Fund managers aren’t shy in drawing attention to their achievements and, while they are quick to call press conferences after a period of strong performance, they tend to be less hungry for publicity when things don’t go according to plan.
However, Peter Saacke (pictured), co-manager of Artemis’s Global Emerging Markets fund, is happy to admit that the group’s Smart GARP strategy – which he built alongside Philip Wolstencroft – gets 50 per cent of its stock-picks wrong. Admittedly, this has not prevented the funds in this range from outperforming.
Smart GARP (growth at a reasonable price) is an in-house quantitative system that screens companies’ growth, valuations, earnings forecasts and share price momentum with the aim of identifying those that are cheap compared with their predicted growth rates.
So how does this strategy make money when it is wrong half of the time?
Saacke aims to hold stocks for two years after he has bought them and said that in his 14 years of running Artemis Global Growth – which uses the same Smart GARP strategy as Artemis Global Emerging Markets – he has noticed the one thing that the winners have in common is that he has held them for 18 months or longer.
“If we buy something because we think the market has got it wrong, on blend, we like to hold these companies for two years because those are the winners,” he explained.
“The trouble is that identifying the winners is very hard and we get 50 per cent of our investments wrong.
“One out of two actually costs us money rather than makes us money and we usually work out that the market, rather than us, was right within the first three to six months, in which case we are very rigorous in selling.”
Raheel Altaf, Saacke’s co-manager on Artemis Global Emerging Markets, said the Smart GARP strategy is useful in highlighting companies with attractive fundamentals that are trading on cheap valuations because they have been unfairly treated by the market.
For example, he said that there have been numerous examples over the past few years of companies with strong fundamentals but depressed share prices, due to political or economic concerns in the country in which they are based.
“If you buy those companies at times when there may be more heightened risk or where they are more out of favour, the upside can be significant,” he explained.
Valuation is just one of the metrics the managers search for – another one of the most important is a catalyst.
“You always have to be mindful in emerging markets of catching ‘falling knives’, so it is one thing identifying out of favour companies, but it is another to see some kind of trigger that convinces us this may lead to a reappraisal of the business,” Saacke continued.
“The catalyst is often a communication from the business. Take a company that has underperformed for a certain period of time and has been de-rated after the market lost faith. You then maybe have a trading update or quarterly results which usually start with management saying, ‘actually things aren’t quite as bad as we anticipated’. And people who put out their forecasts say, ‘actually we may have gone too far’. If you find something undervalued, some positive comments from management can be the thing that leads to the reappraisal.”
Altaf added: “But if you buy a company that you think is undervalued – so you think that there is a catalyst that will mean that the valuation is going to be re-rated, which actually doesn’t follow through and the fundamentals deteriorate – in those cases we tend to cut the position quickly.”
Saacke pointed out that the 50 per cent failure rate only applies to Artemis’ Smart GARP funds and not the group’s entire range – for example he said Adrian Frost, who runs the Artemis Income fund, has a much higher strike rate.
“But then he has to,” added Saacke – pointing out that the strategy only works when there is a much wider universe of stocks to choose from than the pool of UK dividend payers, for example.
The proof is in the numbers. Artemis Global Growth has almost doubled the gains of its sector since Saacke took charge at the start of 2004, while Artemis Global Emerging Markets is up 38.79 per cent since opening for business in April 2015, compared with 32.62 per cent from its MSCI Emerging Markets benchmark and 30.16 per cent from its IA Global Emerging Markets sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
It hasn’t been all plain sailing for the emerging markets fund, though. It launched against the ongoing backdrop of monetary tightening by the Fed which saw it lose a quarter of its value in a matter of months. Saacke said this situation was made even more uncomfortable for him because a significant proportion of the fund’s initial assets belonged to Artemis employees.
He explained: “When you went into the kitchen at work in August 2015 when the value was down 20 per cent, people would look at you in a slightly funny way and say ‘so Peter how is it going? How is the emerging markets fund doing?’
“It was slightly uncomfortable then and awkward. But that is life, fortunately we performed well against the benchmark in that time and when the market turned, we managed to outperform. Since then we are pleased to report it has beaten the market and managed to make money.
“We just went through the three-year anniversary and performance has been good – the more cynical among you would say that we wouldn’t be sitting here telling you about it if it hadn’t been.”
Artemis Global Emerging Markets is £145m in size and has ongoing charges of 1 per cent.