Artemis UK Smaller Companies Fund
Q1 2026 update

Fund objective  

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

Overview 

In the first three months of this year, the fund lost 11.0%, underperforming its first benchmark, the Deutsche Numis UK Smaller Companies (excluding Investment Companies) index¹, and its second benchmark, the IA UK Smaller Companies sector², both of which fell 6.9%.

We believe the fund’s weak absolute performance was mainly driven by concerns about the conflict in Iran and the wider repercussions, should inflation and interest rates climb higher and business and consumer confidence fall further. Meanwhile, we attributed our weak relative performance to the falling share prices of our media and technology holdings. 

Past performance is not a guide to the future.  

Source: Lipper Limited to 31 March 2026 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. 

Negatives

We felt many of our media and software holdings suffered from the perceived threat of artificial intelligence (AI), including publisher Future, consultancy Next 15, LBG Media and identity verification company GB Group. We see the risks as being overstated and not reflective of the importance of these companies' first-party data, the opportunities that AI may create for them in terms of cost savings, or their cheap valuations³.

Some of the fund's consumer-facing holdings were also weak (for example, housebuilder MJ Gleeson and package holiday operator On the Beach).

Although we do not believe the Iran war changes the three-to-five-year outlook for these businesses, it has affected the near-term outlook. Consumer confidence has been hit⁴, inflation is higher⁵ and interest-rate expectations have changed⁶.

Positives

There were no obvious themes among the fund's winners during the quarter:

• Ashtead Technology (an energy equipment rental company) announced its profits were towards the top end of expectations⁷.

• Bloomsbury Publishing (a new holding) upgraded profit expectations after announcing the publication dates for the next two novels by bestselling author Sarah J Maas⁸.

• Online trading portal IG Group benefited from market volatility as it led to increased activity⁹. In addition, improvements being made by its new chief executive are starting to bear results¹⁰. 

Purchases

We started a new holding in Tristel, which supplies chlorine dioxide for disinfecting medical devices in hospitals. Although the shares are not especially cheap in our view, we think its sales growth and profit margins more than make up for this. It is in the early stages of entering the US market¹¹, which we think has the potential to transform its business. 

We also added to our existing holdings in NIOX, which manufactures medical devices for people suffering from respiratory diseases, and DiscoverIE, which designs and manufactures specialist electrical components.

Sales

We sold our remaining holding in JTC, a fund administrator, after the recommended cash bid by Permira¹².

A rally in the shares of SSP, which operates food and beverage outlets in transport hubs, led us to sell our holding after we became concerned about a number of issues with the balance sheet. 

We also sold the fund's small residual holding in Videndum, a provider of hardware and software for the film industry. 

Most other sales involved trimming strong relative performers, including government contractor Serco, Secure Trust Bank and clothing materials provider Coats.

Outlook

We believe events in the Middle East may have pushed back a recovery in UK smaller companies, because higher inflation could delay interest-rate cuts and keep consumers cautious.

However, we don’t think the Iran conflict will change our three- to five-year outlook. We would note three differences between the situation today and the inflation shock of 2022: 

• The labour market is loosening today¹³ (meaning there is a falling number of vacancies), so we think wage-driven inflation pressure will be lower.

• Gas prices have risen less than they did in 2022 (so far)¹⁴.

• Non-energy natural resources have been less affected¹⁵.

With regards to the fund's portfolio, we believe the main risk comes from our exposure to companies that sell non-essential consumer products. We think UK wage growth is likely to be flat this year after inflation is taken into account. Therefore, if people want to spend more than they did last year, they will need to dip into their savings. In the UK, household savings are quite high¹⁶, so we think there is scope for consumer spending to exceed expectations once confidence recovers.

AI threats are overstated

We believe the recent falls in shares seen as threatened by AI are excessive because no one really knows yet how disruptive the technology will be. There are three main reasons for our view.

• Proprietary data: If AI hoovers up all publicly available data, we believe privately owned first-party data will become more valuable. We think this will benefit the fund's holdings in companies such as GlobalData and YouGov.

• Low valuations: The share prices of companies we own that are seen as ‘at risk’ look attractive to us. If a share’s valuation is high, investors need to be confident that their most optimistic case is correct; but if a share price is low, they only need to believe the worst might not happen. 

• Overlooked opportunities: Smaller companies typically underperform in the early stage of a ‘crisis’ and then bounce back strongly thereafter¹⁷. However, we see AI as less of a crisis and more of a double-edged sword. Many of the companies most threatened by AI also have the most to gain from harnessing its power, in our view.

Opportunities when company specifics are overlooked

We believe that when moves in stockmarkets are dominated by major global events such as the war in Iran, it can cause investors to overlook investment fundamentals.

Share-price moves in March (and in early April) have been dominated by global events, which we think tend to be both fast changing and difficult to take a unique view on. Share prices can get disconnected from fundamentals at times like this and company-specific news can easily be overlooked, we have found.

We would cite social housing maintenance provider Mears as one example. In March, Mears reported strong results, upgraded its expectations for the year ahead and reported that its order book (of contracted future revenues) had increased by 38%¹⁸. Yet the shares were down 8% over the month¹⁹. Over the past year, Mears’ 2026 profit expectations have increased by 36%¹⁸, but the share price has fallen by 16%¹⁹.

We view this kind of gap between business performance and the share price as an opportunity for long-term, active investors.