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Fund Manager Focus - September 2014



Artemis - London

Etablished in 1997, Artemis is an independent, owner-managed asset management firm. TAUM are $31.6 billion and comprise a number of funds, two investment trusts, a hedge fund, a venture capital trust and pooled and segregated accounts for institutional portfolios. Fund managers are required to invest in Artemis funds so their interests are directly aligned with their investors. They have no investment style constraints because as active fund managers, they want the freedom to adapt to changing markets and to stock pick. Artemis are benchmark aware, not benchmark driven.

Rosanna Burcheri joined Artemis in October 2011 to manage the Artemis Global Select Fund alongside Simon Edelsten and Alex Illingworth. After graduating in 1996 from Bocconi University in Economics, Rosanna joined Paribas Asset Management. In 2000, she moved to M&G as a fund manager and director with responsibilities for pan-European equity portfolios, before joining Shell Pension Management Service in 2004 as a senior European portfolio manager. Rosanna then became a partner and pan-European fund manager for FrontPoint Management (UK) LLP in March 2006.


What's the breakdown of TAUM?

"Equities account for 86% ($27.2bn) of AUM. Bonds are 9-10% ($3bn) and the rest is in multi-asset securities. 12% of total AUM in global equities ($3.87 billion). 50% of global equity figure is in US equities ($1.98 billion)."

Artemis has recently announced the launch (in September 2014) of five new US equity funds - can you discuss?

"We recently hired a seven-strong team from Threadneedle. Our US funds will be headed up by Cormac Weldon with Stephen Moore acting as his deputy. Think of Artemis as a platform with different strategies with teams of two to three fund managers. We run those strategies in an unconstrained way and use different investment criteria."

You work for the Global Equity Franchise - please explain this franchise.

"The Global Select franchise has $770 million in total. This is made up of a unit trust, segregated accounts and an investment trust. The global select fund has 60 - 70 names and a thematic approach. Artemis has another two global equity funds, the Global Income Fund which, as the name suggests, has an income mandate; and the Global Growth Fund, which is managed through a GARP model. There is no fixed investment philosophy, and we are completely free to manage money in the way that is best for our investors."

Can you give an example of a current theme?

"One of our biggest themes is healthcare. We analyse United Nations population data, for example, and of course there are ageing populations in a lot of developed countries. As we live longer, we get more illnesses and healthcare costs are spiralling for a lot of governments. Governments don't have a lot of cash, so there's an increasing awareness that solutions need to be found. Obama's State of the Union address in February 2013 focused on the need for healthcare reform, for example. In the UK, NICE which manages the NHS budget dictated that only 12 billion ($20.5 billion) can be spent on branded medicines. So we take all these factors into account and work out which healthcare companies will have growth drivers over the next three to five years. We believe that the generic drug companies will do well in this context because they help to save money. It is unaffordable to pay $1 million for a drug for one year's treatment. We expect more and more freedom to be given to the generic drug companies as their products are cheaper. We have 16.5% in healthcare (vs. 10.6% for the benchmark). We monitor the benchmark, but we are unconstrained.

We think there are very powerful long-term drivers for these generic companies. We can find a lot of names that will profit from these trends, so we own companies like Perrigo, Bayer, Glaxo (after the joint venture with Novartis' OTC business). We own a lot of drug distributors in Japan, China, the US and the UK as well. We have this overweight position because we think it's a very powerful long- term trend and we are able to find good companies with barriers to entry which will benefit from these trends at cheaper valuations. The final criterion by which we select stocks is their valuation."

Do you use screens?

"We don't use screens. But some of my colleagues on our Global Income Fund, for example, use a dividend yield screen. For us, screening is identifying long-term trends and companies which will benefit. From a valuation point of view, we look at EV to operating free cash flow."

You co-manage the Global Select franchise alongside Simon Edelsten and Alex Illingworth. Do you split sectors and/or geographies?

"No, we came together from different backgrounds. I had a European equity background. Simon had a global background as he worked for THS and had a very strong knowledge of the Japanese and Asian markets. (This is really valuable as that has been lost due to the long-term decline of the Japanese stockmarket). Alex had been working at Insight on global mandates with a US bias. So there are no preferred sectors or geographies. We try to work in a thematic way and come up with ideas in an unconstrained way. We are three experienced fund managers. This means we have witnessed stockmarket behaviour over time."

What's the investment objective of Global Select Fund?

"The aim is long-term capital growth and we put a lot of emphasis on this. Now we have a three-year record and statistical data. Because of following long- term themes, we are able to outperform in a down market and also outperform in a rising market."

Any likes or dislikes? Sectors you won't invest in? Does a stock have to be profitable?

"Once we've identified our long-term themes, we look for the best companies to exploit these themes. We pick companies on a collegiate basis. We have to think that the top line is going to profit from our long-term trend. It might be a healthcare company, a company with exposure to emerging market consumers or a US shale gas company.

Then we look at the valuation and our valuation model consists of two parts. We look at valuation based on the balance sheet. We put ourselves in the business owner's shoes and ask: 'How much would it cost to create this company?' We look at balance sheet, barriers to entry, the industry, the competitive advantage in terms of the technology, the supply chain, whether the company has a global brand, and its history. Does it have factories all around the world, and so on?
So this is an important double check for us on what we think the intrinsic value of the company is. Then we value a company on cashflow. You will never hear us talk about the P/E or the P&L. We look at the cash generation of the company, and we look at the average profitability through the cycle. We check if they use a reasonable amount of capex to maintain their competitive position. That's very important as a lot of people just look at maintenance capex. But for us, the true capex need is what companies must invest in their business to maintain the value of their assets and to maintain their competitive position in the market.
Then we come up with an operating free cashflow figure after tax and all across the world we discount that by 8%. We believe 8% after tax is a fair figure, because we think in essence the discount rate is the minimum return per annum (after tax) we require invested capital to return."

