Artemis UK Special Situations Fund update

Derek Stuart and Andy Gray, managers of the Artemis UK Special Situations Fund, report on the fund over the quarter to 30 September 2023.

Derek Stuart

Review of the quarter to 30 September 2023.

  • The fund returned 2.6% over the quarter versus 1.9% from the FTSE All-Share index.
  • While interest rates increased modestly on both sides of the Atlantic, the growing expectation is that we now are at – or close to – the peak.
  • OPEC extended its production cuts, pushing oil prices higher.
  • Sterling weakened significantly against the dollar.
  • Inflation in the UK fell materially.
  • UK consumer confidence continued to hold up.

Key positives

Babcock introduced new financial targets.

The realignment of Babcock towards higher-margin, higher-growth end markets is largely complete. Two-thirds of its revenues now come from the defence sector. Its management believes it can now go on to deliver growth in revenues in the mid-single-digits coupled with margins of at least 8% over the medium term.

Johnson Service Group is increasingly focused on growth.

The bolt-on acquisition of Celtic Linen in Ireland follows its recent acquisition of Regency in Southwest England. At the same time, the announcement of further share buybacks points to continued discipline in capital allocation.

Restaurant Group continues to restructure.

The company, which owns Wagamama, reported better-than-expected growth in revenues over the summer, leading to upgraded profit expectations for the full year. It also announced the sale of its (lossmaking) leisure division. That should improve margins and sales growth of the overall business.

Key negatives

Entain disappointed.

It made a large provision (£585 million) to cover a settlement with the HMRC over historic issues related to a business it no longer owns. At the same time, sales trends have disappointed although cost reductions allowed it to retain its profit guidance. Regulatory actions and unfavourable results were highlighted as impacting in the quarter.

Jet2 underperformed despite strong trading.

The company expects to exceed market profit forecasts due to continued strong trading through the summer. This was despite disruption from air traffic control failures and the Rhodes fires. Demand trends for winter 2024 are solid and ATOL authorisations for Summer 2024 point to a 15% increase in capacity next year.

Watches of Switzerland fell on news of an acquisition by Rolex.

Rolex, the company’s most important supplier, bought Swiss retailer Bucherer. Reassurances have been given that this will not impact Rolex's relationship with other retailers, but investors seem sceptical. We view these businesses as not having a large overlap, so any conflict of interest should be limited.

Activity: We added two new investments and sold ITV.

New holding: B&M European Value

Discount retailers have seen significant growth in their sales. In part, this has been driven by changed shopping habits since the pandemic and the more recent squeeze on household budgets. The demise of Wilco should further strengthen B&M's position in the UK. Higher sales densities in France and the UK will allow management to accelerate store growth.

New holding: Morgan Advanced Materials

A cyberattack in 2022 caused substantial disruption to this business: the loss in sales and the investment remediation required had an impact on the company’s earnings. But its respected and capable management team has now repositioned the business, focusing it on faster-growing markets like semiconductor manufacture, healthcare and clean energy.

Sale: ITV

Spending by advertisers on broadcast media has fallen short of expectations despite improved economic data. Cost pressures have also had an impact on ITV’s margins. We sold the shares, preferring to invest behind holdings that are historically undervalued and that are meeting – or beating – expectations.

Engagement over the quarter

FirstGroup

We discussed the company’s net zero transition plans with its Head of Corporate Responsibility. We are pleased by the company’s commitment to electric buses.

Pearson

We met Pearson’s chairman and the company’s outgoing chief executive to discuss his retirement and the appointment of its new CEO, Omar Abbosh, who will join from Microsoft in early 2024.

IG Group

We met the chairman to discuss plans to find a new chief executive on the back of the announcement that CEO June Felix would be stepping down due to health concerns.

NatWest

We met the chairman to discuss the resignation of Dame Alison Rose, the company’s chief executive.

Outlook

In general, valuations across the UK market remain attractive, with high levels of share buybacks being supportive. Sticky wage inflation, the strength of the oil price and a weak pound continue to pose inflationary risks. In that environment, we remain focused on investing in companies delivering earnings upgrades through ‘self-help’.

Past performance is not a guide to the future.
Source: Lipper Limited/Artemis from 31 March to 30 September 2023 for class I 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.
Classes may have charges or a hedging approach different from those in the IA sector benchmark.
Benchmarks: FTSE All-Share Index TR; A widely-used indicator of the performance of the UK stockmarket, in which the fund invests. IA UK All Companies NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. These act as ’comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.

Derek Stuart

Manages:

Chairman, Artemis Charitable Foundation

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

View Profile

Andy Gray

Manages:

‘UK special situations‘ strategy

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

View Profile

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information on sustainability-related aspects of a fund, visit the relevant fund page on this website.

For information about Artemis’ fund structures and registration status, visit artemisfunds.com/fund-structures

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any statements are based on Artemis’ current opinions and are subject to change without notice. They are not intended to provide investment advice and should not be construed as a recommendation.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.