Artemis European Growth Fund

Artemis European Growth Fund Manager s Short Report Investment objective and policy The objective of the fund is to achieve long-term capital growth through investment principally in companies in Europe (excluding the United Kingdom). The manager actively manages the portfolio in order to achieve the objective and will not be restricted in the choice of investments either by company size or industry, or in terms of the geographical split of the portfolio. The fund may also invest in other transferable securities, units of collective investment schemes, money market instruments, warrants, cash and near cash, derivatives and forward transactions and other investments to the extent that each is permitted by the regulations. 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. For the year ended 31 March 2016 Fund information Launch date 7 March 2001 Unit types R accumulation I accumulation IA sector Europe (ex-uk) Historic yield * R accumulation 1.2% I accumulation 1.9% Accounting dates 30 September & 31 March Distribution date 31 May * 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. ART/EURGRO/0516 1

Artemis European Growth Fund Manager s Short Report Investment review Over the year, the fund is down 1.9%* versus a decline of 4.2%* in the benchmark. Since its inception the fund is up 164.6%* (class R accumulation units), while the European market has risen by 100.2%. Our stocks continue to increase their profits and dividends faster than the market. Performance Ebbs and flows It is always a little disappointing to report that the fund s net asset value has fallen. Many people look on this as a sign of failure and as a warning. In reality it reflects the normal ebb and flow of markets. If anything, it is a harbinger of better things to come. 300 250 200 150 100 ARTEMIS EUROPE & BENCHMARK 300 250 200 150 100 50 50 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 FT EUROPE EX UK ARTEMIS EUROPEAN GROWTH Source: DATASTREAM In the 15 years since the fund s launch, both it and the market fell in the years ending March 2002, 2003, 2009, 2012 and now 2016. In other words, markets have fallen a third of the time. Whenever this happens, we observe that investors tend to get nervous and take money out of equities. Yet, despite this, the FTSE World Europe ex UK Index has doubled since March 2001. Our fund, meanwhile, has returned 164.6% after all fees. In a similar vein, we have underperformed the market in six of the 15 years but outperformed in the other nine. It would be great if markets delivered positive returns and we outperformed each year. The real world, however, is not as benign as that. Review Growth discounted The weakness in stock markets over the year has been attributed to many things. The main causes, however, were slowing growth and valuations that had become stretched. In general when valuations are high, subsequent returns tend to be poor. When equity markets are cheap, subsequent returns tend to be good. There is no one measure of valuation that is fantastic at predicting future returns. But one indicator that is often used is the Shiller p/e (an adjusted price-to-earnings ratio named after a US professor of economics). Basically this compares the price of the stock market today to its earnings (adjusted for inflation) over the past decade. The logic of looking backwards this far is to reduce the impact of the business cycle. The chart below illustrates the returns from US stocks in the decade after they were bought for a range of Shiller p/e multiples: the higher the p/e, the lower the returns and vice versa. The predictive power of the Shiller p/e 16 12 8 4 0-4 11.0 11.3 Less than 10 SUBSEQUENT ANNUALZED 10-YEAR REAL TOTAL RETURN* 6.6 6.7 4.4 3.1 INITIAL SHILLER P/E 0.5 0.5 MEDIAN AVERAGE -3.4-3.7 10 to 20 20 to 30 30 to 40 More than 40 Source: Bank Credit Analyst March 2016. The US has data on this measure of value going back to 1881 a good basis for its guesstimates. Gathering information on profits in Europe began more recently: we only have the Shiller p/e back to 1980 for the whole market and to 1937 for the UK. Nevertheless, the next chart, which illustrates these valuation measures, puts things in perspective: While the p/e of the US is quite high (26), figures on this side of the Atlantic are a good deal lower (13-14). This would suggest real returns from US equities will be pretty modest over the next decade (3-4%) but that they could well be better in Europe (6-7%). This may not seem very much but it is likely to be a good deal ahead of returns from bonds or cash. The Shiller p/e a transatlantic gap 50 45 40 35 30 25 20 15 10 5 UK PE US PE Europe PE 0 1900 1915 1930 1945 1960 1975 1990 2005 Source: Morgan Stanley April 2016 Real bond yields are actually negative giving investors the choice of either guaranteed negative real returns or hoping for positive returns from equities. To put this in context, 100 worth of government bonds today may be worth 90 (in real terms) in 10 years time, while assuming a 6% return 100 invested in equities may well be worth about 180. Obviously, after a year of falling prices, investors are a bit sceptical about such an outcome. This is a familiar reaction: investors tend to buy after strong returns and sell after falls. My suggestion would be to pay less attention to the crowds and focus more on the evidence. Indeed this is the style of investing that we pursue. We identify the financial characteristics which have been good predictors of subsequent returns, then look for and buy the stocks that possess them. The outcome has not been too shabby an outperformance versus the index of almost 2% per annum. Over the same period the typical actively managed unit trust is 0.1% ahead of the index. * Source: Artemis/Lipper Limited, class I accumulation units, bid to bid basis in sterling with net income reinvested to 31 March 2016. Class R accumulation units returned (2.7)% for the period. Benchmark is the FTSE World Europe (ex-uk) Index. 2

