objective and policy The objective of the fund is to achieve long-term growth through investment in a portfolio of UK and international assets. The fund may invest in all of the asset classes eligible for a UCITS scheme to invest in including equities, fixed income instruments, other transferable securities, units of collective investment schemes, money market instruments, warrants, cash and near cash, derivatives and forward transactions for investment purposes (including taking long and short positions). The fund may also seek exposure indirectly to other asset classes such as commodities and property (for example). The manager actively manages the portfolio and allocation between the asset classes in order to achieve the objective and, in particular when market conditions are less favourable, a higher proportion of the fund s scheme property may be invested in cash and near cash. The manager will not be restricted in the choice of investments either by industry, or in terms of the geographical split of the portfolio and may invest in overseas assets including taking exposure to currency. The fund may be wholly invested in any one of the asset classes listed above at any time (with the exception of units of collective investment schemes in which it can only invest up to 10% of the scheme property and warrants in which it can only invest up to 5% of the scheme property). ART/STRASS/0416 Risk and reward profile Typically lower rewards Lower risk Typically higher rewards Higher risk This indicator is based on historical data and may not be a reliable indication of the future risk profile of the fund. The risk category shown is not guaranteed and may change over time. A risk indicator of 1 does not mean that the investment is risk free. The indicator is not a measure of the possibility of losing your investment. The risk indicator for the fund is as above because: The price of units, and the income from them, can fall and rise because of stock market and currency movements. Stock market prices, currencies and interest rates can move irrationally and can be affected unpredictably by diverse factors, including political and economic events. A portion of the fund s assets may be invested in a currency other than the fund s accounting currency (sterling). The value of these assets, and the income from them, may decrease if the currency falls in relation to sterling, in which the fund is valued and priced. The fund may hold derivatives with the aim of profiting from falling prices. If the related assets rise in value the fund will lose money. A portion of the fund s assets may be invested in new, emerging markets. in emerging markets can involve greater risk than that usually associated with more established markets. This means that aboveaverage rises and falls in unit prices can be expected. Investing in small and medium-sized companies can involve more risk than investing in larger, more established companies. Shares in smaller companies are often not as easy to sell as shares in larger companies are. This can cause difficulty in buying, valuing and selling those shares. For the six months ended Also, reliable information for deciding their value or the risks may not be available. s in fixed interest securities are subject to market and credit risk and will be impacted by movements in interest rates. Interest rate movements are determined by a number of economic factors, in particular market expectations of future inflation. The fund can invest in higheryielding bonds, which may increase the risk to your capital due to a higher likelihood of the company issuing the bonds failing to pay returns on investments. Changes to market conditions and interest rates can have a larger effect on the values of higheryielding bonds than other bonds. If the fund holds a large percentage of cash when markets are rising, the return on your investment could be less than if it were fully invested in other types of asset. Prices of ETFs may be higher or lower than the value of the underlying investments. These prices are also influenced by: supply and demand of the commodity involved; inflation, currency exchange and interest rates; and political, economic or financial events. Fund information Launch date 5 May 2009 Unit type Class R accumulation Class I accumulation IA sector Flexible Historic yield * R accumulation 0.0% I accumulation 0.0% Accounting dates Last day in February & 31 August Distribution date 31 October * The historic yield reflects distributions declared over the past 12 months as a percentage of the mid-market unit price, as at the date of this report. It does not include any preliminary charge and unitholders may be subject to tax on their distributions. 1
