Identifying gems in the global emerging markets

Raheel Altaf, EM co-fund manager at Artemis IM

In the dynamic realm of emerging markets, identifying lucrative investment opportunities requires expertise, thorough analysis, and a strategic approach. We talk with Raheel Altaf, the Co-Fund Manager at Artemis Investment Management, to delve into the intricacies of the Artemis Funds (Lux) – SmartGARP Global Emerging Markets Equity.

This actively managed equity fund aims to enhance shareholder value through a combination of capital growth and income generation. Raheel sheds light on the fund’s investment objective, the innovative SmartGARP stock screening tool, due diligence processes, portfolio diversification strategies, and the fund’s impressive historical performance.

Can you provide an overview of the Artemis Funds (Lux) – SmartGARP Global Emerging Markets Equity and its investment objective?

The Artemis Funds (Lux) – SmartGARP Global Emerging Markets Equity is an actively managed equity fund investing in companies within the Emerging and Frontier markets. The aim is to increase the value of shareholders’ investments through a combination of capital growth and income.

A proprietary tool called ‘SmartGARP’ is used as the foundation of the investment process. It screens the financial characteristics of companies by identifying those that are growing faster than the market but are trading on lower valuations than the market. The Investment Manager selects companies with good ‘SmartGARP’ characteristics. This tends to mean that the portfolio contains stocks that have favorable characteristics

How does the fund identify investment opportunities among the vast universe of over 2,500 companies?

We use our proprietary stock screening tool, SmartGARP, which has been developed and refined over the last 30 years. It puts a range of fundamental stock data, behavioral and market insights into a systematic framework, which makes it easier to assess the relative attractiveness of companies. It also filters down the large investible universe to a smaller subset of attractive opportunities.

At the same time, we recognize that all quantitative stock selection and risk management processes have their limitations. As a result, we think it is essential that the fund manager complements them with his own judgment to carry out due diligence on individual companies and to ensure a broad diversification of portfolio risks.

Could you explain the SmartGARP stock screening tool used by Artemis to identify potential stocks?

SmartGARP is a systematic, evidence-based process, focused on company fundamentals. It aims to identify companies with superior fundamental growth that are trading on reasonable valuations across a broad universe of investable companies. The objective is to alert the manager to stocks where certain variables are influencing the share price and to identify the best entry point for investment.

We start with a universe of all listed companies from emerging and frontier economies. Once market capitalization, liquidity, and research coverage filters are applied, this reduces the universe to around 2,500 investable companies. We score all companies on eight investment factors. These include bottom-up and top-down inputs and incorporate fundamental and market trends as well as behavioral insights. The top decile of these ideas is considered for inclusion in the fund, as they represent the best opportunities.

Can you provide examples of factors that the managers consider during their due diligence process to assess the substance behind the identified attractive characteristics?

The stock’s specific due diligence is primarily looking for any non-operational issues or other company-specific information that may be skewing a company’s financial characteristics (e.g., accounting changes, acquisitions, disposals, etc). Importantly, this is strictly a validation exercise to ensure that the financial data is a complete and accurate reflection of the underlying characteristics of a company. The fund manager is not looking to gain intimate and detailed insights of the company’s business or its management which might compromise the investment process by introducing subjectivity and behavioral bias. The focus is on trying to identify any red flags that are not well captured by a systematic process.

What is the typical number of stocks held in the portfolio, and how does the fund achieve diversification across sectors, countries, and investment styles?

We also ensure that the funds are well-diversified: by number of holdings, sector, and region, as well as by style and size tilts. Typically, the fund will hold 80-120 companies at any point in time. Limits are applied at the country and sector level that ensure that there is no concentration towards one area. We believe that this risk management helps in delivering better outcomes for the end client in the long run.

Can you discuss the fund’s historical performance and how it has delivered on its objective of delivering long-term returns by selecting undervalued stocks in emerging markets?

In the last 3 years (as at 31.05.2023) the fund has delivered +29.6% compared to the benchmark index MSCI EM at +10.8% in US dollars. In the longer term, since launch on 05.09.2018, the fund has delivered +15% compared to the index at +4.9% (as at 31.05.2023). Whilst the historical performance has mostly been against a backdrop that has been quite challenging for emerging market stocks and value-biased investors, our stock-picking approach has helped us deliver outperformance through time. In more recent years the fortunes of value stocks have turned more favourable. We think we’re in the early stages of this recovery and see better prospects ahead for emerging markets in general. 

Looking within the market, the gap in valuations between cheap and expensive stocks remains at extremely high levels compared to history. We see this across a range of metrics we look at. Earnings, cash flows, dividends, book values, and operating profits.  This suggests that value stocks are unusually cheap. They have been for some time now. With the end of the low-interest rate world, we think our discipline around valuations is likely to be a rewarding strategy as we progress through the years ahead. Whilst the market environment may be volatile, we remain optimistic that our disciplined approach to stock picking will continue to deliver.