Tracker funds, however, are behind it (they charge fees too). So what kinds of things do work? Our process focuses on a number of factors such as growth, value, revisions, momentum, economic trends and investors positioning. The most important of these are typically value and revisions. Basically we buy stocks which are cheaper than most others, but whose profits are growing faster than had been expected. Since cheap stocks are by definition priced to grow slowly, these positive surprises act as a catalyst for them to be re-rated. As an example, last year we owned Swiss Life Holding (a life assurance company). The stock was on a valuation about 40% cheaper than the European market. However, it has grown profits and dividends faster than the market and faster than had been expected (whereas most companies in Europe delivered poor growth). The result is that Swiss Life has outperformed the market by about 20% but it still sits on a discount of about 30%. This is the kind of stock we like to own. So what went wrong? Why did the fund only outperform the market by 2.3%? Well, partly because we had some torpedoes stocks where profits disappointed and the hoped-for increase in the share price became a decline. Companies such as Tecnicas Reunidas (oil services), which had its first profit warning in quite a few years, did us no favours. In general, though, our stocks had pleasant surprises throughout the year. What didn t help, however, was having a bias towards value. Last year and indeed most years since 2008 value stocks generally delivered poor profits and so performed poorly. Examples are banks and oil companies. We largely avoided these. Nevertheless those value stocks that we did own tended to suffer by association. As an example, there are five stocks we have held throughout the past year which have all grown their earnings per share by more than the market and certainly more strongly than expected: Daimler, Renault, Salini Impregilo, TAV Havalimanlari Holding and AXA. Their relative earnings per share (EPS) have risen by over 25% on average. Ordinarily we would expect the share prices to outperform the market by a similar amount but these stocks have simply moved sideways. This is irritating but not unprecedented. Whenever investors get terribly excited about one theme or another there is a tendency for share prices and fundamentals to diverge. Over the past few years there has been a huge swing towards safe investments. At the extreme this means government bonds while, within equity markets, investors tend to buy stocks with low volatility (food companies spring to mind). These have delivered respectable growth but a good chunk of their outperformance has been due to a re-rating (that is, the pressure from this increased affection from investors). We would rather own stocks that deliver respectable growth but sit on much lower valuations: they have a better chance of delivering super-sized returns. Outlook Europe expects The chart below illustrates the relative return for the portfolio of stocks that we have owned over the years, together with a measure of its relative value (an average of earnings, dividends, book value, cashflow and earnings before interest, taxes, depreciation and amortisation). Stocks in the Artemis European Growth Fund versus the market 220 220 200 180 160 140 120 100 200 180 160 140 120 100 80 80 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 AEG STOCKS REL RETURN EPS,DPS ETC RELATIVE Source: DATASTREAM What we see is that our companies have a knack of delivering superior growth the red line has trended up. Unsurprisingly this means our stocks tend to do well (clearly we had a torrid time in 2007/8). Over the past few years they have lagged the growth in value creation. Our best guess is that if our companies continue to churn out superior growth they will end up on higher valuations. If this is the case, then not only will the markets have delivered respectable returns over the next 10 years, but our fund should have delivered very good returns indeed. We look forward to watching events unfold over the next decade. Philip Wolstencroft Fund manager 3