review In the last six months, the fund fell by 3.7%* versus a 1.2%* decline in the FTSE All-Share Index. Our equities performed well, making just over 2% as our long and short positions both generated positive returns. Our precious metals generated a similar positive return. Detracting from returns were currencies, which lost just over 3%. Most harmful, however, were our government bond positions, which cost about 5.5%. For a number of years, we have believed government bonds to be overvalued from a number of perspectives. These include: 1) A questioning of the fundamental creditworthiness of sovereign borrowers due to their high levels of debt and the lack of any visible path to repayment. If a creditor is likely to default, then its bonds are likely to be overvalued irrespective of the current rate of interest (all the more so when interest rates are very low). 2) An observation that bond valuations are at extreme levels in the context of history. Most long bond yields are significantly below their levels at the depths of the last financial crisis and are consistently setting new all-time historical lows. Any reversion to the mean would imply a significant loss of capital. 3) A recognition that, as with any security where payments are fixed, bond returns are asymmetrically skewed to the downside. If held to maturity, the most you can gain is the yield of the bond; the most you can lose is 100%. It may seem that the third of these perspectives has been called into question by recent returns. Continually falling yields have resulted in stellar returns from bonds that are far in excess of their yields. For example, over the six-month reporting period the yield on 30-year Japanese government bonds (JGBs) fell by 54 basis points to 0.86%, resulting in a return of about 14% to their holders. However, the fact that the cumulative return to maturity is fixed should not be forgotten: high returns today necessarily mean low returns tomorrow. Let us consider what would have to happen for this bond to be a good investment from this point. Assuming an investor were to buy and hold this JGB today, they would make a cumulative return of 29% over a 30-year period. But if that bond returned 4% annually over the next five years, it would mean that it would make 0% over the remaining 25 years. It is hard to argue that something is undervalued if you would receive no return for holding it for 25 years. This is very different from equities, where the cumulative cashflows over the next 25 years are unknown. An increase in, say, Nestlé s share price today may be a reflection of a perceived increase in cashflows that will accrue to its shareholders in the future. The implementation of negative interest-rate policies has further distorted this view. A buyer of a Japanese 10-year bond that yielded 0.38% at the start of the period could have expected a cumulative return of 3.9% over 10 years. But the 44 basis points fall in yields to -0.06% is equivalent to a return of 4.4% in just six months more than the holder would have received in coupon payments in 10 years. The fact is that positive returns today imply negative returns in coming years for buy and hold investors. To state the obvious, it is impossible for a negative yielding bond to produce a positive return if held to maturity. For such a bond to be valuable today one either needs to be a forced holder (such as life insurance companies or pension funds) or to be taking a speculative position ( trading ) on the possibility that its yield will fall even further before you sell. For central banks, the value in negative bond yields lies elsewhere in suppressing the cost of borrowing