Artemis UK Smaller Companies Fund
Q2 2026 update

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

Changes to the team

Anna Pugh joined Artemis' UK smaller companies team as an analyst in May. Anna, who has 11 years’ experience, previously worked at River Global Investors, where she focused on UK small-cap and micro-cap strategies. She has a first-class degree in economics from the University of Bath and is a CFA charterholder.

Overview 

During the second quarter of 2026, the fund gained 10.5%. This was ahead of its first benchmark, the Deutsche Numis UK Smaller Companies (excluding Investment Companies) index¹, which gained 9.3%, but slightly behind its second benchmark and peer group, the IA UK Smaller Companies sector, which gained 10.8%².

Over the 12 months to 30 June 2026, the fund lost 4.2%, while the first benchmark gained 7.1% and the second benchmark gained 2.4%. This was because the share prices of the companies we own became cheaper compared with the wider market, rather than because their profits weakened. In our view, the fund's holdings now look inexpensive compared with other UK smaller companies, which themselves look cheap compared with larger UK companies (and cheaper still compared with the global stockmarket average).

Past performance is not a guide to the future.  

Source: Lipper Limited to 31 December 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

Last quarter we highlighted Mears, which maintains social housing, because its share price had fallen even though expected profits had risen³. We believed investors would eventually notice the difference and the shares duly rose during the quarter despite little significant company news. We sold some of the holding to lock in part of the gain.

Tatton, an asset manager, benefited from continued inflows of new money into its funds. Together with rising stockmarkets, this led to a double-digit increase in expected profits⁴.

Halfords, the car and cycling retailer, saw expected profits rise by 10% in June due to strong sales growth and higher profit margins⁵.

Negatives

Several of the largest negatives for relative performance were companies the fund did not own whose shares rose strongly. These included Tate & Lyle, Raspberry Pi, Watches of Switzerland, AJ Bell and TP ICAP.

Telecom Plus, which provides energy and broadband services, cut prices in response to stronger competition, with the aim of encouraging more customers to use more of its services. Consumers who use multiple products are more valuable and tend to stay for longer than those who only take one. It reduced expected profits by 40%⁶, but the shares were already weak and we think they now look inexpensive compared with expected profits.

While first-half revenues at LBG Media (LADbible) grew strongly, there was a rapid shift away from high-margin Facebook revenues and towards lower-margin direct ones. Although the speed of change prompted a downgrade to profit expectations⁷, we think reducing its dependence on Facebook should ultimately improve the quality of LBG’s earnings.

Purchases

We added Workspace, a provider of flexible office space. We expect its new chief executive, Charlie Green, who co-founded The Office Group, to sharpen the focus of the business by selling properties that are not central to its plans and investing in existing sites to raise occupancy, rather than cutting rents. We do not expect a quick turnaround, but we estimate the shares trade at roughly 40% of the value of the underlying properties, which we believe offers an attractive balance between risk and potential reward. The fund currently has little exposure to property companies.

Avon Technologies is a global leader in protective equipment such as respiratory masks and helmets. After restructuring its operations, the company is now ahead of its medium-term targets and is benefiting from strong demand. We believe its valuation is attractive given its ability to generate spare cash.

We started a holding in AB Dynamics, the global market leader in car testing. Management aims to double sales and triple profits over the medium term⁸. We believe these targets are credible because vehicle safety tests are becoming more demanding and standards introduced in Europe are often adopted elsewhere. In our view, the strong growth outlook is not reflected in the share price.

Another new holding was Keystone Law. Keystone is a platform for self-employed lawyers, providing them with compliance, IT, finance and marketing support in exchange for 25%⁹ of the revenues they generate. The number of lawyers using the platform continues to grow. The business needs relatively little capital and generates strong cashflows¹⁰, while we think its shares look cheap.

Sales

With the war in Iran creating a risk that energy prices would stay higher for longer, we reduced some of the fund's exposure to companies that sell directly to consumers early in the quarter. These included Halfords, Greggs, Secure Trust Bank and Jet2. Together, the sales represented just over 1% of the fund.

We reduced our holdings in IG Group, Zigup, RWS and Keller as their share prices rose. We sold Morgan Advanced Materials after its shares rose despite a reduction in profit expectations¹¹.

Outlook

UK smaller-company valuations look unusually low

There is plenty of debate about whether parts of the US stockmarket are in a bubble. One long-term measure of the S&P 500's valuation is at its highest since around 2000¹², while SpaceX’s valuation at its public listing was about $2 trillion¹³, equivalent to nearly 100 times its historic annual sales¹⁴.

By contrast, UK smaller companies look cheap compared with their own history, larger UK companies and companies in the US. On one measure, their valuations are roughly a third of those in the US¹⁵. The dividend yield from the FTSE 250 has also moved above that of the FTSE 100 for the first time in more than 20 years¹⁶.

Developments in Iran have reduced one risk

At the start of the quarter, we believed a prolonged war between Iran and the US was the biggest threat to UK smaller companies. The outcome remains uncertain, but the likelihood of the worst-case scenario appears to have fallen. We think this should mean lower oil & gas prices, which would help UK consumers. Expectations that the Bank of England will raise interest rates are also fading; in our view, the next move is more likely to be a cut than an increase.

Political uncertainty remains, but may be less damaging than feared

Although Andy Burnham has been named prime minister, the policies of the new government remain uncertain. To us it seems probable that:

• He has limited room to increase government borrowing without unsettling financial markets. UK government borrowing costs are already higher than those of other G7 countries¹⁷, so convincing investors that the public finances will be handled responsibly could lower borrowing costs and create more room for spending elsewhere.
• He will introduce policies to support economic growth. Housing is an obvious area for targeted support because it requires little government spending. There has also been renewed discussion about tax incentives for pensions and ISAs that invest in UK shares.

The UK economic outlook is improving

The outlook for the UK economy has improved, but companies that depend on consumer spending remain unpopular with investors. Halfords shows what can happen when a company in an unloved part of the market performs better, or less badly, than expected: a 10% increase in expected profits in June was followed by a 30% rise in its share price¹⁸.

Companies are buying back more shares

A record number of the fund's holdings bought back their own shares during the first half of the year (by reducing the number of shares in circulation, share buybacks increase the value of the shares that remain). We see this as evidence that their boards are more confident about the outlook, believe they have spare cash and consider their shares to be significantly undervalued.

The first half of 2026 was also the first six-month period since 2019 in which none of the fund's holdings received a takeover bid. The typical company in the fund generates strong cash relative to its share price, is expected to grow profits at a double-digit rate and is forecast to have no net debt¹⁹. We therefore believe further takeover approaches are likely to resume.