Boutique pioneer Artemis suffered in the financial crisis when its SmartGarp quant system foundered. Now rebuilt, with new funds and seasoned managers, can it resist further shocks?
Artemis was a fund management group built by fund managers. At the time, many of the qualities on which it built its business were rare – fund managers investing in their own funds, not being constrained by bureaucracy and investing with conviction. After its launch in 1997, its ascent was dramatic, but it was hit by a series of difficulties in the aftermath of the credit crisis. It has rebuilt with a range of new funds, but has it now future-proofed its business?
Artemis built its business on a series of successful UK funds. These have proved popular with retail investors, who tend to prefer a higher domestic allocation, and assets under management have remained steady. Originally, they found similar resonance with institutional investors, but they then abandoned their preference for individual country funds, and decided to go global, which saw clients shift loyalties and the group lose assets. Where, the institutional market leads, the retail market often follows, so the group is two years in to a change in strategy.
Richard Turpin, managing director, says: “The UK centric approach served us well in the early years. There was lots of liquidity, there were no shocks, it was all focused on financial fundamentals. Markets rallied and UK equities did well. But after 2007/08, there was a structural change and there was a move to global equities. I believe that this is a structural change for the industry and we have had to move with the times.”
The problems of the UK focus were compounded by the relative weakness of the group’s international funds. The European and Global Growth funds were run according to the quantitative SmartGARP system. Prior to the 2007 crash, the system had delivered consistent top quartile performance for the group’s European manager Philip Wolstencroft and the global version had been launched with the aim of replicating its success. But it was derailed – along with many other quantitative investment management processes – by the credit crisis. Markets simply stopped behaving rationally – risk on, risk off became the norm and fundamentals were often ignored.
The European Growth fund slid and has not recovered. It is down 33.2 per cent over five years, compared with a fall of just 5.6 per cent in the wider sector. The process has been more forgiving on the Global Growth fund, run by Peter Saacke, which had a poor run during the crisis, but has recovered with aplomb and is now top quartile over one and three years.
In spite of the recovery of the Global Growth fund, the group decided to expandsits global offering. It has seen a reasonably active period of fund launches, almost all with a global remit. The group’s re-invigoration began with William Littlewood’s Strategic Assets fund. It was still the strongest launch in which Turpin – a 30-plus year industry veteran – had ever participated. They raised about £140m in just the two week launch period, a testament to Littlewood’s standing in the industry. The fund is now £809m in size and continues to see a steady flow of investment.
The fund has, in general, rewarded the faith shown by investors. It had a strong early run and remains just outside the first quartile in the IMA Flexible sector over three years. More recent performance has knocked by Littlewood’s negative position on Japanese government bonds and developed market government debt, but this position is starting to turn positive for him now. Certainly, compared with some of the high profile launches at the same time, he has held his ground. Littlewood, to his credit, has always been clear that this is not an absolute return fund, but a multi-asset strategy. It aims to protect on the downside, while still participating in the upside, but will not deliver a consistent positive return, month in, month out.
Littlewood was a big name and showed the group still had pulling power to attract industry heavyweights. This was seen again with the recruitment of Mark Page and Laurent Millet from LV Asset Management in 2011. They are now at the helm of the group’s European Opportunities fund, which takes an unconstrained, fundamentals-driven, stockpicking approach. This is still just £19m in size after a tough year for asset-raising in European equities. However, early performance has been strong, with the fund now top quartile over one year.
The group also built a new global team under Simon Edelsten, recruited in May 2011 from Taube Hodson Stonex. The Global Select fund was launched in June of the same year and is top quartile over one year. The global team has also won a number of institutional mandates, run on the same process.
The other major launch for the group has been Jacob de Tusch-Lec’s Global Income fund. This is loosely based on Adrian Frost’s income approach in the UK. Turpin says: “The process takes the basic philosophy on the UK income fund and translates it to a global environment. It looks for good dividend cover, and the ability to grow dividends. A lot more companies globally are coming round to the concept of dividends. There are now around 1,000 that meet the requirements of this fund.”