or potentially stimulating economic growth. We think it is very worrying when bonds only represent good investments to speculators or central bankers. That the entire system is being priced by these two groups of participants represents a dangerous dynamic. From any perspective, government bonds are extremely overvalued. As their prices increase, we grow more confident that our shorts will be essential in protecting the fund when the anomaly is corrected. Equities Due mainly to our concerns regarding sovereign debt we do not believe this is a buy and hold bull market. Since 2011, we have been buyers when equities fall and sellers when they rise. This thinking proved effective over the period as markets became increasingly volatile. Our strategy is reflected in the fund s net equity exposure. Following the market s brief panic about China, we increased our exposure to equities to 49% in September. Markets then recovered sharply despite evidence of a slowdown in the global economy. So we reduced the fund s net exposure to 37% in December. There was another market panic from January to mid February, this time about the possibility of a US recession and/or banking crisis. We then increased our net exposure again, taking it up to a peak of 59% in February, just prior to another strong rebound. By the end of the period, the fund s net exposure stood at 58%. When equity markets reached a trough on 11 February, the falls since the start of December had been severe. The FTSE 100 Index was down 13%, the US market had fallen by 17%, Shanghai by 20%, Europe by 21%, and the Japanese market stood 24% lower. Amid these falls, there had been a clear divergence in sector performance. For example, the Dow Jones US Financials Index had fallen by 19% compared to a flat US consumer staples index. So as the * Source: Lipper Limited, class I accumulation units, bid to bid basis in sterling with net income reinvested. Class R accumulation units returned (4.1)% during the period. Data from 26 May 2009 due to the fixed offer period of the fund. Benchmark is the higher of cash and the FTSE All-Share Index over a rolling three-year period. 2
market fell we increased our positions in a wide range of existing holdings but particularly in financials. Given that most banks now have a much stronger capital position than they did going into the last recession, a banking crisis seems unlikely. Crises rarely repeat themselves exactly, but investors naturally recall the last crisis and re-predict it. An example of a company whose valuation we could not reconcile with its fundamentals is KKR & Co. It is one of the oldest private equity companies with a 40-year performance record. During the meltdown in financials we saw in February, its shares traded as low as $11 a discount to the company s $12 of balance sheet investments. KKR could sell these investments and still have an asset management business with $120 billion under management (a sum that has doubled over the last five years). It generates over $1 per share of management fees, not including 15-20% performance fees. Placing no value on this stream of income seemed irrational to us. We will continue to capitalise on such opportunities as the market presents them. We continue to find equities an attractive asset class, especially relative to the negligible or negative return on bonds. But corporate profitability is high relative to history, it has been nearly seven years since the US last had a recession and an implosion in the bond market would be bad for shares. Against this backdrop, we expect we will continue to increase the fund s net exposure to stocks when markets fall and to reduce it when they rise. Bonds While equity markets were characterised by volatility, bond markets were characterised by a relentless falls in yields, towards and below zero. This was largely at the behest of central banks, with Japan joining Sweden, Switzerland, Denmark and the EU in using negative interest rates. As a result of the Bank of Japan s (BoJ s) policies, more than 70% of all Japanese bonds have a yield of zero or lower and the BoJ owns 33% of the entire Japanese bond market. The impact of such policies on private