Artemis returns to European focus

The closure of Artemis’s North American Growth fund removes the one blemish on an otherwise untarnished reputation, leaving it to concentrate on UK and European funds. Adam Lewis reports.

Although Artemis only manages 11 funds, it accumulated retail assets under management of 7.5bn to the end of March 2006. According to the Investment Management Association, this ranks it as the 20th largest fund provider in Britain, running more than both HSBC and the Scottish Widows Investment Partnership.

The provider was established in 1997 and a large factor behind the amount it runs is fund performance. Of the 11 funds on its books, 10 have one and three-year track records, according to Standard & Poor’s. Over one year to May 22, 2006, seven of these are ranked first or second-quartile in their respective peer groups, while over three years, nine out of 10 are ranked in the top half of their sectors. More impressively, over both one and three years, five of the group’s funds are ranked first-quartile: Artemis Capital, European Growth, Global Growth, High Income and UK Special Situations.

The only major blot in Artemis’s fund range is its North American Growth fund, the management of which has been outsourced to US-based Montag & Caldwell since its launch in November 2001. However, this blot will disappear from next month, following the group’s decision to close the fund.

Nick Wells, the Artemis product and communications director, says the fund, an old ABN Amro portfolio, was launched at a time when growth investing was in vogue. “At the time we thought it made sense to have a core growth mandate, so that investors could balance it with any value mandates they might have,” he says. “It invested in between 20 and 40 large-cap growth companies.”

Unfortunately, 2001 proved to be the time when markets turned their attention from growth to value. “The fund performed reasonably well in the early days,” Wells says. “But value soon took over, with much of the market investing in small and mid caps. When this happened, investors did not, as anticipated, balance out their growth and value mandates, and the fund quickly fell in size.”

At its peak, the North American Growth fund reached 25m in assets under management. But Wells says it has dwindled in the past 18 months, falling to a current 3m. “We reviewed the fund on a number of occasions, but at 3m it was no longer viable,” he says. “The cost of dealing in the underlying securities has become detrimental to the overall performance.”

According to S&P, the fund was ranked fourth-quartile over both one and three years in the IMA North America sector. As a result, and following FSA approval, it will close at the end of this month. If investors do nothing, their holding will be switched into Peter Saacke’s 130m Global Growth fund, which has 27% of its portfolio in American equities. Other options are to take cash or transfer their assets into any other Artemis managed fund, free of charge. Wells says: “The fund was a product of the old ABN Amro business model, which was much more of a global operation than Artemis. It is unlikely that we would ever have launched a North American fund, as it does not fit in with our UK/European-centric funds proposition.”

Artemis was acquired by ABN Amro in June 2002, shortly after ABN lost star managers Nigel Thomas and George Luckraft to Framlington (now Axa Framlington). Wells was one of a number of staff who transferred from the Dutch giant to Artemis.

The impending removal of the North American fund means that Artemis’s 7.5bn worth of asset under management will be spread across just 10 funds. This works out that each fund is on average 600m in size. The last time Fund Strategy profiled the group (May 16, 2005, page 26) it had 5.4bn.

Wells attributes its growth to several factors, including links with life companies, fund platforms and multi-managers. “An extensive array of intermediaries have noticed us and like what we’ve been doing,” he says.

Gary Potter, fund of funds manager at Credit Suisse Asset Management, says that wherever he looks in Artemis there are strong fund managers. “While its assets have risen significantly, given the managers at its disposal, it will not present a problem for the company,” he says. “The closure of North American was inevitable, as it was not core to its business strategy and was not taking any money. Like its fund of funds operation, which it sold to us [in March 2005], the American fund did not fit in.”

In the Credit Suisse fund of funds range, Potter says, the two primary Artemis funds he holds are Philip Wolstencroft’s 1.5bn European Growth and Adrian Frost’s 1.7bn Income fund. “I have held Derek Stuart’s Special Situations fund in the past, but I sold it in the middle of last year because I wanted more of a large-cap bias,” he says.

“Derek is one of the top managers in the industry and the fund could come back at any stage. But like football managers, at times you have to make substitutions when you need to change the strategy.”

Darius McDermott, managing director of Chelsea Financial Services, describes Artemis as one of the best groups in the industry. “Almost everything we have ever done with the group has been successful,” he says. “As a group, it is the third-biggest taker of our client inflows.”

At present, the only fund that does not have a buy rating from Chelsea is the North American fund. On top of this, eight Artemis funds are on the group’s “Premier League” list of recommended funds, while three of its funds – European Growth, Special Situations and Smaller Companies – are on its shorter list of recommended funds, called Chelsea Leaders.

“No other group in the industry has 80% of its funds [after the closure of North America] on our Premier League list,” McDermott says. “The only funds not on the recommended list at the moment are James Foster’s Strategic Bond fund and the High Income fund, but both have buy ratings.”

