Finding value in US equity
After joining Artemis last year, Cormac Weldon launched the Artemis US Equity, US Select and US Smaller Companies Funds. A lot has happened in the US economy since – including a period of unexpectedly weak growth in the first quarter of this year.
US stocks, however, have produced positive returns and all three funds are comfortably ahead of their benchmarks. Weldon looks back on the changes and explains why the funds are changing too:
When we launched the US Equity, US Select and US Smaller Companies funds towards the end of last year, we initially expected to make money through appreciation of the dollar, a rise in corporate earnings and through some revaluation of the US market. And, more or less, that was what happened. Last Christmas, however, we became more cautious. We could see potential headwinds in Europe and the prospect for interest rates in the US to rise.
Certainly, the first half of this year was a tough time for the US economy. The fall in the oil price hit capital expenditure by energy companies, the strong dollar damaged exporters and lowered the dollar value of profits made overseas. And there was a port strike on the West Coast. That may read like a laundry list of excuses – but they are all genuine (and I haven’t even mentioned the bad weather). But what we are seeing now – at last – is a pick-up in economic growth.
As for what worked in our funds during this period, I would highlight a couple of winners:
- Private equity group Blackstone was a classic play on low interest rates. It borrows to invest – so low interest rates make it easier to make money on future investments and to realise profits on investments made in the past.
- We should also mention Time Warner Cable. At the time of the funds’ launch we bought Charter Communications. Since then, the US cable industry has seen a series of takeover deals. Initially, Comcast tried to buy Time Warner Cable. That deal failed because of objections from the Department of Justice (DoJ). When it fell apart, we expected Charter to bid for Time Warner Cable. So we sold our holding in Charter and bought Time Warner. Happily, we were right. Time Warner has made a significant (positive) contribution to the outperformance of both the US Equity and US Select funds over the year to date.
Banking on rising rates
Today, we believe the US economy is growing at around a 2% to 2.5% rate. The US has been creating jobs consistently for a number of years, and continues to do so. Most importantly, wage inflation is starting to come through. The most accurate measure is the quarterly employment cost index. That should help the housing market and lead eventually to some consumer price inflation (though not of a magnitude sufficient to derail current corporate profitability).
These first signs of inflation in the US have caused us to change one of our most dogmatic views – that 10-year interest rates would remain low, at around 2%. We have consistently believed that short-term US interest rates will rise in the latter part of this year. Crucially, we now expect long-term rates to do the same. That has encouraged us to make some important changes in the portfolios, particularly in the financials sector.
Previously, our holdings have tended to be in non-bank financials that have benefited from the low interest-rate environment. We have already mentioned Blackstone but this group also includes Lazards, which advises on mergers and acquisitions (an ongoing theme), and McGraw Hill, which benefits from the rising issuance of debt through its Standard & Poor’s subsidiary. But higher long-term interest rates will make banks more profitable and therefore more attractive. So we have been reversing our long-held underweight in the sector. In the Artemis US Equity Fund, for example, we have built a position in Wells Fargo.