Artemis’ Derek Stuart: How I invest in volatile markets

Derek Stuart 200w

Artemis UK Special Situations manager Derek Stuart says the key to value investing in volatile markets is to focus on individual companies rather than trying to predict what will happen in the macroeconomic environment.

Stuart (pictured) has been running the £1bn Artemis UK Special Situations fund since March 2000. The fund has returned 24.2 per cent over three years to November 21, compared to 22.9 per cent by the UK All Companies sector, according to data from FE.

Stuart says he does not let the macroeconomic environment dominate his stock picking.

He says: “One thing that studying economics teaches you is that it is very difficult to forecast, whether that is market movements, macroeconomics, demographics or interest rates. I try to invest without taking the risk of forecasting.”

Stuart says the macroeconomic “noise” is louder in the current volatile market than it has been in the past.

He says: “When I started in the market, a 3 per cent move in a FTSE 100 stock was a big move. Nowadays, that is run of the mill. There is a 3 to 5 per cent move in some FTSE 100 companies in a day.

“It is very easy to get bogged down with the macro, when you should be spending more time looking at companies. This means that when you have strong conviction in a risk-averse environment, you can go in and buy your stocks at lower valuation.”

Stuart says managers should resist the temptation to turn over holdings off the back of sharp moves in share prices.

Stuart bought a 2.5 per cent position in cruise line operator Carnival after its share price fell following the crash of one of its ships, the Costa Concordia, in January.

Stuart says: “There is a growing demographic that like going on cruises and the US economy is improving and that is the largest buyer of cruises. The shares have done well since the crash. The de-rating happened quickly, as has the re-rating. Over a number of years, I expect Carnival’s share price will go on to do well.”

The fund has a 1.5 per cent position in BAE systems, which Stuart bought at the beginning of summer when it was trading on a price-to-earnings ratio of seven times with a 6.5 per cent yield.

It later emerged there was a potential merger with European defence company EADS on the cards, but this has since fallen through.

Stuart says he is not surprised the deal did not materialise. He says: “I always thought it was a big ask to get the politicians on side to do the deal. The problem for BAE systems is it has said it has some problems in the US with budget constraints in defence spending, but it can off-set that by cutting costs.

“The firm is now saying the deal was just opportunistic. People think the defence situation may be worse than it is making it out to be.”

Despite this, Stuart thinks the firm is still attractive as the defence business is “always going to grow”. He says the approaching energy independence of the US and the move away from a reliance on the Middle East for oil means the US will not need to be a defence ally for these countries.

He says: “The US will not need to wade into these Middle Eastern countries and so they will have to fight their own battles and allocate spending to defence”.

While not letting the macro dominate investment decisions, Stuart says the macroeconomic environment is the biggest challenge for companies.

He says: “The government wants banks to lend and corporates to spend, but they look at the macro and think it is too uncertain.

“The mess the UK, US and Europe are in will not change for years because the quantum of debt out there is so high.”

In a low-growth environment, Stuart says self-help businesses will do well. He gives ITV as an example of a business that is coming out with good results, while cutting costs.

He says: “I look for the reinvigoration of a franchise through a new management team. When a new management team comes into any business, my interest is sparked quite quickly.”