Artemis UK Smaller Companies Fund
Q3 2025 update

Fund objective  

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

Review  

Takeovers continued to drive fund performance in the third quarter: 

• Alpha Group, a business-to-business provider of foreign currency services and our largest holding, agreed to a bid from US payments company Corpay¹  
• FirstCash acquired pawnbroker H&T² 
• Food manufacturer Bakkavor agreed to an offer from its peer Greencore³ 

Together with the large number of companies buying back their own shares⁴, we view these deals as evidence that company management teams see the UK small cap (smaller companies) market as good value.  

Our fund has received more than its fair share of bids in recent years⁵ – a trend we expect to continue unless valuations increase substantially. Importantly, we believe there is no shortage of opportunities to redeploy the proceeds in other attractively valued companies. 

Performance  

The Artemis UK Smaller Companies Fund returned -2.7% in the quarter, compared with a 3.0% return from its first benchmark, the Deutsche Numis UK Smaller Companies (Excluding Investment Trust) index⁶, and -0.3% from its second benchmark, the IA UK Smaller Companies sector average⁷. 

Our overweight (a higher-than-average position compared with the benchmark) in domestically focused companies has been unhelpful. Although this has acted as a drag on recent returns, we believe the lower valuations of these shares today create a compelling opportunity for the future. 

Household income is rising⁸, but UK consumers are deferring spending, choosing to save instead⁹. Once confidence improves and spending picks up, we believe our holdings have the potential to make substantial returns. 

Past performance is not a guide to the future.  

Source: Lipper Limited to 30 September 2025 for class I accumulation units in 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. This class may have charges or a hedging approach different from those in the IA sector benchmark.

Positives 

Banks were the portfolio’s strongest sector during the quarter. Secure Trust Bank made the largest contribution to performance on the back of positive results in the first half of the year and increasing confidence that it will deliver on its near-term targets¹⁰.  

Alpha Group's share price climbed following Corpay’s aforementioned bid. Corporate services and fund solutions provider JTC also rose on two takeover approaches from Permira, both of which it rejected¹¹.  

We think speculation about takeover interest in some of Next 15’s businesses could be behind the recent rise in the marketing consultancy’s share price. 

Negatives 

Cosmetics company Warpaint London was the most significant detractor during the quarter, citing lower US revenues due to tariffs and a reduced order from a large Scandinavian customer¹². 

AOTI, a provider of wound-care technology, warned of weaker-than-expected growth in US Medicaid and veterans’ affairs reimbursement, following cost cutting by the Department of Government Efficiency (DOGE)¹³. 

Package holiday provider On the Beach cut its profit forecast due to later customer booking and the closure of its small business-to-business division¹⁴. 

Purchases 

We initiated new positions in asthma diagnostic company Niox, food retailer Greggs, subsea equipment rental firm Ashtead Technology and consultancy Science Group during the review period. 

In addition, we took part in a placing of new shares in footwear thread manufacturer Coats and added to holdings such as telecoms business Gamma Communications, meat packer Hilton Food, fraud prevention company GB Group and housing and care provider Mears. 

Sales 

We took profits from Secure Trust Bank following strong performance and trimmed government services provider Serco, wealth manager Brooks Macdonald and security and defence contractor QinetiQ for similar reasons.  

To enable the purchase of Greggs without materially increasing our significant exposure to consumer-facing holdings, we trimmed positions in Dunelm, Wickes and J D Wetherspoon.  

We sold out of Alpha and Bakkavor ahead of the completion of their recommended takeover offers. 

Outlook 

We believe negative headlines about the Autumn Budget could affect confidence and therefore consumer spending in the short term. But ultimately the signs are positive: household debt (as a percentage of gross disposable income) is at its lowest since the late 1990s¹⁵, while the savings ratio of about 11% is more than twice its pre-Covid level¹⁶. 

In our view, if employment doesn’t collapse, consumer confidence and spending should slowly increase, pushing up economic growth in the UK. 

If the UK’s low valuation compared with the US prompted a modest switch in capital flows towards the domestic stockmarket, we anticipate that small-cap returns would be turbo-charged. 

If this doesn’t happen, the status quo would continue: a rather moribund economy where, even though investors don’t return to UK smaller companies, low valuations would mean takeovers and share buybacks continue to drive returns as they have done over the past decade¹⁷.  

We believe our portfolio would remain resilient in either environment.