Although launched only two years ago, the £40m Artemis Smaller Companies fund, managed by John Dodd,...
Although launched only two years ago, the £40m Artemis Smaller Companies fund, managed by John Dodd, has been propelled to the top of all unit trusts, over a year to 8 May on an offer to bid basis.
Artemis, which now has £400m in assets under management, was formed in March 1997 when Dodd, together with Mark Tyndall, Lindsay Whitelaw and Derek Stuart, left Friends, Ivory & Sime.
Dodd managed the Friends, Ivory & Sime UK Smaller Companies investment trust, while Tyndall managed the Isis Trust. Tyndall now manages the Artemis UK Growth Fund, which is ranked seventh of 183 funds, offer to bid, over one year in the UK All Companies Sector to 10 May.
The group has just launched a UK Income and a UK New Enterprise fund and has plans to bring out further investment products later in the year.
Jenne Mannion spoke to Dodd about the direction of the company and the reasons for its recent outperformance.
What is objective of the Smaller Companies fund?
We aim to achieve long-term capital growth by adding value against the FTSE Small Cap Index. This is done through identifying the most attractive investments in any particular sector. By focusing on the potential for re-rating, we give ourselves the greatest possible chance of recognising the opportunities in the market.
What is your investment approach?
We do not set out to be either growth or value investors. Therefore, while stock selection criteria favours growth characteristics, this is not at the expense of traditional value-based disciplines. Our investment process involves both a bottom up and top down approach. Stocks are selected, based on expectations of a positive re-rating of shares. We also take into account our macroeconomic view of what is happening in the economy.
For example we take into account factors like the strong currency and the strong impact this is having on industry. We look for genuine growth companies, for example those involved in technology, health care and life sciences.
A growth company can still offer good value.
I consider a company to be good value if its prospects are strong relative to its growth rates. What I don't want to do is go along and say 'I'll buy that' just because a few pounds have been knocked off and it appears cheap.
How is the research process for the fund structured?
Two other fund managers, Derek Stuart and Lindsay Whitelaw help with the stock selection process. Whitelaw is more of a specialist in the biotech sector, Stuart's expertise is more on the information technology side and I look more broadly at a range of sectors. Although each of us has our own speciality areas, we make sure that we all have some exposure to the underlying companies rather than concentrating exclusively on specific sectors.
Screening of companies is done by meeting management and doing some of the background work ourselves. That involves understanding their business plan and considering how the company will perform in light of the current environment.
We also use the best analysts we can find and tap into their research.
What is your investment universe?
Most companies are selected from the London Stock Exchange AIM, OFEX and Easdaq. The portfolio may include the securities of companies listed, quoted and/or traded in the UK, but domiciled elsewhere. We do not hold any unquoted companies.
Around 26% of the fund is invested in companies with a market cap of less than £50m, while 25% is in companies where the market cap is between £50-£100m. The biggest portion of the fund, at 35%, is in those capped at £100-200m, while the remaining 26.5% is in companies worth more than £200m.
How many stocks do you hold and what is the maximum amount you would hold in any single stock?
The fund is tightly focused and ideally holds around 50 shares but at the moment there are 55.
We aim to have a maximum single stock holding of about 5.5%, but there are no strict guidelines and if a stock is growing rapidly, we will trim it back but allow the bets to continue if we are confident.
A company is trimmed back once it breaks though the small cap barrier (generally £400m), but we still hold exposure if we anticipate further momentum.
For example Fibrenet has gone up five or six times and now has a market cap just short of £1bn. We are taking profits and reducing our exposure there but we still do have quite a high exposure and continue to be confident.
What risk controls do you have in place?
While our portfolios often diverge significantly from their benchmark index, we monitor the risks closely at both the stock and sector level. The portfolio will be closer to neutral if we don't have strong view either way.
What do you attribute the recent strong performance to?
I attribute the performance to good stock selection, good market timing in terms of when the stocks are performing and underperforming, and understanding the macro-environment.
In terms of some of our individual successes there is Fibernet, Kewell Systems, Recognition Systems, AFA Systems, Giris, AIT Group and Medisys.
At the start of the year we put some money into companies that we considered undervalued, and have since achieved growth.
Examples here are Rotork Engineering, Jazz FM and Esporta Healthcare.
Our positive stance in the healthcare and biotechnology sectors has also contributed to performance.
Resources also provided good returns due to rising commodity prices. Minmet and Aquarius Platinum, our major holdings, in this sector, both performed strongly.
In February and March we recognised that valuations in technology were getting quite high and that this was not sustainable. We believed that valuations were high not based on growth rates but because investors were entranced by what was happening in the market. Consequently there was an indiscriminate price reduction and the fund fell by 10%.
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