Artemis UK Special Situations Fund update

Source for all information: Artemis as at 31 December 2023, unless otherwise stated.

The fund outperformed a rising UK market

Despite a number of profit warnings across a range of sectors, the UK equity market ended 2023 on a positive note. Markets are relentlessly forward-looking and, during the final quarter, they chose to look ahead to the prospect of lower interest rates in 2024.

Over the quarter, the fund rose by 4.0%, ahead of the 3.2% return from the FTSE All-Share index.

Stock positives

Intermediate Capital Group benefited from investors’ renewed interest in private credit markets, an area in which it has a strong heritage and an impressive record of delivering returns. Not only did ICG’s own investments deliver positive returns but profits in its fund management division also continued to grow nicely.

Watches of Switzerland presented its updated long-range plan, in which management set out its aspiration to more than double sales and profits over the next five years. We believe these targets are credible and that its management have a proven record of delivering on their promises.

Jet2 continues to trade well. We believe it is reaping the benefits of looking after its customers, staff and suppliers through the challenges posed by the pandemic. Profits are also being supplemented by growing net interest income thanks to the cash on its balance sheet.

Stock negatives

Burberry suffered amid poor trading across the wider luxury goods sector. A new management team is now in place and refreshed product from a new design team is appearing in its stores. We are waiting for evidence that these changes are having a positive impact.

Barclays is undergoing a strategic review. Its management highlighted a large exceptional charge as they finalise a plan to cut costs. Our expectation is that these cost savings will underpin higher shareholder returns in future.

Standard Chartered’s quarterly profits were lower than expected. It is feeling the impact of weakness in the Chinese economy and made provisions against the risk of losses on loans to that country’s real estate sector.

We added one new position and sold two holdings during the quarter

We established a new holding in Unilever, which recently appointed a new chief executive. It is selling off its slower-growing brands and placing renewed emphasis on its top 30 brands to deliver growth and enhanced margins.

We sold the holdings in Restaurant Group and Dowlais. Restaurant Group was the subject of a recommended bid from Apollo at 65p per share. With Wheel Topco (the owner of Pizza Express) declining to make a counteroffer - and with the shares trading at close to Apollo’s offer price - we sold to invest in better opportunities elsewhere. Dowlais, meanwhile, was recently spun out from Melrose. It appears to be reliant on a rise in sales volumes in the auto market to rebuild margins while ongoing restructuring costs and payments to its pension funds would appear to limit the prospect for debt reduction.

ESG engagement

Inchcape

We met Mike Bowers, Inchcape’s Head of Sustainability, and members of his team. We discussed Inchcape’s sustainability initiatives, the role it is playing in the transition to electric vehicles and the influence it can exert over car manufacturers.

Standard Chartered

We met Amit Puri, Global Head of Sustainable Finance, to discuss the company’s approach to net zero and its financing of renewable projects.

Ryanair

We met Thomas Fowler, Ryanair’s Director of Sustainability & Finance, to discuss the company’s climate transition plan.

Shell

We met Andreas Bork, Head of ESG, to discuss Shell’s climate transition plan and opportunities to contribute to the energy transition.

NatWest

We met James Close, NatWest’s Head of Climate Change, to discuss the bank’s sustainability strategy.

Outlook

A number of important elections are due to take place in 2024 and this seems likely to include a general election in the UK. The usual pre-election giveaways should provide another boost to the disposable incomes of UK consumers. Lower mortgage rates, meanwhile, should also be supportive for consumers and for the UK housing market, which plays an important role in UK economic activity more broadly.

Lower interest rates also raise the prospect that private equity will gain fresh interest in buying UK-listed companies. That’s not to say there has been a lack of takeover activity in the UK. Far from it. But US companies have been more prominent buyers than private equity operators in recent times. That may now change.

This all comes at a time when expectations are low, sentiment is depressed and the UK market remains cheap relative to its global peers. The fund’s holdings, meanwhile, are even cheaper than the wider UK market and we have high level of conviction in their prospects. We therefore look to 2024 – and beyond – with confidence.