The manager of the £1.3bn Artemis UK Special Situations fund says high valuations have created a dearth of opportunities at the lower end of the market cap spectrum. Stuart retains some exposure to the FTSE 250, because he does not think there are enough attractively valued opportunities among large caps. The manager has a deep-value style, which he says is making life for him very difficult at the moment.
“I am less bullish on the lower end of the market cap spectrum because we have had significant outperformance of mid and small caps over the past few years,” he said.
“It is going to be a tough time for mid and small caps over the next few years. Large caps in general will outperform for at least the next year.”
“Valuations have become a lot higher over the past few years, whereas before you could buy a lot of companies on single-digit multiples.”
“In general it is very difficult to find value because the market has re-rated. Today, companies might still be offering value but there is a lot less upside.”
“There are a lot of stocks in the FTSE 100 that are good but a bit expensive. However, I can’t put the entire fund in there because I don’t have enough FTSE 100 ideas – that is the reality of life for me at the moment.”
Mid and small caps have significantly outperformed larger stocks over the past two years, with the FTSE 250 beating the FTSE 100 by more than 20 percentage points.
Performance of indices over 2yrs
Source: FE Analytics
Markets have been choppier in 2014, however, with the FTSE 250 lagging behind the FTSE 100, with returns of 1.59 per cent compared with 3.18 per cent.
Performance of indices in 2014
Source: FE Analytics
Stuart has managed Artemis Special Situations since its launch in April 2000. He says the fund has been consistently overweight in mid and small caps over this period, which has contributed to his outperformance.
Artemis UK Special Sits has returned 436.2 per cent since inception – more than five times the average return in the sector.
Performance of fund, sector and benchmark since Apr 2000
Source: FE Analytics
Stuart says he started taking money out of mid caps and companies at the lower end of the FTSE 100 at the end of 2013.
“The reason we sell shares is because most of the self-help upside has happened,” he explained. “We set pretty conservative price figures and so it was more that these companies had hit fair value.”
“The key thing for us is to try and identify companies that are trading below the valuations they should be trading on. We don’t play the momentum game because it is very difficult to know when this game has stopped and you can always count on the fact that somewhere a management group is screwing up a company.”
Stuart says he is a lot more cautious now than he was 12 months ago, because he thinks the UK economy is currently growing at its maximum possible rate. This, combined with expensive valuations across the board, is making him nervous.
“The UK economy is not going to suddenly start growing at 4 per cent and we will probably get a slower growth rate in the next few years than we have had in the past one,” he explained.
“But more worrying is that all of a sudden everyone in the UK markets is very bullish.”
Despite his increasingly bearish stance, Stuart says he is not worried about the political risk posed by the Scottish independence vote in September 2014 or the UK general election, which is expected to take place in May 2015.
“We are conscious of it because there will be a lot of noise and a lot of volatility in the market place during this period, but I’m not factoring it in because ultimately I don’t know the outcomes of either the election or the independence vote,” he finished.