Stephen Moore reviews the performance of the Artemis Funds (Lux) US Absolute Return fund over the second quarter to 28 June 2019. The fund generated a modest positive return across its GBP and dollar share classes, but its EUR hedged classes edged into negative returns.

Although the US market rose over the quarter, it experienced swings along the way in reaction to evolving news on trade tariffs and the economy. In May, President Trump hardened his stance by announcing new tariffs aimed at Mexico, putting pressure on share prices. Relief followed when he lifted the tariffs on Mexican imports indefinitely in June. Sentiment was also helped by indications of progress in the negotiations over trade at the G20 summit.

In economic news, employment data remained relatively encouraging even if showing a slowdown in June. Indicators of confidence, however, continued to weaken and expectations grew that interest rates will need to be cut. Comments from members of the Federal Reserve also made the market increasingly confident that there could be as many as three cuts to US interest rates this year.

The long position in Microsoft (the funds largest long position) helped returns after the company posted solid quarterly numbers. Government services firm Booz Allen Hamilton, meanwhile, performed well thanks to strong results. These results reinforced the companys position as the most rapidly growing stock in its industry; a backlog of orders pointed to further growth in sales.

Churchill Downs, the horseracing and casino company, also did well. We like the risk-reward profile of the company as it is a mixture of flagship assets (the Kentucky Derby) as well as land with significant development potential (including property close to downtown Chicago).

Early in the quarter, Qualcomm (semiconductors) benefited from a positive ruling on a long-running dispute with Apple over the licensing of its technology. There was a negative legal ruling the following month, so the share price lost some of its gains. We have retained a long position.

On the negative side, long positons in healthcare stocks such as Anthem continued to suffer on potential reforms mooted by various candidates for the Democratic nomination for president. We have been reducing our exposure since the beginning of the year. Within the sector, however, our holding in Zoetis (animal health) performed well. Defence company Raytheon, meanwhile, suffered as the terms of its merger with UTC were viewed as relatively disappointing.

With share prices across the US market rallying in response to hopes of rate cuts, our short positions accounted for nine of the 10 biggest negatives over the quarter.

As the funds positioning reflects, we remain cautious over the outlook for the US market. The recent rally has pushed valuations higher and any negative news on trade talks could see volatility increase. The second-quarter earnings season is now upon us. Consensus expectations are for a modest decline in corporate earnings relative to the same period a year ago.

Stephen Moore manages the Artemis Funds (Lux) US Absolute Return fund;visit the fund pagefor further information about its performance and current positioning.

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