Turpin is quick to point out that the fund is in no way a clone of the UK fund with a bit of global exposure thrown in for good measure. Not only is de Tusch-Lec his own man, making his own decisions, but the fund is truly global in its approach. The UK weighting in the fund is currently just 7.6 per cent. The fund has been a top-performer, second in the Global Equity Income sector over one year, but has yet to replicate the success of rivals such as M&G Global Dividend fund, or the Newton suite of international income funds with just £81m in assets.
The Global Energy fund was launched for John Dodd and Richard Hulf in April 2011. This, unusually for a sector fund, raised about £70m in its initial period. This was the first sector fund for the group and built on Dodds’ long-running interest in energy companies. Hulf worked at an independent oil and gas consultancy where he provided independent sector research to Artemis prior to joining the group.
More recently, the group has also soft-launched a Monthly Distribution fund, aiming to build a track record before taking it out to the market. It gives the group a presence in the managed sectors. Its only previous flirtation in this part of the market was when it inherited a multi-manager team from ABN Amro, which it sold to Credit Suisse Asset Management.
It is clear from these recent launches that attracting assets has become tougher: Assets are harder to come by generally, the group has more competition and a less established record. Equally, some of the group’s key selling points – manager autonomy, lack of bureaucracy – have been widely copied by other boutiques in the industry and are therefore not the draw they once were.
But of course, Artemis still has plenty of assets in its range of UK funds. The group’s real banker has been Adrian Frost. His Artemis Income fund is now £4.5bn in size and remains a core holding for fund selectors across the board. He is more pragmatic than some of his value-driven peers, such as Neil Woodford, a strategy that has generated remarkable consistency in his 10 years at the helm.
Turpin says: “He looks at free cash flow analysis, and dividend cover. He wants strong companies with strong balance sheets that can deliver dividend growth over the longer term. he aims to grow the distribution from the fund to the best of his ability.” The fund hovers at the top of the second quartile/bottom of the first quartile in the UK Equity Income sector in most market conditions and Frost is often seen as a ‘safe pair of hands’.
Derek Stuart’s UK Special Situations fund is £993m in size and continues to deliver some respectable performance. Equally, Frost’s High Income fund remains a solid performer: top quartile over one year and second quartile over three. For all these funds, Turpin’s focus has been on ensuring adequate support and succession planning for the managers. All the funds now have a second manager or analyst support.
Equally, the group appears to have entered a period of more stable ownership, after a series of deals occupied management’s attention. It is now majority-owned by Affiliated Managers Group, a specialist group investing in asset managers listed on the New York stock exchange, with the remainder owned by partners and staff.
Gavin Haynes, investment director at Whitechurch Securities, says: “Artemis has built up an excellent culture over the years. It styled itself as a fund management company built by fund managers – in other words, it was willing to taste its own cooking. The managers invest in their own funds and it is an investment-led culture. There is a lack of red tape and that freedom has enabled the group to attract some strong managers.
“We like the culture and environment and there are some areas where they have done exceptionally well. We hold Derek Stuart in high regard and Adrian Frost’s Income fund is probably our most significant investment across our portfolios. It has been very consistent. He is more pragmatic in the way he runs money than some of his rivals. He won’t tend to be at the top of the performance tables, but equally when markets slide, he won’t lose lots of money,”
Haynes admits that the group have had some issues over SmartGARP which did not work at the market inflection point, but says the group has done well to address the problems and bring in the LV team.
David Coombs, head of multi-asset investing at Rathbones, does not currently hold any of the group’s funds, but says that there are some interesting options in the group’s range nevertheless, notably the Income fund. He is untroubled by the difficulties of the SmartGarp process, but says that the group has found itself in the tough middle ground of asset management: “Fund managers have got to be big or niche. Being in the middle is quite difficult.”