Artemis UK Special Situations Fund – first-half review

Manager Andy Gray looks back on a positive six months for the Artemis UK Special Situations Fund.

Derek Stuart

Main changes to the fund

We made few material changes to the fund. We did, however, continue to build positions in Next and NatWest.

The largest new addition was IG Group, a company we have invested in before. Levels of trading activity among its customers have been low recently and its share price has been depressed as a result. Our expectation is that trading levels will pick up again as market volatility increases.

The largest sale was Flutter Entertainment. Its US division, FanDuel, is establishing a leading position in the online betting market in the US. Equally, the shares have performed well since we bought them and we now believe its prospects are fully reflected in its share price.

Explaining the fund’s performance

The fund returned 6.9% over the six-month period, some way ahead of the FTSE All-Share index, which returned 2.6%1.

Our strongest contributor was FirstGroup, the UK travel company. New management has improved the margins in its core UK bus business and its recently launched ‘open-access’ rail services (such as Lumo, on the East Coast Main Line) have moved into profit.

3i and Melrose Industries were also strong performers. Action, a European discount retailer which is 3i’s largest holding, continues to go from strength to strength. Revenues are growing, margins are improving and it continues to roll out new stores, driving strong profit growth. Melrose now operates as a pure aerospace business. A recent presentation to investors was well-received and highlighted the favourable backdrop for aerospace orders and underscored the company’s strength in engines.

Our holding in telecoms testing firm Spirent was the biggest negative. An upbeat trading statement in mid-November and strong orders had led us to expect the company would enjoy a very positive finish to its financial year. We were wrong. Caution among Spirent’s customers is resulting in orders being deferred. That said, its peers in the US are seeing similar delays to orders, suggesting this is a market-wide issue rather than a company-specific problem.

The wider context

Central banks continue to raise interest rates in an attempt to slow the economy and bring inflation down. Oil prices and input costs are now falling but wage inflation remains high and unemployment is low, which is supporting consumer spending in the UK. Many households, meanwhile, own their homes outright or on long-term fixed-rate mortgages, so the impact of higher interest rates is blunted.

Higher interest costs are, however, putting pressure on more indebted companies that need to refinance their borrowing. We have little exposure to companies like this. Instead, we prefer to invest in companies whose financial strength allows them to invest and so strengthen their competitive position for the years ahead.

Looking ahead

Improving UK consumer confidence is being reflected in trading updates from companies in our portfolio such as Next and Jet2. We are, however, wary of a potential slowdown into 2024 as recent interest-rate increases begin to take full effect.

Discrete performance, 12 months to 30 June 2023 2022 2021 2020 2019
Artemis UK Special Situations Fund, class I acc GBP 11.6% -12.5% 39.0% -5.8% -8.7%
FTSE All-Share TR 7.9% 1.6% 21.5% -13.0% 0.6%
IA UK All Companies NR 6.0% -8.7% 27.6% -11.2% -2.1%

Past performance is not a guide to the future. Source: Lipper Limited. Data prior to 7 March 2008 reflects class R accumulation GBP. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class.

1Source: Artemis/Lipper Limited, class I accumulation units, in sterling, with dividend and/or income reinvested to 30 June 2023. All figures show total returns with income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. Our benchmark is the FTSE All-Share index.

Derek Stuart

Manages:

Chairman, Artemis Charitable Foundation

Derek co-founded Artemis in 1997 and chairs the Artemis Charitable Foundation.

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Andy Gray

Manages:

‘UK special situations‘ strategy

Andy works alongside Henry Flockhart managing Artemis’ ‘UK special situations’ strategy.

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