Artemis UK Select Fund update

Source for all information: Artemis as at 31 March 2025, unless otherwise stated.

Performance

The UK started January on shaky ground as concerns around growth and inflation led to higher bond yields, in turn reducing the chancellor’s fiscal headroom and raising fears that we would see further tax rises and spending cuts.

Yet problems for the economy aren’t necessarily problems for the stock market, and the subsequent weakness in sterling boosted the FTSE 100, which derives more than three-quarters of its sales from abroad. Mid- and small-cap stocks didn’t fare quite so well: outflows from active funds continue to weigh on this part of the market, while its higher exposure to the domestic economy has also held it back. In particular, businesses exposed to lower-income consumers have reported a tougher trading environment since the Budget.

However, we do not think the outlook is universally gloomy. Our base case is that the UK economy will muddle through near-term headwinds, before seeing a pick-up in momentum in the second half of the year as inflation starts to fall (as costs from the Budget will annualise) and the consumer benefits from lower interest rates. The main threat to this thesis is a sharp rise in unemployment, a scenario that looks a long way away from the current, broadly encouraging data.

Later in the period, concerns around UK stagflation rapidly faded into the background as investor attention switched across the Atlantic and the Channel. Donald Trump’s initial foreign policy moves brought the need for rapid re-armament to the top of the to-do list for UK and European politicians. Then, just after the end of the quarter came ‘Liberation Day’, sending global markets into freefall, only for most of the tariffs introduced by the US president to be postponed and reduced a matter of days later. For our thoughts on this subject, see the ‘Outlook’ section below.

Against this backdrop, the Artemis UK Select Fund made 0.9% during the quarter, compared with 4.5% from the FTSE All-Share index and 0.0% from its IA peer group. 

Contributors

Rolls-Royce continued to perform well, aided by a further rally in EU defence stocks post-German stimulus. We took some profits. 

All the major UK banks continue to benefit from the contribution of higher interest rates to net interest margins, with their structural hedges underpinning earnings growth for years to come. In addition, Standard Chartered’s growing focus on tilting its investment bank towards financial institutions and wealth is paying dividends, while Lloyds reported stronger-than-expected results. 

From a relative point of view, we benefited from avoiding Diageo and Glencore as these stocks fell.  

Detractors

Despite little news, Oxford Instruments de-rated sharply, possibly due to fears around tariffs and export restrictions. We added to our position.

International Consolidated Airlines Group (IAG) fell on de-risking after warnings from US airlines that a pullback in government spending as part of the DOGE cuts was hitting domestic bookings. Anecdotal evidence from corporate travel agents suggested that trade war threats had caused a drop in bookings to the US from Canada and Mexico, with similar fears now in place for North Atlantic traffic. However, IAG’s balance sheet is strong and higher operating margins leave it with less operational gearing than peers, while the recent fall in the oil price should provide a reasonable tailwind.

Construction company Morgan Sindall drifted on no news, perhaps a victim of general domestic malaise. Its shares have now fallen significantly from their recent peak and it looks like this is another small cap suffering due to outflows from the shareholder register. We added to our position.

Packaging manufacturer Smurfit Westrock took a hit from tariff fears due to its cyclical nature and the business’s significant operations in Mexico, the US and Canada. Given the consolidated nature of the industry, we believe the company will be able to recover prices over time, despite short-term uncertainty.

Airline Jet2 fell despite reporting generally robust trading.

Activity

In banks, we switched more from NatWest into Lloyds where the regulatory backdrop on motor finance looks to have improved slightly. Even taking a pessimistic view on likely compensation, Lloyds’ shares look meaningfully cheaper compared with earnings over the next two to three years.

In oil & gas, we switched some of our exposure from BP into Shell, as the latter offers similar returns for a given commodity price but with lower risk.

The impact of the Asda price-war story on competitors looked overdone, so we added to Marks & Spencer on weakness. In addition, supermarkets could be indirect beneficiaries of the trade war.

Despite falling a long way during the quarter, there was little change to our investment thesis on Intermediate Capital or St. James’s Place. We added to our positions.

We also added to Plus500 as the recent surge in volatility will mean good near-term trading and customer recruitment.

Ahead of its takeover by International Paper, we reduced our holding in DS Smith because the valuation ascribed to the business by US investors leaves it looking less attractive compared with other opportunities in the UK market.

Outlook

Trump’s ‘Liberation Day’ provided a significant shock to equity markets, with the speed and scale of the moves feeling like the early days of Covid. Even before the US president postponed and reduced most of the tariffs, we doubted the impact on global GDP would be comparable. In the UK, the impact of tariffs of 10% on exports worth £60 billion (2% of UK GDP) equates to less than two days of the government’s current spending of £3.5 billion per day. This contrasts with Covid, when about 60% of the economy was shut down overnight.

Beyond the direct impact of tariffs, we believe recent market moves could even be helpful for the chancellor, Bank of England and UK consumer:

• A weaker dollar is helpful for inflation. Ditto lower oil & gas prices.
• If the elevated tariffs on the Asian supply chain remain, exporters are likely to cut prices to place inventory elsewhere. UK retailers should benefit.
• Five-year swap rates have fallen by 25bps, which should see five-year fixed rate mortgages fall by a similar amount in about six weeks.
• Employment data has stabilised, and job vacancies are starting to tick higher, supporting our view that companies have already passed on cost increases announced in the Budget.
• The UK consumer remains in a strong place, as a 12% savings ratio gives plenty of scope to spend more as confidence improves.

It is a different story for the US.

Tariffs mean the US consumer is facing significant tax rises, as well as a confidence hit from the fall in the stock market and job losses (caused by DOGE and weakening economic growth). For companies based or investing in the US, the tariff uncertainty should not be underestimated and will likely lead to an air pocket in short-term trading across many end markets, while long-term investment decision-making will also be put on hold.

Once the dust settles, we believe Trump’s desire to reset the world economic and geopolitical order will have put a significant dent in the US exceptionalism story that has driven capital flows to the country over the past decade. Given the sheer size of the US equity and debt markets relative to the rest of the world, even a small move away by global asset allocators would likely be significant.

Today we can see the UK market with its low valuation, defensive sector skew, low tariff exposure and modestly improving economic outlook as being a beneficiary. The most recent BofA Global Fund Manager Survey (which we think shows where investors would like to have been a month ago) shows most investors now have an overweight in the UK compared with their positioning over the past 20 years.

We are doing what we always do in times of increased volatility: namely, sticking to our investment process of a cashflow focus and three-year time horizon, while working out if the consensus on how tariffs affect individual companies aligns with reality. Where that is not the case, we will act quickly if we see an opportunity. In the meantime, buybacks continue at pace (68% of the fund by value is currently buying back shares), and with many stocks trading on mid-single digit P/Es and distribution yields in the teens, retiring equity at these levels will continue to be accretive to long-term returns. March was a poor month for relative returns and, at the time of writing, April has been a poor month for absolute returns. After Liberation Day’s falls, the fund was trading on 8.3x forward earnings with a 4.1% dividend yield and earnings which, excluding the commodity stocks (7% of the fund), we expect to continue growing in 2025.