markets is also clear. AB InBev, a global beer company that has grown through acquisitions, managed to issue $46 billion of debt in a single day in January. As investors are starved of income, this colossal offering was nearly three times oversubscribed. When the distortions in bond markets are eventually corrected it will have a damaging effect on a number of market participants. We made few changes to the combination of our short positions in bonds during the period. Our short position total was 99%, the majority being in Japanese bonds (61%) with smaller positions in France (16%), Italy (13%), and the UK (9%). Currencies Our currencies detracted from performance. Most costly was our short position in the Japanese yen, which appreciated by 16% against sterling. In part, the yen appeared to appreciate in response to increased volatility as it regained its safe-haven status. Why anyone would consider a currency that is being actively debased by money printing by its central bank as safe is unclear to us. The yen s strengthening seemed to be an unintended consequence of the adoption of negative interest rates. The devaluation of the yen and the resulting improvement in Japan s trade deficit has been one of the few successes of Abenomics. The Japanese economy will struggle with the yen at these levels and the country s deficit will start to grow again. It therefore seems inevitable to us that the yen will weaken either in response to fundamental factors or to more aggressive measures from policymakers. We made two notable changes to our positioning in the period. First, we reduced our net long exposure to Asian (excluding Japan) currencies from 28% to 16%. This was achieved by reducing our longs in the Singaporean dollar and Malaysian ringgit, whilst also increasing our short in the Chinese yuan. Having manufactured high growth for an abnormally long period of time, China seems likely to struggle at some point. Although we suspect Asia will still excel over the long term, increasing evidence of weak economic data coming out of China and a broader slowdown of trade in the region warranted us to exercise more caution in our positioning. Second, we increased our long exposure to sterling, taking it from 1% to 10%. We think a Brexit is unlikely. But even if the bookies are right and there is a 29% probability, then a lot of that risk has already been priced in by sterling s recent weakness. If Britain does leave the EU we also suspect that it will have a less damaging effect on the economy than many fear. Commodities As their prices rose, our precious metals made a positive contribution to performance and grew to 15% of the fund, with the majority being in gold (8%) and platinum (6%). Following the emissions scandal at Volkswagen, platinum s discount to gold touched 26%, a level not seen since the early 1980s (catalysts fitted to diesel cars use platinum). We have switched some of our gold into platinum. The discount subsequently narrowed, ending the period at 22%. Falling yields on government bonds, quantitative easing and negative interest rates continue to provide a compelling backdrop to hold precious metals. Gold now yields more than many currencies and more than Switzerland s 15-year bond and it cannot be printed. While it has been possible to make similar arguments for some time, the recent rally in precious metals has been encouraging because it has seemed, in part, to be a response to the desperation of central banks. It has also persisted through a market recovery and a period of dollar strength. William Littlewood Manager 3
