Artemis UK Special Situations Fund update

Andy Gray and Henry Flockhart, managers of the Artemis UK Special Situations Fund, report on the fund over the quarter to 31 March 2024.

Andy Gray

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

The fund’s objective is to grow capital over a five-year period. Global growth continues to show resilience despite high interest rates, calming fears of a recession. Despite high oil prices and wage growth, inflation remains on a downward trajectory, raising the prospect of interest rate cuts in the UK and US this year. As a result, the first quarter of 2024 saw continued strong performance from stockmarkets.

Against this backdrop, the fund performed well, rising by 5%, ahead of the 3.6% return from its FTSE All-Share index1 benchmark, and 2.8% return from its Investment Association UK All Companies sector2 average benchmark.

For full five-year annualised performance, please see below. Please remember that past performance is not a guide to the future.

This quarter’s biggest positives

  • Barclays
  • Defence company Babcock
  • NatWest

It was a strong results season for banks and our holdings in NatWest, Standard Chartered and Barclays all performed well. Investors responded particularly well to Barclays’ new strategy, which aims to improve financial returns and return capital back to shareholders through methods such as dividend payments and share buybacks3.

Defence company Babcock’s four divisional managing directors were all optimistic about growth and improved profit margins, supported by recent contract wins.

This quarter’s biggest negatives

  • Watches of Switzerland
  • Rolls-Royce
  • Bookmaker Entain

Our holdings in the luxury industry detracted from performance. Watches of Switzerland reported poor sales over the Christmas period, especially in the UK. Burberry is also facing problems. The new chief executive and chief designer are in the early stages of trying to refresh the brand, but a difficult environment for the luxury industry is making this task harder.

Bookmaker Entain reported it made a loss in 2023, confirming 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 making changes that we hope will translate into better long-term shareholder returns.

Our industrial holdings Spectris, Oxford Instruments and Smiths Group also fell as the share price rally in the final weeks of last year reversed over the quarter. We believe the longer-term opportunity for each business remains intact.

Changes to the fund

  • We remain optimistic and invested in two new companies during the quarter. Both 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 increasing its market share and is likely to open new stores.
  • 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 and its German business.

We added to holdings in B&M European Value Retail and Unilever after management meetings and recent results increased our confidence.

Sales activity has focused predominantly on profit taking from investments that have recently done well. We have substantially reduced our holdings in private equity firms 3i and Intermediate Capital Group and pipe manufacturer Genuit, while selling out of engineer Melrose.

Melrose was one of our strongest performers in 2023, with margins and profits drastically improving thanks to changes made by the management team. Recycling profits from successful investments into companies at an earlier stage of their recovery remains a core part 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 pharmaceutical AstraZeneca, testing company Spirent and greetings card provider Moonpig.

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. Growth in income (such as wages) 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 personal finance component of UK consumer confidence surveys continues to rise back towards historical averages. The portfolio reflects that view. Despite strong returns over the past 18 months, the fund remains on a lower price-to-earnings ratio (a key measure of valuations) than the UK market, which looks cheap itself. We think this position the fund well to deliver future returns.

1FTSE All-Share Index TR: A widely-used indicator of the performance of the UK stockmarket, in which the fund invests. It acts as a ‘comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by this benchmark.
2IA 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. Management of the fund is not restricted by this benchmark.
3Share buybacks, also known as share repurchases, refer to the reacquisition by a company of its own shares. Instead of paying dividends, it is an alternative way for a company to return money to shareholders. In most countries, a company is able to repurchase its shares by paying cash to existing shareholders in exchange for a reduction in the number of shares outstanding.

 

Annualised performance, 12 months to 31 March
 2024 2023 2022 2021 2020
Artemis UK Special Situations Fund 13.1% 2.1% -1.4% 56.2% -17.9%
FTSE All-Share TR 8.4% 2.9% 13.0% 26.7% -18.5%
IA UK All Companies NR 7.5% -2.1% 5.2% 37.8% -19.2%
*Past performance is not a guide to the future.
Source: Artemis/Lipper Limited, class I accumulation GBP to 31 March 2024. 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.

Andy Gray

Manages:

‘UK special situations‘ strategy

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

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Henry Flockhart

Manages:

‘UK special situations‘ strategy

Henry works with Andy Gray managing Artemis’ ‘UK special situations’ strategy.

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