Tourism was dropped from the Artemis Global Select Fund’s thematic investment approach in summer last year, in a move that would come to be seen as fortuitous in light of the havoc wreaked on the sector in 2020. The theme was cast off due to environmental reasons, according to Rosanna Burcheri (pictured), who has been a co-manager on the £226.6m fund alongside Alex Illingworth and Simon Edelsten since launch in 2011.
“That was really expressed through the ownership of airports across the world, and in a certain way you can say we were lucky,” says Burcheri. While the FTSE All-World has returned 7% in the year to date, the FTSE All-World Travel and Leisure Index has fallen by 14%. It suffered a 34.3% drawdown in the month following the coronavirus sell-off.
There are nine themes in the Global Select portfolio at present, with online services the largest at 17.7%. It is represented in the top-10 holdings by Equinix, Amazon and Microsoft. The management trio also runs the £351.3m Mid Wynd investment trust, which takes the same thematic approach to investing, albeit with more exposure to smaller companies due to the closed-ended structure.
Mid Wynd has outperformed over a five-year period, delivering 117.2% compared with 101.6% in the Artemis Global Select Fund, according to FE Fundinfo. Both have outperformed the 86.9% gains in the MSCI ACWI.
How Burcheri has found the shift from hedge fund to global equities
A punchy portfolio of 60-70 positions suits Burcheri, given her previous role as a hedge fund manager. “It means we don’t have any position in companies that are there just because they are a big part of the benchmark. It may not be a massive short position but it is still a big statement, saying that we don’t actually like that company for our fund.”
An economics graduate of Bocconi University in Milan, Burcheri had initially hoped for a diplomatic career, completing internships at the United Nations, World Trade Organisation, European Commission and the local US embassy. But she says: “I realised there was nothing tangible I was creating and it was taking ages to make a decision. I’m not impatient but there was all this talk and all these analyses, I just wanted a decision to be made.”
A graduate programme at a bank in Geneva allowed her to experience asset management, and shortly after she was managing CHF40m (£339m). “Since then I’ve never stopped.” She’s also managed financial funds and European assets. “I like to challenge myself,” she says of her foray into different asset classes.
Tapping into French luxury amid the coronavirus lockdown
In the Artemis portfolios, every stock is allocated to a single theme, although there is an opportunistic bucket for stocks that are attractively valued but don’t quite fit elsewhere in the portfolio.
Labelled the high-quality assets theme, it currently represents 8.5% of the portfolio, with Sumitomo Corporation one of the most recent additions, introduced at the start of July. Burcheri notes Warren Buffett bought into the company several days later – an auspicious sign, she hopes. For the most part, though, Burcheri views the pandemic as an opportunity to tap into her “shopping list” of desirable companies across the main themes of the portfolio.
The fund held 7% cash on 20 February, when markets peaked before the sell-off, and by the end of April it held 4.6%. Cash levels were slightly high coming into 2020, as the team took profits on several stocks in 2019. “Last year was a fantastic year for the stock market.” But, by its nature, the fund always has a little dry powder on hand, she adds. “We don’t want to sell something that is in the fund to buy something else. We need to separate the decisions.”
During the coronavirus sell-off, French luxury fashion brand Hermès entered the portfolio via the emerging markets theme, which taps into where revenue growth is occurring, rather than where a company is based.
“It really speaks to the kind of business model we are looking for, with high barriers to entry. During the sell-off it went down like a stone and we used the cash to buy it.” Cashflow analysis at the time showed an implied growth of 5.3%, compared with an historical compounded annual growth rate on the free cashflow of 10%. Already the stock is trading at over €800 (£727) compared with its March dip to €525.
Some stocks were dropped from the portfolio during the period, with Los Angeles music events business Live Nation sold due to an “abrupt swing” in the cashflow position and the leverage ratio. The business, which owns Ticketmaster, saw its revenue crash by 98% in Q2 2020 to $74m (£56.7m), from $3.2bn a year earlier.
Speaking in October, before Pfizer, BioNTech and Moderna had released details of their successful Covid vaccine trials, Burcheri says coronavirus has worked in favour of most of the themes in the portfolio.
Thermo Fisher is the largest holding, at 2.7%, and sits within the scientific equipment theme. It started the year at $326 and is now trading at $467. Apple, the third-largest holding at 2.2%, made history in August when it became the first company to hit a market capitalisation of $2trn.
Apple is in the screentime theme, which represents 7.8% of the portfolio. “Already we were spending quite a lot of time in front of screens; now it’s almost screen exhaustion,” she says.
Low carbon is another area Burcheri expects will be boosted as governments spend their way out of the crisis. She notes that the UK government is now following in the footsteps of Europe by backing green projects as part of its coronavirus fiscal stimulus. Its Build Back Greener plan aims to make the UK the world leader in wind power, with £160m committed to doing so.
‘We try to look for themes that are as uncorrelated as possible’
The thematic approach means the fund, which has an 88% active share, can diverge significantly from the MSCI ACWI benchmark.
The UK, for example, is just 2.9% of the portfolio, easily putting the fund in the lowest quartile of the Investment Association Global sector for its weighting to the home market. By contrast, Japan is an 11.9% weighting in the fund, compared with 6.9% in the index, which Burcheri attributes to the automation theme.
“The geographical location is a complete output of our thematic approach and the stockpicking.” But there are some countries the team won’t touch due to governance reasons, she says, pointing to Russia as an example.
Correlation analysis is conducted between themes with anything above 80% considered a potential warning signal, depending on the underlying cause of the correlation.
“I double check there are no hidden correlations I don’t understand,” she says, stating she creates a matrix sourced from two years of backward-looking data from Bloomberg. “In a way, that’s the beauty of the strategy. We try to look for themes that are as uncorrelated as possible and that is what’s allowed this nice performance of not going too much down-market and underperforming in a bear market.”
Healthcare costs and automation are the least correlated themes in the portfolio, with a correlation coefficient of 0.4, while fintech and online services have a correlation coefficient of 0.87. Burcheri is comfortable with this because she understands the explanation behind it, noting the two themes are US heavy.
The online services theme also has a correlation of 0.81 with the screentime and scientific equipment themes.
By definition, the team doesn’t look at cyclical companies, says Burcheri. “Economic recovery is not a theme. Automation is a theme for me because it’s a longer-term trend that is going to happen independently of GDP being at 1% or -20% or 3%.”
She plays down the price-to-earnings ratio often used by value investors, noting Amazon and Pirelli have both been trading around 99x. “The one I prefer to have in the portfolio because it completely fits in my online services theme is Amazon. I think I have more chance of making money in the long term with Amazon over Pirelli.”
She believes a Covid-19 vaccine is already priced into markets, although she is not placing any bets on when that might occur. “I don’t think we would be having this rebound of the stock market if the market was not anticipating the situation is going to end.”
