Artemis UK Smaller Companies Fund update

Source for all information: Artemis as at 30 June 2025, unless otherwise stated. 

Review of the quarter to 30 June 2025.

The quarter was characterised by a wider market rebound from the tariff-related uncertainty that peaked in early April.

While this threat hasn't gone away, we remain of the view that UK small caps are relatively well positioned:

• More than 60% of the fund's revenues are earned in the UK;
• UK exports of goods to the US are ‘only’ £60bn (small in the context of overall GDP); and
• A weaker dollar and lower energy prices will help to bring down UK inflation, thereby enabling the gradual reduction in interest rates to continue.

Against this backdrop, the Artemis UK Smaller Companies Fund rose 13.8% in the quarter, compared with gains of 14.3% from its Deutsche Numis UK Smaller Companies (-InvTrust) benchmark and 13.1% from its IA UK Smaller Companies sector average.

Positives

The defence sector continued to contribute to performance, with our positions in Babcock, Chemring and Qinetiq all doing well. With Babcock up more than 100% this year and entering the FTSE 100, we sold out.

Our overweight in travel & leisure stocks was also a positive, with Jet2 and JD Wetherspoon making a strong contribution. Jet2 joined the (increasingly long) list of companies in our portfolio that are buying back their own shares: over the first half of the year, a record 21 holdings reduced their share count by more than 0.5%. We see this as indicative of management teams expressing the view that:

• Their businesses have surplus capital (our median holding is forecast to have no net debt);
• They are confident in the outlook; and
• Their share prices do not reflect fundamental value.

Another major driver of recent returns, M&A activity, also continued into the quarter, with UK pawnbroker H&T receiving a recommended offer by US-listed trade buyer FirstCash at a 44% premium.

Negatives

GB Group, a provider of identify-verification and fraud prevention services, was the biggest detractor from performance. Full-year results were in line with expectations, but some analysts cut forecasts for next year (in large part due to currency movements). We are still positive on GB Group's medium-term prospects and felt the share price reaction was overdone. We see an 8% free cashflow yield as attractive and so added to our holding.

Victorian Plumbing also performed poorly after cutting forecasts: the company underestimated the impact of depreciation following completion of its new warehouse, it is yet to see an improvement in the market backdrop, and management has invested in the MFI brand to enter the UK homewares market. We added to our holding: the investment in MFI represents a low-cost way of entering a new large market and can be curtailed quickly if it is not successful.

Translation services provider RWS had another negative update. It downgraded profits-before-tax due to several issues including onboarding challenges with two new customers, weakness in its life sciences division and the impact of currency movements. The shares are now trading at just 5x earnings, there are no balance-sheet issues and the incoming chief executive just bought 1 million shares. However, RWS has a lot of work to do to regain investors' confidence.

There is a lot going on at marketing consultant Next15, whose chief executive has stepped down after more than 30 years. The business has uncovered ‘potential serious misconduct’ at its Mach49 division which led it to self-report to law-enforcement agencies and terminate the employment of three senior members of the management team. Deferred consideration of up to $91m may now not be payable. Weak trading in this part of the business, negative currency movements and investment costs will all contribute to "materially lower" profits. There was a subsequent announcement that Next15 is in talks to sell a number of brands. The valuation is compelling and the balance sheet looks OK but there are a lot of moving parts.

MJ Gleeson was forced to cut profit expectations on the back of rising build costs, flat selling prices and increased use of incentives. Subsequent updates from other housebuilders suggest most of these issues appear to be company-specific and are in part a continuation of the legacy site issues identified in 2023 which we had believed to be resolved.

Purchases

We started four new holdings in the quarter: Coats, YouGov, GlobalData and M&C Saatchi. These were all companies that were held in the Artemis Future Leaders investment trust when we took on the management. We have retained these holdings and added them to the fund.

Coats is the global market leader in the supply of premium threads to the apparel industry and threads and structural components to the footwear industry. Historically we have held back from investing due to the cashflow which has been supressed by pension contributions and restructuring costs. However, with the pension issue now resolved and restructuring 'done', the free cashflow yield looks compelling.

YouGov is an international online research data and analytics company. It had lost its way under the previous chief executive and faces a greater competitive threat than in the past. However, we believe it remains a high-quality business that has valuable proprietary data and (for the first time) offers a double-digit free cashflow yield.

GlobalData also sells access to its proprietary data sets. Four-fifths of its earnings are recurring, operating profit margins are close to 40% and it has a net cash position. After takeover talks with ICG and KKR did not lead to a recommended cash offer, the shares fell back to an attractive valuation, so we initiated a holding.

Creative agency and consulting business M&C Saatchi has recently undergone an historic restructuring programme which is now ‘largely done’. We were impressed upon meeting the new chief executive and the plan to move onto a common platform across the group. The business may face cyclical challenges, but we see a double-digit free cashflow yield and a net cash position of more than 10% of the market cap as attractive.

Sales

As well as selling out of Babcock and H&T we reduced our holdings in Bakkavor (following a bid approach from Greencore) and Keller (which is up strongly over the last eighteen months but faces growing macro risks).

Outlook

We continue to believe that the negative narrative that surrounds the UK economy is not supported by the data: the fundamentals are better than widely perceived. Consumers are relatively well positioned (with rising real incomes, low unemployment and declining household debt); businesses have strong balance sheets (the median company in the fund is forecast to have no net debt); and the political backdrop is (relatively) stable. Savings rates of 12%¹ suggest that it is confidence that is holding consumers back from spending. With the national insurance increases now in the past, we are confident that the slight softening we have already seen in the labour market will not translate into a spike in unemployment. This view is supported by our conversations with companies. If we are right, then we expect a gradual recovery in consumer, business and ultimately investor confidence, resulting in a recovery in consumer spending, business investment and UK equity allocations.

In the interim, we continue to see high levels of takeover activity – third parties attracted to the same traits as we are, taking a more positive view on the outlook and illustrating the degree of undervaluation of UK smaller companies (the average takeover premium is close to 50%). We are also seeing record levels of holdings buying back their own shares.