Artemis UK Future Leaders plc
Q2 2025 update

Trust objective 

The trust 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.

Performance

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

While the threat of tariffs hasn't gone away, we remain of the view that UK small caps (smaller companies) 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 the economy); 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.

During the quarter, Artemis UK Future Leaders’ NAV rose by 16.1%, compared with a 13.6% return from its benchmark, the Deutsche Numis Smaller Companies plus AIM (-InvTrust) index⁴.

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: Lipper Limited. 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.*Artemis assumed management of the trust on 10 March 2025.

Positives

The defence companies in our portfolio made a powerful contribution to performance, with holdings in Avon, Chemring and others associated with the sector rising strongly.

Our overweight (above-average position) in consumer discretionary (non-essential goods and services) was another positive, with retailer Dunelm announcing robust third-quarter sales in a trading update⁵ and JD Wetherspoon also doing well⁶.

Two major drivers of recent performance continued at pace during the quarter. The first of these is buybacks⁷: 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 the fundamental value of the business.

The second is M&A (merger & acquisition) activity, with UK pawnbroker H&T receiving a recommended offer by US-listed trade buyer FirstCash at a 44% premium to its 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 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. 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 (bonuses) of up to $91m may now not be payable¹³. 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 satisfactory 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. 

Activity

The portfolio rebalancing that we initiated when we were awarded the mandate on 10 March 2025 is now effectively complete, with a 75% overlap between the trust and our open-ended Artemis UK Smaller Companies Fund.

If you are wondering why 25% is different, about 10 percentage points is in companies we own in both vehicles, but in different weights, while the other 15 percentage points is in companies we own in one and not the other (there will always be shares entering or exiting any live portfolio, while in some cases we have exposure to the same theme across both vehicles through different companies).

With so many changes in the portfolio, we thought it would be more instructive to focus on four of the companies we inherited in the trust that we kept hold of – indeed, we liked them so much we added them to our open-ended fund: 

Coats supplies premium threads to the clothing 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 yield 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 believe it faces a greater competitive threat than in the past. However, we also think it remains a high-quality business that has valuable data and strong cashflows.

GlobalData also sells access to its data sets. After takeover talks with two private equity companies did not lead to a recommended cash offer, the shares fell back to 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’, according to the company¹⁸. We were impressed upon meeting the new chief executive. 

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 (with rising real incomes, low unemployment and declining household debt¹⁹); businesses have strong balance sheets; and the political backdrop is (relatively) stable. In our view, savings rates of 12%²⁰ suggest that it is confidence that is holding consumers back from spending. With the national insurance increases now in the past, we do not anticipate 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 stockmarket.  

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 is close to 50%²¹).