Stephen Moore reviews the last quarter and explains how long positions in stocks such as

The fund rose 1.1%* over the quarter in US dollar terms. At the start of the quarter, solid economic data supported the equity market. Volatility increased, however, and the beginning of February was marked by a sharp sell-off in the US market, prompted by rising inflationary pressures. This put pressure on short volatility investment products, which added to the selling pressure and unsurprisingly increased volatility.

Economic data remains strong, but it is no longer improving as rapidly as it was. Meanwhile, the earnings season saw many companies reporting results that were ahead of expectations and raising their guidance for future profits. Despite this, volatility remained high during March and technology stocks in particular came under pressure.

The funds net exposure drifted down over the quarter, ending the period at 5.5%. The best contributions to returns came from long positions in stocks related to semiconductors, such as Lam Research, Micron and Applied Materials. Following their strong performance, we reduced our positions as we thought the risk/reward ratio was deteriorating amid concerns about falling demand. Our long positions in defence companies such as Raytheon also proved rewarding as news from the sector remained positive. With spending on defence expected to increase further, the good news should continue. A short position in a large industrial stock also helped performance.

On the negative side, performance was held back by a couple of short positions in technology and consumer stocks that we believe to be overvalued but which still have momentum behind them. We have retained the positions. Industrial stocks generally lagged over the quarter and our long position in Rockwell Automation held back returns despite reporting good conditions. The long in gold miner Franco-Nevada also detracted.

We added to the funds exposure to industrials, buying railway operator Norfolk Southern. Increasingly tight regulation of the trucking industry and a shortage of truck drivers are likely to benefit the railways. Late in the quarter we reduced our short position in a consumer staples stock that has suffered substantially from lower pricing power and rising interest rates.

Share prices are likely to remain volatile this year. Recent selling has been across all sectors and asset classes, leaving little opportunity to protect capital. Although economic fundamentals are still supportive, we expect the markets performance to be capped by falling liquidity and rising discount rates.

Tightening liquidity prevented equities from rebounding over the month. As concerns about inflation subside, we may see some easing in the near-term. But with the quantitative easing coming to an end we may see more of the same over the rest of the year.

* Source: Lipper Limited, data from 29 December 2017 to 29 March 2018, class I USD accumulation shares, mid to mid in dollars. All figures show total returns with dividends reinvested.

Stephen has managed Artemis US Extended Alpha and US Absolute Return Funds since launch.

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