information Equities * Long positions** Short positions** Gross exposure** Net exposure** as Valuation United Kingdom 42.33 (7.23) 49.56 35.10 40.21 United States of America 16.40 (9.91) 26.31 6.49 16.49 Canada 4.30-4.30 4.30 4.30 Switzerland 2.53-2.53 2.53 2.53 Japan 3.72 (0.19) 3.91 3.53 2.40 South Korea 2.04-2.04 2.04 2.04 Israel 1.24-1.24 1.24 1.14 Netherlands 1.03-1.03 1.03 1.03 France 1.01-1.01 1.01 1.01 Russia 0.70-0.70 0.70 0.70 Australia 0.51 (0.75) 1.26 (0.24) 0.58 Panama 0.43-0.43 0.43 0.43 Spain 0.48-0.48 0.48 0.36 Jersey 0.36-0.36 0.36 0.36 Sweden - (0.15) 0.15 (0.15) - Ireland - (0.50) 0.50 (0.50) (0.03) Bonds *** United States of America 3.06-3.06 3.06 1.65 Italy - (12.97) 12.97 (12.97) - France - (15.88) 15.88 (15.88) (0.45) United Kingdom - (9.46) 9.46 (9.46) (3.25) Japan - (60.84) 60.84 (60.84) (4.03) Commodities 14.93-14.93 14.93 14.93 Forward currency contracts 83.10 (83.76) 166.86 (0.66) (0.66) Net other assets 18.26 Net assets 100.00 Long positions** Short positions** Gross exposure** Net exposure** as Valuation Equities * United Kingdom 41.41 (5.40) 46.81 36.01 40.58 United States of America 10.68 (9.15) 19.83 1.53 9.88 Canada 4.01 (1.09) 5.10 2.92 3.62 South Korea 3.22-3.22 3.22 3.22 Switzerland 2.34-2.34 2.34 2.34 Jersey 1.46-1.46 1.46 1.46 Netherlands 1.25 (0.29) 1.54 0.96 1.27 Australia 1.11 (0.78) 1.89 0.33 1.19 Japan 0.92 (0.60) 1.52 0.32 0.93 Isle of Man 0.46-0.46 0.46 0.46 Spain 0.38-0.38 0.38 0.38 Russia 0.25-0.25 0.25 0.25 Bermuda 0.24-0.24 0.24 0.24 Israel 0.13-0.13 0.13 0.13 Sweden - (0.55) 0.55 (0.55) 0.02 Finland - (0.02) 0.02 (0.02) - Ireland - (0.18) 0.18 (0.18) - Bonds *** 4
Long positions** Short positions** Gross exposure** Net exposure** as Valuation United States of America 2.21-2.21 2.21 1.30 France - (17.72) 17.72 (17.72) (0.34) Italy - (13.56) 13.56 (13.56) (0.40) Japan - (59.68) 59.68 (59.68) (1.77) United Kingdom - (7.46) 7.46 (7.46) (1.99) Commodities 11.84-11.84 11.84 11.84 Forward currency contracts 65.54 (67.10) 132.64 (1.56) (1.56) Net other assets 26.95 Net assets 100.00 * Equities includes equities, collective investment schemes, equity futures and contracts for differences long and short positions. ** Global exposure has been calculated in line with the guidelines issued by the European Securities and Markets Authority ( ESMA ) and represents the market value of an equivalent position in the underlying investment of each derivative contract. For all other asset types the percentage of net assets has been calculated based on the valuation of each holding. The gross exposure is the long position plus the value of the short position. The net exposure is the long position less the short position. *** Bonds includes bonds, bond futures and interest rate swap long and short positions. Ten largest long equity* positions Global exposure Lloyds Banking Group Plc 3.89 Central Fund of Canada Ltd. Fund A shares 2.90 Just Retirement Group Plc 2.84 KKR & Co. LP 2.26 Stagecoach Group Plc 2.22 Centrica Plc 2.14 BAE Systems Plc 1.97 Capital One Financial Corp. 1.87 Samsung Electronics Co. Ltd., GDR Preference 1.71 Nestle SA 1.63 Global exposure Lloyds Banking Group Plc 3.83 Just Retirement Group Plc 2.98 Card Factory Plc 2.17 Samsung Electronics Co. Ltd., GDR Preference 2.12 Central Fund of Canada Ltd. A shares 2.07 Partnership Assurance Group Plc 1.78 Nestle SA 1.72 KKR & Co. LP 1.59 HSBC Holdings Plc 1.57 Consort Medical Plc 1.54 * Equity includes equities, collective investment schemes and contracts for difference long positions. 5
information (continued) Five largest short contract for difference positions Notional exposure as * Valuation as % of net assets* WH Smith Plc (2.34) (0.04) Persimmon Plc (1.65) (0.17) Imperial Brands Plc (1.21) (0.03) Chevron Corp. (1.06) 0.07 General Electric Co. (0.92) 0.01 Notional exposure as * Valuation as % of net assets* WH Smith Plc (1.72) 0.05 Persimmon Plc (1.41) (0.08) Tesla Motors, Inc. (1.28) (0.10) Valeant Pharmaceuticals International, Inc. (1.09) (0.39) Imperial Tobacco Group Plc (0.85) 0.04 * The global exposure shows the market value for each contract as a percentage of net assets. Currency exposure (excluding securities) Long Norwegian Krone 22.02 19.32 Singapore Dollar 18.15 22.22 Taiwanese Dollar 13.57 13.92 Sterling 9.44 - Swedish Krona 5.47 4.31 Swiss Franc 4.95 - Russian Rouble 3.35 - US Dollar 2.87 - Malaysian Ringgit 1.91 5.53 Mexican Peso 1.37 - Korean Won - 0.24 Short Japanese Yen (33.84) (24.73) Euro (22.53) (18.86) Chinese Yuan (17.26) (13.59) Canadian Dollar (6.62) (5.64) Australian Dollar (3.51) (3.28) Sterling - (0.57) US Dollar - (0.43) Commodities Gold Bullion Securities Ltd. 7.99 6.58 ETFS Metal Securities Ltd Physical Platinum 5.96 4.03 ETFS Metal Securities Ltd Physical Silver 0.89 0.69 ETFS Metal Securities Ltd Physical Palladium 0.09 0.54 6
