Artemis UK Special Situations Fund update

Source for all information: Artemis as at 31 March 2024, unless otherwise stated.

The fund continued to outperform

Global growth continues to show resilience despite the lagged effect of previous interest rate rises, calming fears of a sharp economic slowdown. Despite firmer oil prices and ‘sticky’ wage growth, inflation remains on a downward trajectory, raising the prospect of interest rate cuts on both sides of the Atlantic as the year progresses. As a result, the first quarter of 2024 saw continued strong performance from equity markets.

Against this backdrop the fund performed well and finished the quarter at its all-time high. It rose 5% in the three months to 31 March 2024, compared with gains of 3.6% from its FTSE All-Share benchmark.

Stock positives

• It was a positive bank reporting season and our holdings in NatWest, Standard Chartered and Barclays all performed well. The restructuring plans and refreshed strategy of Barclays were particularly well received as management looks to improve financial returns and give capital back to shareholders.
• Defence company Babcock hosted a well-attended capital markets day at Devonport Royal Dockyard in February. The four divisional managing directors were all optimistic about growth and margin improvements, supported by recent contract announcements.
• GSK increased its medium-term revenue-growth guidance, targeting £38 billion sales in 2031, up from £30 billion in 2023, as the successful invigoration of the new drug pipeline starts to bear results.
• AdvancedAdvT returned from suspension having acquired a platform of software businesses from Capita in July 2023. We expect operational improvements under the new management team, with further acquisitions likely to follow.

Stock negatives

• The luxury sector was a source of weakness. Watches of Switzerland reported mixed trading over the key Christmas period, with the UK in particular experiencing poor sales.
• Burberry is also facing problems. The new chief executive and chief designer are in the early stages of rejuvenating the brand, but the more difficult trading backdrop is making this task harder.
• Poor results from bookmaker Entain in March confirmed the need for new management. The previous chief executive stepped down in December and the search for a permanent replacement remains ongoing. In the meantime, interim chief executive Stella David is driving business improvements which we hope will translate into better long-term performance.
• Our industrial holdings Spectris, Oxford Instruments and Smiths Group also drifted as the share price rally in the final weeks of last year unwound over the quarter. We believe that the longer-term opportunity for each business remains intact.

Activity

We continue to see a healthy opportunity set and initiated two new holdings in the quarter. Both companies operate in areas we expect to benefit from improving conditions for the UK consumer.

• Dunelm, the UK homeware retailer, has a long track record of market-share growth, while store growth also looks set to accelerate.
• A new chief executive continues to build on Whitbread’s reputation as the UK’s leading budget hotel operator through its Premier Inn brand. Opportunities exist for improved performance across its pub estate as well as in the nascent German business as it moves towards making a profit.

We also continued to build our holdings in B&M European Value Retail and Unilever as management meetings and results increased our confidence.

Disposal activity has focused predominantly on profit taking as valuations reflect improved prospects. We have substantially reduced our holdings in private equity firms 3i and Intermediate Capital Group and pipe manufacturer Genuit, while selling out of Melrose.

Melrose was one of our strongest performers in 2023, with aerospace margins and cashflow drastically improving as a result of the management team’s restructuring activity. This recycling of profits from successful investments into companies at an earlier stage of their recovery remains a core pillar of our process.

We remain wary of companies where profit expectations are being downgraded. As a result, we reduced our holding in equipment rental company Ashtead and sold out of AstraZeneca, testing company Spirent and greeting card provider Moonpig.

Engagement

Our key engagement activity in the quarter focused on B&M European Value Retail. We arranged a meeting with the finance director who holds board responsibility for the company’s sustainability initiatives. As a relatively new holding, the aim was to deepen our understanding of the company’s approach to topics including emission targets and supply-chain monitoring.

Outlook

With UK inflation falling and the national minimum wage and state pension set to rise by 9.8% and 8.5% respectively in April, we are becoming more positive on the outlook for the UK consumer. Income growth coupled with the prospect of energy-bill reductions, interest rate cuts and pre-election tax cuts suggest the pressure on household finances should continue to ease.

For all the bad news in the press, the future personal finance component of UK consumer confidence surveys continues to rise back towards historical averages. The portfolio reflects that view. Despite strong absolute and relative returns over the past 18 months, the fund remains on a lower P/E ratio than the UK market, which looks cheap itself. We think this positions us well to deliver future returns.