Foster’s Strategic Bond fund was the last portfolio launched by Artemis, at the end of June last year. The fund was, and still is, the group’s first fixed income offering, following the arrivals of Foster and Alex Ralph from Isis (now F&C) in April last year.

Owing to the fund’s ability to move globally into any sub-sector of the fixed income universe, from government bonds to high yield, Wells says there are no plans for any other bond funds at this stage. “We don’t launch funds for the sake of it,” he says. “We launch them for new managers when they join us.”

No manager has left Artemis since the group was set up in 1997. Wells says this is because of the way it allows its managers to operate. “We operate with a boutique culture, whereby the managers have huge freedom to do what they want,” he says. “If it suits them to work from home from time to time, they can. All our managers have an incentive to do well by having holdings in their own funds. This means they are 100% responsible for what they do.”

Apart from Mark Tyndall, chief executive officer and co-manager of Artemis Capital, Wells says the only responsibility managers have is for their funds. “Managers want to manage money, not people or any other part of the business,” he explains. “Our managers find it liberating that here they can simply concentrate on what they want to do, with no distractions.”

In November last year, Jacob de Tusch-Lec joined the group from Merrill Lynch to co-manage the Capital fund with Tyndall. Wells says this was partly in recognition of how quickly the business was growing, which was making demands on Tyndall’s time. “We didn’t want Mark to get into the position where unitholders in the fund were questioning how much time he could spend on it,” he says. “In time, Jacob could take over the fund on his own.”

McDermott describes Artemis as “the archetypal large and growing boutique”. This is the reason he gives for why managers never leave. “The managers are all owners of the business, and on top of this they get on well together,” he says.

While there is no investment by committee, several of the group’s funds carry out a screening process developed by Wolstencroft, called SmartGarp – Sentiment, Momentum, Analysts, (earnings) Revisions, Top down, Growth at a Reasonable Price. There are two versions of the system: the pan-European version created by Wolstencroft and the more recent global version, which was developed and built by Global Growth manager Saacke. The pan-European version looks at 2,000 firms, while the global version screens 4,000.

The funds that use SmartGarp most extensively are Artemis Capital, Global Growth and European Growth. However, Wells says the group’s other managers also use the screening process as a reference point when comparing similar stocks and looking at sectors. “The team hunts as a pack, but they think like individuals,” he adds.

Potter says: “Artemis stands for everything we believe in in fund management. That is, a high-quality investment management team, a focus on absolute returns, managers with incentives, and a focus on what the clients want.”

McDermott says: “Before the group’s decision to close the American Growth fund, I suggested that because of the successful transformation of Global Growth, it should move the fund to the SmartGarp model. But it did not feel that the existing SmartGarp team could cope with another fund.”

Away from its equity and bond fund management, Wells says, there are two other elements to the group’s business: the management of institutional mandates, and the running of venture capital trusts and hedge funds.

The group entered the institutional space in March 2005 when it launched four funds: UK Alpha, UK Growth, UK Special Situations and Equity Income. All are mirrors of its retail funds. Wells says that it has so far taken in more than 3bn in institutional money, and that the net sales of the institutional funds was similar to that of its retail business last year. “As well as the four main funds, we are running 20 mandates for institutional clients,” he says.

The group also manages 500m in its three hedge funds, two venture capital trusts and the Alpha investment trust. In December, William Littlewood, former manager of the 1.6bn Jupiter Income trust, joined the firm to manage a global long/short equity fund called Artemis Absolute. But while participating with the equity team in terms of idea generation, in particular the UK growth funds, Wells says there are no plans to launch a long-only retail fund for Littlewood.

Potter says the developing of institutional products is an interesting sideshow development. “It is a group with an understanding of what matters,” he adds.

By the end of the third quarter this year, Wells says, Artemis will convert all of its funds to the FSA’s new collective investment scheme rulebook. At present, only Foster’s Strategic Bond fund is Ucits III registered. The group’s remaining nine funds will also adopt Ucits III status, rather than become non-Ucits retail schemes, also allowable under Coll. “There is no reason for us to adopt Nurs; we can do all the things we need to do under the Ucits III umbrella,” says Wells.

Indeed, keeping things simple seems to be the basis for Artemis’s success so far.

Artemis was set up in 1997 by former Ivory & Sime fund managers Mark Tyndall, Derek Stuart, John Dodd and Lindsay Whitelaw. The first funds were launched in 1998. In 2002, ABN Amro acquired a 58% stake in the firm, but executive control lies with the original founder shareholders. Based in Edinburgh and London, the firm employs 87 people. These include 14 fund managers, who run 10.3bn on behalf of retail and institutional investors through in-house unit trusts, an investment trust, hedge funds and segregated holdings.