Comparative tables Fund sizes & net asset values Date Net asset value of fund ( ) Net asset value per unit (p) Units in issue 31 August 2013 1,009,869,223 R accumulation 76.42 1,028,657,941 I accumulation 78.93 283,526,998 31 August 2014 961,546,604 R accumulation 77.14 730,799,380 I accumulation 80.28 495,534,712 914,742,957 R accumulation 74.66 541,778,736 I accumulation 78.29 651,739,915 803,901,941 R accumulation 71.55 444,904,104 I accumulation 75.31 644,716,478 Net revenue distribution & unit price range Year Net revenue per unit (p) Highest offer price (p) Lowest bid price (p) R accumulation 2011 0.5803 71.39 56.48 2012 0.4721 70.72 58.17 2013-82.01 67.28 2014-81.89 73.80 2015-86.86 70.48 2016 * - 76.56 67.70 I accumulation 2011 1.0771 69.42 57.52 2012 0.9549 69.76 59.53 2013 0.3961 81.31 69.16 2014 0.3062 81.66 76.48 2015-87.25 73.95 2016 * - 77.24 71.23 Net revenue includes all amounts paid and payable in each calendar year. * To. Ongoing charges Class R accumulation 1.63% I accumulation 0.88% Ongoing charges shows the annual operating expenses of each unit class as a percentage of the average net assets of that class for the preceding 12 months. Class R performance Artemis Strategic Assets Fund Since launch * 5 years 3 years 1 year 6 months 50.7 9.3 (0.2) (7.1) (4.1) FTSE All-Share Index 87.5 28.3 10.8 (7.3) (1.2) FTSE WMA Stock Market Growth 85.7 34.5 16.9 (2.7) 1.8 Sector average 65.6 21.7 10.9 (4.7) 0.1 Position in sector 71/84 84/96 108/115 94/126 115/128 Quartile 4 4 4 3 4 * Data from 26 May 2009. Source: Lipper Limited, class R accumulation units, bid to bid in sterling with net income reinvested to 29 February 2016. All performance figures show total return percentage growth. Sector is IA Flexible, universe of funds is these reporting net of UK taxes. Value of 1,000 invested at launch to 2,000 1,750 1,500 1,250 1,000 FTSE All-Share Index Artemis Strategic Assets Fund (class R accumulation units) 2010 2011 2012 2013 2014 2015 2016 Class I performance Artemis Strategic Assets Fund Since launch * 5 years 3 years 1 year 6 months 58.7 13.5 2.1 (6.4) (3.7) FTSE All-Share Index 87.5 28.3 10.8 (7.3) (1.2) FTSE WMA Stock Market Growth 85.7 34.5 16.9 (2.7) 1.8 * Data from 26 May 2009. Source: Lipper Limited, class I accumulation units, bid to bid in sterling with net income reinvested to 29 February 2016. All performance figures show total return percentage growth. Value of 1,000 invested at launch to 2,000 1,750 1,500 FTSE All-Share Index 1,250 1,000 Artemis Strategic Assets Fund (class I accumulation units) 2010 2011 2012 2013 2014 2015 2016 7
General information Report & accounts This document is the Short Report of the Artemis Strategic Assets Fund for the six months ended 29 February 2016. The Half-Yearly Report can be obtained from the manager s website artemis.co.uk, by contacting the Client Services team on 0800 092 2051 or by writing to the manager s address on this page. Manager Artemis Fund Managers Limited * Cassini House 57 St James s Street London SW1A 1LD Dealing information: Unit Trust Department Artemis Fund Managers Limited PO Box 9688 Chelmsford CM99 2AE Telephone: 0800 092 2051 Website: artemis.co.uk adviser Artemis Management LLP * Cassini House 57 St James s Street London SW1A 1LD Trustee National Westminster Bank Plc Trustee & Depositary Services Younger Building 1st Floor, 3 Redheughs Avenue Edinburgh EH12 9RH Registrar International Financial Data Services (UK) Limited * IFDS House St Nicholas Lane Basildon Essex SS15 5FS Auditor Ernst & Young LLP Ten George Street Edinburgh EH2 2DZ Keep up to date...... with the performance of this and other Artemis funds throughout the year on Artemis website Monthly fund commentaries and factsheets Artemis Filmclub videos by our fund managers Market and fund insights Fund briefings and research articles The Hunters Tails, our weekly market newsletter Daily fund prices Fund literature artemis.co.uk * Authorised and regulated by the Financial Conduct Authority ( FCA ), 25 The North Colonnade, Canary Wharf, London E14 5HS. Authorised by the Prudential Regulation Authority ( PRA ), 20 Moorgate, London EC2R 6DA and regulated by the PRA and the FCA. 8