it's a very diversified offering.
Sam Benstead: Can you talk me through some of the top positions in the portfolio? Why are they there and what fundamental characteristics do they share?
Raheel Altaf: The characteristics of all our top positions are similar to the characteristics of all the companies in our portfolio. Typically, these are companies that are trading on reasonable valuations, in some cases very depressed valuations, where the growth characteristics are quite good, where there are some economic tailwinds in place, and where you're starting to see profit forecasts for the companies really going up over time.
I've mentioned that we are spread all around the globe. If we look at the portfolio today, we have a couple of positions in China. For example, China Railway Group (SEHK:390), which is one of the large infrastructure companies in China, trades on almost a third of the market valuation or even less, actually. And there's a commitment to infrastructure spending in that part of the market, But people aren't interested in boring railway stocks. They'll be looking at new economy companies. And so this is a company that's really been shunned for a number of years, but actually has been delivering quite good growth and is now trading on a really depressed valuation. So, we're quite excited about that sort of opportunity and it's in our top 10 positions.
Sam Benstead: You don't look anything like the index, there's no Apple or Alphabet or Amazon in there. So why is that such a good way of investing
Raheel Altaf: I think it's one of the key ingredients to delivering good performance in the long term. And ultimately, we know that you can buy the index very cheaply. It's easy to replicate. Our job is really to outperform the market. And one of the key ingredients to doing that is to make sure that you are not like the market. And there are times where we will have exposure to some of the much larger companies that make up big index weightings. But in general we have a bias towards mid and small-cap companies, and many of those deliver very good returns, and they tend to be overlooked by funds that are closely hugging the benchmark index. So, it's a high active fund, but it's one that is quite agnostic about where the best opportunities might be in the future.
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Sam Benstead: Has there been a shift in the top stocks in the portfolio over the last couple of years as we've seen a shift from growth to value shares performing best?
Raheel Altaf: If you look at the top-down environment, things have materially changed in the last few years. So, we've got an environment where we have stickier and higher inflation. We've got an environment where central banks have had to move into a tightening mode, and we've had much higher inflation than we expected. And that's had a quite big ramifications for global markets.
In terms of what we've been doing, we have been shifting to more of the inflation beneficiaries, if you like. So, financials and banks make up a larger part of the portfolio than they have done historically elsewhere. If you look at energy and commodity stocks, they also feature more prominently than they have historically. So, there's a change in the economic environment that is a catalyst for much better performance of the underlying companies that benefit from that, and that's feeding through into the portfolio changes.
Sam Benstead: So that makes your portfolio quite value-driven right now. What would cause you to invest in more growth stocks?
Raheel Altaf: Well, I would argue that the stocks we have exposure to do have good growth characteristics. And historically, if you look at the earnings and the cash flow growth that our portfolio has delivered, it has been far superior to that of the market. It is just slightly curious that many of those companies happen to have depressed valuations right now.
What would make us go back to some of the premium valuation stocks? Well, right now, the gap in valuations between cheap and expensive companies has become quite extreme and quite stretched. I think if that starts to revert to more normal levels, then the opportunity set in those growth stocks will look attractive again. But right now, we're seeing many risks to some of those high growth parts of the market, and I don't think those are reflected more broadly in investors' portfolios. It's still a popular and overblown part of the market. I think it might take a few years before we become very enthusiastic about high-growth stocks again.
Sam Benstead: What are those risks to high-growth stocks now?
Raheel Altaf: Well, clearly higher inflation and the fact that you've got parts of the market where you've seen a lot of speculative activity that has led to overvaluation, and the overvaluation is really based around growth that might materialise far out into the future.
But clearly, as interest rates go out, that discount rate increases and the potential of getting those earnings now, the price of that now should be lower than it was historically with much lower rates. And that's clearly a challenge. I think, given we've had a decade of very strong performance for high growth stocks. We've had a period of a couple of years where we've seen a lot of speculative activity, and that has led to loss-making companies, companies that are pre-revenue gaining very big market caps. And I think we're starting to see that unwind quite dramatically. And there's probably more to go on that side of things.
Sam Benstead: Emerging markets are one of the biggest overweight. Why is that and what sectors and companies are you finding opportunities in there?
Raheel Altaf: The opportunity in emerging markets is really highlighted by our investment process. So, a process that is fundamentally driven is evidence-based. When you look at the best ideas, almost 40% of them are coming from emerging market stocks. So, the process is telling us there are lots of companies in emerging markets that look attractive today. Why is that? We're seeing some signs of positive catalysts coming through. In the short term, clearly, China's reopening is likely to be a good tailwind for Asian economies and the rest of the world. But if we look towards the longer term, and I think the longer-term views have really taken a bit of a back seat with emerging markets, you've got younger working populations, you've got increasing middle classes and increasingly you've got much more self-sufficiency within the underlying economies. And I think these are likely to be the drivers in the future. And that's why emerging markets look quite exciting today.
Sam Benstead: The UK is about 10% of the portfolio. Is that typical, and what are your best stock and sector ideas in UK markets?
Raheel Altaf: So 10% sounds quite low in context, but the index weighting for the UK is around 4% at the moment. Going back a decade the index weighting was around 10%. So, we've seen a significant decline in the UK equity market and we've experienced that quite firsthand. Why are we optimistic about UK stocks and why do we have a modest overweight towards that part of the market? Well, again, dirt-cheap valuations, we're starting to see much better evidence of improving earnings outlook. And when you focus on which companies in the world are generating more cash versus their size, the UK really stands out as a market. So, we've got a diversified exposure to the UK market in some of the large-cap areas of the market, in financials, in energy, but also in some of the more consumer-focused parts of the market.
Sam Benstead: Is there one sector in the UK which is particularly attractive right now?
Raheel Altaf: If we look at the biggest sectors in the market, we think about financials in particular. Banks look quite attractive, but also energy. In energy, I think we're seeing some quite interesting trends. If you look at the fundamentals of Shell (LSE:SHEL), for example, which we hold in the portfolio, clearly we've seen energy prices rising in the last few years. The company has been plagued by some of the challenges that come from environmental, social and governance (ESG) investors, let's say, and also a very difficult decade where we've seen slowing demand from the likes of China and various other parts of the world. And that has led to a drop in terms of capex and investments that the company has made and they've had to clean up their balance sheet.
But now, as we're starting to see profits rising, those are being fed back to shareholders and the company’s buying back stock as well. So, you've got a company that trades on a depressed valuation, is out of favour, is starting to see some tailwinds and it's delivering very good returns to shareholders. So that part of the market looks quite attractive to us.
Sam Benstead: And finally, the question we ask all our guests, do you personally invest in the fund?
Raheel Altaf: Yes. We invest a lot of our own money in the fund. I think the advantage with Artemis is that we get to run money in line with our own investment beliefs. And so we're very comfortable putting our own money into the fund. And that does mean that we share in the client journey through time, as well as obviously taking the fiduciary responsibility of running those assets very seriously.
Sam Benstead: Raheel, thanks very much for coming into the studio.
Raheel Altaf: Thank you.
Sam Benstead: And that's all we have time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment, and subscribe. See you next time.
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