Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Simon Edelsten, Manager of the Artemis Global Select Fund.
Hello, Simon.
Simon Edelsten: Hello.
Wall: So, over the last year, you have made the perhaps controversial decision to sell off some big name tech funds, which marks you out as very different from a number of your global equity peers. What drove that decision?
Edelsten: Well, clearly, the global equity markets have gone up an awfully long way over the last 10 years and we launched our funds seven years ago now. And some of our largest holdings ended up being companies like Amazon (AMZN), Facebook (FB), just because those shares had led the bull market up. And we were enormously impressed and very pleased by how well they have developed their businesses.
But we are always concerned that any companies' shares are fully supported by the underlying cash earnings and we have felt in those two cases that there isn't really much margin of safety left for us. No doubt that they are still putting on sales very, very rapidly, but they are not necessarily generating that much underlying cash flow. And furthermore, we found other opportunities around the world where we could find similar levels of top-line growth which are much more easily understood valuations, let's put it that way. And we do expect markets to become a lot more choppy. And when markets become choppy, you want that valuation support in place.
Wall: And one of the opportunities that you found – you mentioned there – you put your cash to work in Japan, haven't you?
Edelsten: Yes. So, we try to find themes, areas of industrial activity around the world which we think will show growth whether economies are growing fast or not. At the moment, economies are growing fast. So, those stocks and those themes are, if you like, super-charged. One of the themes that we have been tracking since about 2012 was the opportunities for industry to automate and these opportunities are very specific between different industries.
You've even seen people using robots to do surgery recently. That's how clever robots have become and how nimble they have become. But in a very large-scale industry like retailing, obviously, one of the advantages Amazon has had over the traditional retailers is how efficient their supply chain is and how good their warehouses were and how automated their warehouses are that they know where their stock is on this huge range and could get the product delivered to your door so rapidly. So, one of the biggest investments that we made when we were around the same time as we were taking profits in Amazon was a company called Daifuku (6383), which is a Japanese company, a rather small company, but it is the world's leader in making automated warehouses. So, everyone trying to compete with Amazon was ringing up Daifuku, saying please help us to compete and that was on a much more reasonable valuation and actually was growing quicker than Amazon.
Wall: And a lot of investors do get quite nervous about Japan though. A period of deflation, those missed targets in terms of growth and there's also the underlying demographic issue in that they are very much an aging population with no migration to sort of stop gap the lower birth rate. Do these sorts of larger themes give you cause for concern when stock selecting in Japan?
Edelsten: You are absolutely right. And we are not trying to stock select in Japan. We just try to find really good companies. In this case, they happen to be in Japan. Ironically, the reason that automation is such an advanced industry in Japan is because the Japanese have seen their shrinking population for 25 years. The government has sponsored and encouraged robotics and most of the world's best robot makers and robot-controlled companies happen to be Japanese-based because it's been their speciality perhaps with that demographic hanging over it. So, you need to go there. In fact, when you compare the skills and the ability of Japanese robots with robots I'm afraid in Europe and even in America, there are hardly any companies to compare with the Japanese automation businesses.
Wall: Simon, thank you very much.
Edelsten: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
