Artemis UK Smaller Companies Fund
Q2 2025 update

Fund objective

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

Performance

The quarter was characterised by a global and UK stock market rebound¹ from the tariff-related uncertainty that peaked in early April.

While this threat hasn't gone away, we remain of the view that UK small caps are relatively well positioned:

• More than 60% of the fund's revenues are earned in the UK;
• UK exports of goods to the US are ‘only’ £60bn² (small in the context of overall GDP); and
• A weaker dollar and lower energy prices will help to bring down UK inflation³, thereby enabling the gradual reduction in interest rates to continue.

The Artemis UK Smaller Companies Fund returned 13.8% in the quarter, compared with a 14.3% return from its first benchmark, the Deutsche Numis UK Smaller Companies (Excluding Investment Trust) index⁴, and 13.1% from its second benchmark, the IA UK Smaller Companies sector average⁵.

For the past five calendar years of performance, please see the table below. Please remember that past performance is not a guide to the future.

Calendar year performance (%)

Past performance is not a guide to the future. Source: Artemis/Lipper Limited, class I accumulation GBP to 30 June 2025. 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.

Positives

The defence sector continued to contribute to performance, with our positions in Babcock, Chemring and Qinetiq all doing well. With Babcock up more than 100% this year and entering the FTSE 100⁶, we sold out.

Our overweight (above average position compared with the benchmark) in travel & leisure stocks was also a positive, with low-cost airline Jet2 and pub and hotel group JD Wetherspoon making a strong contribution. Jet2 joined the (increasingly long) list of companies in our portfolio that are buying back their own shares⁷: over the first half of the year, a record 21 holdings reduced their share count by more than 0.5%. We see this as indicative of management teams expressing the view that:

a) Their businesses have surplus capital;

b) They are confident in the outlook; and

c) Their share prices do not reflect fundamental value.

Another major driver of recent returns, M&A (merger and acquisition) activity, also continued into the quarter, with UK pawnbroker H&T receiving a recommended offer by US-listed trade buyer FirstCash at a 44% premium to its original share price⁸.

Negatives

GB Group, a provider of identify-verification and fraud prevention services, was the biggest detractor from performance. Full-year results were in line with expectations, but some analysts cut profit forecasts for next year (in large part due to currency movements)⁹. We are still positive on GB Group's medium-term prospects and felt the share price reaction was overdone. We added to our holding.

Victorian Plumbing also performed poorly after cutting profit forecasts: the company underestimated the impact of depreciation following the completion of its new warehouse, it is yet to see an improvement in the market backdrop, and management has invested in the MFI brand to enter the UK homewares market¹⁰. We added to our holding: in our view, the investment in MFI represents a low-cost way of entering a new large market and can be curtailed quickly if it is not successful.

Translation services provider RWS announced another negative update. It downgraded profits-before-tax due to several issues including challenges with two new customers, weakness in its life sciences division and the impact of currency movements¹¹. In our view, the shares look cheap, there are no balance-sheet issues and the incoming chief executive just bought 1 million shares¹². However, we think RWS has a lot of work to do to regain investors' confidence.

There is a lot going on at marketing consultant Next15, whose chief executive has stepped down after more than 30 years¹³. The business has uncovered ‘potential serious misconduct’ at its Mach49 division which led it to self-report to law-enforcement agencies and terminate the employment of three senior members of the management team¹³. Deferred consideration (staff bonuses, for example) of up to $91m may now not be payable¹³. The company said weak trading in this part of the business, negative currency movements and investment costs will all contribute to "materially lower" profits¹³. There was a subsequent announcement that Next15 is in talks to sell a number of brands¹³. The valuation is compelling and the balance sheet looks okay, but there are a lot of moving parts.

MJ Gleeson was forced to cut profit expectations on the back of rising building costs, flat selling prices and increased use of incentives¹⁴. Subsequent updates from other housebuilders led us to believe most of these issues appear to be company-specific and are in part a continuation of the legacy site issues identified in 2023 which we had believed to be resolved.

Purchases

We started four new holdings in the quarter: Coats, YouGov, GlobalData and M&C Saatchi. These were all companies that were held in the Artemis UK Future Leaders investment trust (which aims to achieve long-term total returns for shareholders primarily by actively investing in a broad cross-section of small to medium sized UK quoted companies) when we took on the mandate. We have retained these holdings in the investment trust and added them to this fund.

Coats is the global market leader in the supply of premium threads to the apparel industry and threads and structural components to the footwear industry. Historically we have held back from investing due to the cashflow (the amount of money left over after all liabilities have been met) which has been supressed by pension contributions and restructuring costs. However, with the pension issue now resolved¹⁵ and restructuring complete¹⁶, the cashflow looks compelling.

YouGov is an international online research data and analytics company. We felt it had lost its way under the previous chief executive and it faces a greater competitive threat than in the past. However, we believe it remains a high-quality business that has valuable proprietary data and strong cashflow.

GlobalData also sells access to its proprietary data sets. After takeover talks with ICG and KKR did not lead to a recommended cash offer, the shares fell back to what we felt was an attractive valuation¹⁷, so we initiated a holding.

Creative agency and consulting business M&C Saatchi has recently undergone an historic restructuring programme which is now ‘largely done’¹⁸. We were impressed upon meeting the new chief executive and the plan to move onto a common platform across the group.

Sales

As well as selling out of Babcock and H&T, we reduced our holdings in fresh food provider Bakkavor (following a bid approach from convenience foods producer Greencore¹⁹) and geotechnical specialist contractor Keller.

Outlook

We continue to believe that the negative narrative that surrounds the UK economy is not supported by the data. Consumers are relatively well positioned in our view (with rising real incomes, low unemployment and declining household debt²⁰); businesses have strong balance sheets (the median company in the fund is forecast to have no net debt); and the political backdrop is (relatively) stable. In our view, savings rates of 12%²¹ suggest that it is confidence that is holding consumers back from spending. With the national insurance increases now in the past, we are confident there will not be a spike in unemployment. We expect a gradual recovery in consumer, business and ultimately investor confidence, resulting in a recovery in consumer spending, business investment and allocation to the UK stock market.

In the interim, we continue to see high levels of takeover activity as companies are also optimistic and recognise that UK smaller companies are undervalued (the average takeover premium to the pre-offer price is close to 50%²²).