Do you have a market cap cut-off?

"No, but the free float and liquidity is important to us. I started in 1997 and there was a small company in Germany called SAP. At that time I couldn't invest as I had a market cap constraint of $1 billion! Now we try not to eliminate anything. But from a risk management point of view, we don't want to have to spend weeks or months buying or selling a position. It's common sense."

Average holding period?

"Two to three years."

Average market cap of a US holding?

"We tend to focus on mid caps ($2 billion to $15 billion). Of the five US equity funds we're launching, one is a mid-cap US fund. This will be a very good source of information and knowledge for us on US mid-caps."

Average size of a US holding?

"We try to get 1.5 - 2.5% NAV of the fund. So an average position is between $12 - $20 million."

Do you use a benchmark?

"We use the MSCI AC World Index."

Active share ratio?

"We are very unconstrained. We try to double check what percentage of our top 20 positions are in the benchmark. The biggest one currently is Time Warner with 2%. So our active share would be north of 90%."

Do you vote your proxy for US holdings?

"Yes. We use Manifest."

Any SRI constraints e.g., won't invest in tobacco, A&D etc?

"No, but we try to be aware of risks. We have a dedicated person for SRI issues who gathers all the votes for the whole firm. She highlights any issues we should be aware of."

Do you use a SRI/|ESG rating agency - eg Ethix, Hermes EOS, MSCI ESG etc?

"No."

Top 10 holdings in the Global Select Fund include: AmerisourceBergen, Time Warner and Capital One Financial. Can you discuss what you like about these stocks?

"AmerisourceBergen is part of our healthcare theme. It's a pharmaceutical distributor in the States. What is nice about it is that it has signed a deal with Walgreen which is in the process of merging with Alliance Boots (in the UK). So we expect a lot of synergies. give them a leadership position in terms of being a buyer of drugs in the United States. We believe there will be a push into generics. At the time we bought it, AmerisourceBergen was not very well understood. The pharmaceutical distributor business scares off a lot of people as they work on a wholesale business model and they have tiny margins - EBIT margin of maximum ~1.8 - 2%. But what is key is scale, logistics, distribution and the breadth of their client base.

Time Warner is another of our important themes, media content. It is 5% of our AUM. The way people consume content has changed completely. Consumers don't just want to watch TV. You can use your mobile or your iPad so what is really important is the content. Whoever comes up with the best content will make money. It is difficult to bet against a cable operator versus NetFlix versus a TV operator. This led us to look at the best content providers worldwide, and the best content providers in the world are in the US, partly because the English language travels very well. Films produced in English can be exported all around the world. So we like Disney, Discovery, Time Warner and ITV. ITV has been very proactive in getting hold of small and innovative production companies with attractive content. Look how successful ITV has been with Downton Abbey, which it has exported all around the world.

Capital One Financial is part of our asset growth theme. We look for companies with a leading position in their sector. Capital One have a fantastic position and the potential to grow their assets is underestimated by the market. We were attracted by the fact that in the dire situation, before 2011, we found this bank with a leading position in credit cards with one third of the book exposed to sub-prime and an amazing risk management model. If you look across the different cycles, they've always been able to price the risk correctly - for billionaires or the unemployed in Alabama! They bought the ING assets in the States which gave them cheap deposit funding, so they ticked all the boxes. They are growing their assets and they are undervalued in terms of their asset base."

Recent sales and why?

"There has been a lot of trimming of the portfolio. We had a big position in Disney. We trimmed it recently as we'd made a lot of money. According to our valuation, it completely ticks our box in terms of fitting our theme and it has a fantastic franchise which is undervalued by the market in terms of the cashflow. But the stock is now up to speed, so we took some money out.

Another fantastic performer was a media company we sold, Grupo Televisa. It's a Mexican company. It did fantastically well in Latin America and in the United States (due to the very large Hispanic population in the United States). The content travelled well and the company was not well understood by the market. But we are disciplined, so sold out completely because of the stock's valuation. We like to have a margin of safety."

How important is meeting management?

"It is not a pre-requisite to meet management before buying. However, once we are holders we try to meet companies once a year. We like to meet companies that fit our themes to double check our hypothesis. We are not interested in quarterly EPS numbers. Management generally like meeting us as we approach a company from a different angle. US companies often get a lot of short term questions from their domestic investors - but not from us!"

How many US companies do you meet a year? In your offices/at conferences/via conf calls?

"It is hard to pinpoint an exact number. In London there are more and more global conferences taking place, and corporates normally visit their London investors once or twice per year. We normally travel to the US two or three times per year, focussing on a certain area for one week each time."

Tips for US corporates?

"IR departments should ensure their websites work properly. I do due diligence when researching a company, and if it takes 10 minutes to find the annual report, something is wrong! There should also be access to previous presentations and investor days. I often go back seven to eight years when researching a company to see if the message/ strategy is the same. That is valuable information. Websites should be shareholder friendly."

How have recent corporate access changes in the UK affected Artemis?

"The service that Phoenix-IR provides is very valuable as now in the UK we can't pay for corporate access. Being global we travel to a lot of conferences and companies are generally very open to meeting us."

Outlook for US market for rest of 2014?

"As thematic investors, we find it harder to find a lot of cheap stocks nowadays. Stock prices have run up without cashflow earnings coming through. That said, the US has many profound advantages ranging from leadership in new technologies to the shale oil & gas revolution. The US will always be a land of opportunity for stock-pickers."

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