Artemis UK Special Situations quarterly review, September 2023
Derek Stuart, Andy Gray and Henry Flockhart, managers of the Artemis UK Special Situations Fund, report on the fund over the quarter to 30 September 2023.
Source for all information: Artemis as at 30 September 2023, unless otherwise stated.
Fund objective
To grow capital over a five-year period.
Share prices in the UK edged higher over the quarter
The fund returned 2.4%, a slightly better return than the wider UK market as measured by the FTSE All-Share index, one of this fund’s two ‘comparator benchmarks’, which rose by 1.9%.
The fund’s margin of outperformance relative to its peer group was even wider. The average fund in the Investment Association’s UK All Companies sector, the other ‘comparator benchmark’, returned just 0.8% over the quarter1.
For full five-year discrete performance, please see below. Please remember that past performance is not a guide to the future.
This quarter’s biggest positives
The biggest positive contribution to the fund’s strong relative performance came from Babcock (up 46%), whose turnaround continues to make excellent progress. Its repositioning, which it has focus on faster growing markets, is largely complete.
Johnson Service Group also performed well (up 31%). Its focus on the hotel and catering sectors obliged it to navigate a difficult operating environment through the pandemic. Its management are now focusing on growth by making bolt-on acquisitions in Ireland and South West England and are investing in new facilities to capitalise on opportunities in London and the South East.
Restaurant Group, the owner of Wagamama, reported better-than-expected revenue growth over the summer. Its shares rose by 34% on the quarter. Private equity group Apollo then tabled a takeover bid shortly after the quarter ended.
This quarter’s biggest negatives
On the negative side, gaming company Entain had a disappointing quarter (down 26%). It set aside £585 million to cover a settlement with the HMRC over historic issues related to a business in Turkey it sold some years ago2. And while sales trends have disappointed, cost reductions have allowed it to retain its profit guidance.
Jet2 also underperformed (down 12%). Air-traffic control failures and the Rhodes fires resulted in £13 million in unforeseen costs. Despite this, it expects to beat profit forecasts thanks to continued strong trading through the summer.
Watches of Switzerland fell sharply (down 13%) on news of Rolex’s acquisition of Swiss competitor Bucherer. We feel this was an overreaction. Rolex is famously secretive, so that it offered an explicit statement of support to Watches of Switzerland was testament to the strength of their relationship.
Changes to the fund
We added a new investment in B&M European Value. Like other discount retailers, B&M has seen significant growth driven by changing shopping habits and the squeeze on household budgets. The demise of Wilko further strengthens its position in the UK.
We also added a holding in Morgan Advanced Materials, which makes advanced carbon and ceramic materials. It suffered a cyber-attack in 2022, resulting in lost sales and a temporary increase in costs as it moved to fix the problem. But we feel the market has temporarily lost sight of the fact that a capable management team has re-positioned this business to exploit faster-growing markets like semiconductor manufacture, healthcare and clean energy.
We sold the holding in ITV. We had expected the launch of ITVX, its upgraded streaming service, to provide impetus to advertising revenues but we are yet to see much evidence this is happening.
| Discrete performance, 12 months to 30 September |
2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| Artemis UK Special Situations Fund | 25.2% | -21.6% | 45.4% | -11.3% |
-1.5% |
| FTSE All-Share TR | 13.8% | -4.0% | 27.9% | -16.6% | 2.7% |
| IA UK All Companies NR | 12.4% | -15.5% | 32.5% | -13.1% | 0.1% |
Source: Artemis/Lipper Limited, class I accumulation GBP to 30 September 2023. 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.
Benchmark is FTSE All-Share TR.
Risks specific to this fund
Market volatility risk
The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
Currency risk
The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
Special situations risk
The fund invests in companies that are in recovery, need re-financing or are suffering from lack of market attention (special situations). These companies are subject to higher-than-average risk of capital loss.
Concentration risk
The fund may have investments concentrated in a limited number of holdings. This can be more risky than holding a wider range of investments.
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