How do we identify stocks and sectors?

Along with our collegiate culture, our fund managers utilise our SmartGARP system as a tool in the decision to include a stock in one of our portfolios. Once a list of good ideas is generated, the fund managers research these. This allows our fund managers to focus their time, applying their knowledge and skills where our clients benefit most – investigating in depth those candidates with true investment potential.

Philosophy, Process and Style

Artemis has a number of products, each with an appropriate investment philosophy. The overriding philosophy that has driven Artemis' reputation for delivering outstanding investment returns is based around the team's belief that their primary aim is to beat the markets. Fundamentally we believe that, whatever the markets are doing, opportunities for superior returns are available for active managers to find, provided they possess the skills and confidence necessary to identify and exploit them. Fund managers are not restricted to a house style or process.

We seek to exploit market inefficiencies with an absolute return mindset in order to generate maximum returns. In practice this means that we only buy a share if we believe that it is undervalued, be it through its capital growth potential or its income stream, and not because it represents a significant proportion of the index.

Within funds, absolute stock positions are limited to 5%. Capital is allocated to an individual stock on the basis of valuation and conviction, and not as a function of its weighting in the index. Our active fund managers are given the freedom to adapt to changing markets. Portfolios are diversified but focused. They are benchmark aware, not benchmark driven.

When tracking down Profits, irrespective of the market environment, the basis for our investment philosophy is ‘growth at a reasonable price’ – stocks that are cheap when compared with their growth rate. While many investment managers use this investment philosophy, at Artemis we have extended and refined it into a system which we believe is more effective at helping our fund managers to identify great investment opportunities.

As part of our decision-making process, we also include factors such as analysts’ revisions of forecast growth rates, top-down/macroeconomic elements as well as investor sentiment, which can have a dramatic impact on share price movements. We believe that combining financial theory, investor behaviour and sentiment in this way gives us a better chance of producing stronger results for our clients.

We believe that stock markets need to be split into two components; large cap (this includes the top end of mid cap) and small/mid cap. The former is more widely researched than the latter. Our in-house proprietary stock screening system, SmartGARP.
(Sentiment, Momentum, Accruals, Revisions, Top down + Growth At a Reasonable Price) is used to look at larger cap stocks

SmartGARP

This is an important aid in our hunt for Profits. Based on the premise that companies with strong financial characteristics tend to perform well, we created SmartGARP as the tool which measures these characteristics objectively. SmartGARP’s output is relevant to all Artemis funds, but it is used more for our large cap growth funds. Our income managers, nonetheless, use it as a factor in their stock selection.

SmartGARP collects and processes enormous amounts of information from approximately 2,000 analysts worldwide on a daily basis. It then amalgamates all this information to give each stock a score, based on pre-set parameters. Stocks are then ranked according to their score, giving fund managers a snapshot of a company’s financial credentials. This quantitative process does the job of a large team of analysts - essentially screening out distracting noise and highlighting stocks which merit further investigation.

SmartGARP not only helps identify new ideas, but it also helps police existing holdings by highlighting deteriorating financial characteristics. This allows our fund managers to act quickly if appropriate.

For mid and small cap stocks, idea generation comes from a variety of sources, including broker research. Each fund manager uses a number of specialist brokers who understand what they are looking for. Trade magazines, macroeconomic analysis and company visits supplement our own research.
Through our quantitative screening process and specialist broker network we focus on those companies with the potential for re-rating and the UK equity team meets companies to identify catalysts. They also maintain a dialogue with company management.

Re-rating occurs most reliably in those sectors where relative growth prospects are most robust and rising; and in those companies where there is a clearly defined catalyst for improvement (internal or external); and where the company is best positioned and managed to deliver value.

At Artemis we recognise that whilst the earnings prospects of a company is the key driver of long term re-rating, in the short term changes in other factors, such as the ownership of the company can have a material impact on stock and sector performance. Recognising “market reality” is a major concept within the Artemis philosophy.

For further information about Artemis and our individual funds, please read one of our brochures.