Artemis UK Select Fund update

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

The fund’s objective is to grow capital over a five-year period. 

• The Artemis UK Select Fund returned 4.3% over the quarter. 
• Its holdings in NatWest and Barclays performed particularly well 
• Improving perceptions of the UK economy have the potential to tempt overseas investors back to the UK market. 

Another positive quarter for the fund 

Share prices in the UK continued to edge higher over the quarter, aided by takeover bids and positive news on the economy. The FTSE All-Share index, one of this fund’s two ‘comparator benchmarks’, moved 3.7% higher on the quarter¹.  

With a return of 4.3%, the Artemis UK Select Fund performed slightly better than the benchmark FTSE All-Share index. It also delivered a better return than its second benchmark, the Investment Association’s UK All Companies sector, where the average return was 3.9%². That capped off a strong start to the year for the fund in both absolute and relative terms: over the first half of 2024, it returned 14.4% versus 7.4% for the FTSE All-Share index and 6.9% for its IA peer group.  

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

The fund enjoyed strong returns from its holdings in NatWest, Barclays and Mitchells & Butlers

Having spent the second half of 2023 seeing our holdings in banks come under pressure, it was gratifying to see a distinct improvement in returns here in the first half of 2024. At times last year, returns from our holdings in domestic UK banks such as NatWest and Barclays were disappointing. This year, they have rewarded us for our patience.

Modestly better sales and an easing in inflationary pressures underpinned a strong set of results from pub group Mitchells & Butlers, whose shares rallied after falling in the first quarter. We expect further strong trading through the summer as our original investment thesis – that the strongest operators in the hospitality sector will grow even stronger as weaker players leave – continues to play out.

Earlier this year, there were fears that Oxford Instruments would warn that weaker spending by its customers in the semiconductor and life science industries was having a detrimental impact on its sales. So, when its trading statement dispelled those worries (“underlying order intake has remained robust”)³, its shares rallied, more than recovering the ground they had lost in the first quarter.

While there were relatively few negatives over the quarter, Melrose, Ryanair and WH Smith came under pressure

Shares in aerospace group Melrose fell sharply after Airbus, one of its major customers, cut its production targets due to issues elsewhere in its supply chain. We spoke to Melrose after the news and, although it is certainly unhelpful, it is far from terminal. The delay in delivering new planes will result in older aircraft remaining in the skies for longer. In the short term, that will lead to an increase in Melrose’s sales of spare parts. Longer term, the demand for civil aircraft has not diminished and we still see many years of sales growth ahead.

Meanwhile, Ryanair’s share price fell sharply in response to some cautious comments on summer trading. That caution appeared to stem from weaker-than-expected demand for mid-week leisure travel and ‘shoulder season’ sun routes; the company is not certain whether this is a trend or blip. Our guess is that we are seeing a normalisation in consumer travel patterns after the post-Covid ‘revenge spending’ seen in recent years.

Interim results at WH Smith showed that its UK travel business is making better-than-expected progress. The problem was that its profits in the US were flat. The market regards the US as the company’s medium-term growth driver so its weaker performance there weighed heavily on the shares. Our expectation is that sales growth in the US will recover.

Activity

We started a new position in National Grid, taking advantage of weakness in its share price when it announced it would issue new shares to raise almost £7billion in new funding. It will use those funds to double the pace of investment in its electricity transmission networks in the UK and US. Both countries are looking to upgrade their grids to enable the increased use of renewables and to support the electrification of their economies.

We added to gaming group Flutter. Earlier this year, its shareholders voted in favour of a proposal to move its main share listing from London to New York. One result was that index funds, whose holdings mirror the composition of UK market, had to sell their holdings in Flutter, sending its share price lower. Trading at Flutter’s underlying businesses (such as FanDuel) remains strong and, in time, we believe the shares should receive support from US index funds as they are included in US market indices.

We reduced our holding in Ashtead, an equipment hire company focused on the US. It has been a beneficiary of the recent boom in government spending in the US. Investors are increasingly questioning whether that spending is sustainable; we suspect those questions will grow louder as we get closer to the US election in November.

We sold a small holding in housebuilder Crest Nicholson. Historic issues surrounding build quality, cladding and problematic sites have troubled it in recent years. Fixing these issues is absorbing the majority of its spare cash, leaving little room to invest in and grow the business or to pay a meaningful dividend. We now prefer other companies in the sector such as Redrow, Vistry and Morgan Sindall.

Outlook

The outcome of the UK general election was largely as the polls had predicted. Thoughts now turn to the question of whether the new government can, as promised, deliver stability, end the political drama that has characterised much of the last decade and improve UK economic growth in the medium-to-long-term.

After the political turmoil of recent years, a period of calm is likely to be welcomed by many companies in the UK. It also has the potential to capture the attention of international investors: the UK economy appears to be putting its brief flirtation with populist policies behind it just as some other Western economies are heading the other way. Given political instability elsewhere in the world, the UK might suddenly go from being viewed as a basket case to a relative safe haven.

At a fund level, we remain encouraged by the trading performance of the companies we invest in. Meanwhile, over half of the companies in the fund by value are buying back shares, with International Airlines Group the latest to join the list⁴.

Having been in the relative wilderness for the best part of a decade, we are hopeful that the changing narrative on the UK economy – particularly at a time of increased uncertainty elsewhere – will provide the catalyst for the UK market to attract fresh interest from international investors.