Artemis UK Select Fund – Reviewing the first half of 2023

After a first half in which the Artemis UK Select Fund outperformed the UK market (and the vast majority of its peers), its managers take a brief look at the stocks that contributed, summarise the key changes they have made to the fund and look ahead to brighter times for the UK’s consumer companies.

Ed Legget

Main changes to the fund

A period of weakness in the banking sector (sparked by the collapse of Silicon Valley Bank, a California-based lender focused on the technology sector) provided an opportunity to add to the fund’s holdings in NatWest and Lloyds. Our view is that there is limited ‘read across’ from the problems at US regional banks (and at Credit Suisse) to banks in the UK, which have more diversified client bases – and sources of funding than SVB. Rising interest rates are resulting in a step change in profitability for UK banks and their financial strength should enable them to return those growing profits to their shareholders. We started a new holding in HSBC and added to our existing holding in Standard Chartered.

We sold the remaining holding in British American Tobacco as the outlook for the economy continued to improve. Its shares outperformed the wider UK market significantly in 2022 as investors attempted to position themselves for a recession (tobacco sales tend to hold up during downturns). And while our views have not changed materially on BAT itself, we struggle to see it outperforming the UK market further from here – particularly if other investors come to share our growing optimism on the economic outlook.

Elsewhere, the fund received takeover bids for its holdings in Numis, the investment bank, and Lookers, the motor retailer. We sold the entirety of the former holding and reduced the second significantly. We reinvested the majority of the proceeds in banks, particularly Lloyds, whose share price has lagged its peers.

Explaining the fund’s performance

The fund returned 11.2% over the six months to 30 June 2023 versus a return of 2.6% from the FTSE All-Share index1.

While a broad range of holdings contributed to the fund’s wide margin of outperformance, the gains were led by two of its long-term holdings: 3i and Melrose. 3i reported another set of strong results from Action, its low-cost discount retailer, which continues to go from strength to strength. Melrose, meanwhile, returned 63% after the company confirmed it would focus on being a 'pure-play' aerospace company and reported that trading had been “materially ahead of expectations with significant growth in revenue, profit and margin”.

In the consumer discretionary area, we have a number of holdings in judiciously selected businesses operating in sectors where supply has contracted significantly, allowing the survivors to enjoy market-share gains. Mitchells & Butlers, for example, posted strong results as improved consumer confidence drove performance. Similarly, Jet2 is enjoying robust growth in what was once seen as a mature industry.

The wider context

Despite the seemingly all-pervasive bearishness towards the UK economy and towards its consumer-focused stocks, we struggle to see a scenario in which the prospects for consumers do not get markedly better from here. Although newspaper headlines have become ever more pessimistic and sensational as the focus has moved from the cost-of-living crisis to the pain caused by rising interest rates, consumer confidence rose for the fifth consecutive month in in June. It is worth remembering that only about 30% of households in the UK have a mortgage. In addition, a significant number of homeowners fixed their mortgages when rates were low, meaning it will take time for the impact of monetary tightening to filter through. And the rise in interest rates is not bad for everyone: anyone with cash in the bank and no debt to service will be better off in nominal terms.

Looking ahead

The UK remains distinctly cheap compared to other markets and relative to its own history. Furthermore, the Artemis UK Select portfolio is trading on 7.8x forward earnings versus 10.3x for the FTSE All-Share. This is despite the fund’s strong performance over the year to date.

We remain optimistic about the earnings outlook for our holdings and note that corporates have the appetite to buy back their own shares or to buy each other. We continue to stick to our process, focusing on strong cash-generating businesses with good capital allocation and widening economic moats.

Discrete performance, 12 months to 30 June 2023 2022 2021 2020 2019
Artemis UK Select Fund, class I accumulation GBP  17.2% -10.6% 48.7% -7.6% -6.8%
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 1 September 2010 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 income reinvested to 30 June 2023, net of all charges. The fund’s benchmark index is the FTSE All-Share NR and its peer-group benchmark is IA UK All Companies sector. Stated returns do not take account of any costs incurred when investors buy or sell the fund.

Ed Legget

Manages:

‘UK select‘ strategy, ‘high income‘ strategy

Ed manages Artemis‘ ‘UK select‘ strategy and also co-manages Artemis‘ ‘high income‘ strategy.

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Ambrose Faulks

Manages:

'UK select' strategy

Ambrose works with Ed Legget managing Artemis’ ‘UK select’ strategy.

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