Artemis European Growth Fund Manager s Short Report Investment information Portfolio split 31 March 2016 % of net assets 31 March 2015 % of net assets France 22.83 13.57 Germany 20.08 19.68 Netherlands 8.46 10.46 Sweden 6.51 6.46 Norway 4.45 6.47 Italy 3.93 4.99 Denmark 3.62 1.71 Spain 3.57 3.05 Switzerland 3.42 6.26 Russia 3.20 4.75 Austria 3.12 - Belgium 3.10 4.45 Turkey 2.99 0.63 Israel 2.17 2.44 Greece 2.00 0.65 Ireland 1.75 1.29 USA 1.51 2.84 Ukraine 0.93 0.33 Hungary 0.91 - Portugal 0.88 - United Kingdom 0.41 4.60 Poland 0.37 2.36 Ten largest investments Investment 31 March 2016 % of net assets Renault SA 3.14 Daimler AG 2.88 Swiss Life Holding AG 2.67 Atos SE 2.37 Axa SA 2.31 Thales SA 2.22 NN Group NV 2.18 Peugeot SA 2.11 GN Store Nord A/S 2.10 Deutsche Lufthansa AG 2.02 Investment 31 March 2015 % of net assets Dialog Semiconductor Plc 4.38 Daimler AG 3.29 Yara International ASA 2.63 K + S AG 2.34 Cigna Corp. 2.24 Swiss Life Holding AG 2.22 Novartis AG 2.21 KBC Groep NV 2.13 Snam SpA 2.11 Cap Gemini SA 2.10 Finland - 1.95 Net other (liabilities)/ assets (0.21) 1.06 Net assets 100.00 100.00 4

Comparative tables R accumulation I accumulation 2016 2015 2014 2016 2015 2014 Change in net assets per unit (p) Opening net asset value per unit 258.44 249.24 202.63 272.38 260.73 210.41 Return before operating charges* (2.88) 13.17 50.27 (2.97) 13.92 52.39 Operating charges (4.04) (3.97) (3.66) (2.29) (2.27) (2.07) Return after operating charges (6.92) 9.20 46.61 (5.26) 11.65 50.32 Closing net asset value per unit 251.52 258.44 249.24 267.12 272.38 260.73 Retained distributions on accumulation units 2.93 2.63 7.85 5.07 4.63 9.87 * after direct transaction costs of (0.37) (0.44) (0.50) (0.39) (0.46) (0.52) Performance Return after charges (2.68)% 3.69% 23.00% (1.93)% 4.47% 23.92% Other information Closing net asset value ( '000) 75,927 161,657 226,783 199,357 102,238 89,378 Closing number of units 30,187,065 62,551,132 90,989,337 74,632,780 37,534,302 34,279,790 Operating charges 1.63% 1.64% 1.62% 0.88% 0.89% 0.87% Direct transaction costs 0.15% 0.18% 0.22% 0.15% 0.18% 0.22% Prices Highest offer unit price (p) 284.04 277.17 262.12 287.34 280.29 263.12 Lowest bid unit price (p) 219.67 215.34 196.95 233.06 226.18 204.84 * Direct transaction costs are stated after deducting the amounts collected in relation to expected dealing costs added to the issue of units and subtracted from the cancellation of units. Ongoing charges Class 31 March 2016 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. 5

Artemis European Growth Fund Manager s Short Report Comparative tables (continued) Class R performance Artemis European Growth Fund Since launch * 5 years 3 years 1 year 6 months 164.6 31.0 24.1 (2.7) 7.5 FTSE World Europe 100.2 26.3 20.8 (4.2) 6.7 ex-uk Index Sector average 107.3 32.3 23.1 (1.9) 6.5 Position in sector 7/45 40/79 34/88 47/98 24/100 Quartile 1 2 2 2 1 * Data from 7 March 2001. Source: Lipper Limited, class R accumulation units, bid to bid in sterling to 31 March 2016. All figures show total returns with net income reinvested. Sector is IA Europe (ex UK) NR, universe of funds is those reporting net of UK taxes. Class I performance Artemis European Growth Fund FTSE World Europe ex-uk Index Since launch * 5 years 3 years 1 year 6 months 28.3 36.0 27.0 (1.9) 7.9 47.2 26.3 20.8 (4.2) 6.7 * Data from 7 March 2008. Source: Lipper Limited, class I accumulation units, bid to bid in sterling to 31 March 2016. All figures show total returns with net income reinvested. Value of 1,000 invested at launch to 31 March 2016 Value of 1,000 invested at launch to 31 March 2016 2,500 Artemis European Growth Fund (class R accumulation units) 1,500 1,250 1,000 FTSE World Europe ex-uk Index 2,000 1,500 750 Artemis European Growth Fund (class I accumulation units) 2009 2010 2011 2012 2013 2014 2015 2016 1,000 FTSE World Europe ex-uk Index 2002 2004 2006 2008 2010 2012 2014 2016 6

General information Report & accounts This document is the Short Report of the Artemis European Growth Fund for the year ended 31 March 2016. The Annual Report and Financial Statements 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 below. Manager Artemis Fund Managers Limited * Cassini House 57 St James s Street London SW1A 1LD Dealing information: Artemis Fund Managers Limited PO Box 9688 Chelmsford CM99 2AE Telephone: 0800 092 2051 Website: artemis.co.uk Investment adviser Artemis Investment 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 * 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. 7

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