Artemis UK Special Situations Fund
Q2 2025 update

Review of the quarter to 30 June 2025

Potential changes in global terms of trade have dominated headlines and market commentary over the last quarter. The announcement of ‘Liberation Day’ tariffs by President Trump on 2 April led to a sharp initial fall in markets. This correction was short-lived, however, and a 90-day pause to allow time to negotiate trade deals led to a subsequent recovery in share prices.

In the UK, companies have been facing additional National Insurance costs and another material rise in the minimum wage. Although that has dampened profit growth, we think management teams have done a good job in mitigating the impact and they now have a well-established playbook, having had to deal with significant cost pressures and inflation in the last few years.

Operational momentum remains strong in the businesses we own, as evidenced by an upbeat reporting season that has been rewarded by positive share price performance from many of our holdings.

Over the quarter, the fund outperformed its benchmark, rising by 14.0% compared with 4.4% from the FTSE All-Share index on a total return basis.

Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 30 June 2025 for class I accumulation 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. Classes may have charges or a hedging approach different from those in the IA sector benchmark.

Contributors

• A new chief executive at Entain is driving improvements in the business, with the UK and US operations performing ahead of expectations. This builds credibility in the medium-term profit target of its US joint venture, BetMGM.

• Babcock has raised its medium-term margin target from 8% to more than 9%. With defence budgets set to rise faster than GDP and the UK’s Strategic Defence Review pointing to submarine and nuclear deterrent investment as key priorities for the government, Babcock's mid-single digit revenue-growth guidance looks well underpinned and set to be maintained for many years. It announced a surprise £200m buyback, with results underscoring how far the business has progressed since fears of a rescue rights issue in the early days of the management team’s tenure.

• FirstGroup continues to increase margins in its UK bus division and expects earnings growth in the year ahead despite headwinds from the government’s nationalisation of its rail franchise. It announced a new £50m buyback.

• We retain significant exposure to the UK consumer through companies including Jet2, Mitchells & Butlers, DFS and Dunelm. All continue to trade well.

Detractors

There were no material underperformers in the quarter.

Activity

We took advantage of volatility in April to add to holdings such as Barclays, Barratt Redrow and Entain, which fell sharply despite not being materially affected by tariffs.

We continue to manage the portfolio actively, selling our positions in Tesco and Imperial Brands and taking sizeable profits in Babcock and FirstGroup. All have performed well and re-rated, so we recycled the capital into companies that offer, in our view, more prospective upside. These included several new holdings in the quarter:

• Retailer Wickes de-rated during a period of difficult trading post the Covid lockdown-induced pull-forward of home-improvement spending. However, management set about investing in the proposition and modernising the customer experience during this time. We see significant volume recovery potential after years of industry decline, as well as additional market share gains.
• Future is a magazine and website media business that owns titles such as TechRadar, Homes & Gardens and Marie Claire. Future also owns the price-comparison website Go.Compare. Concerns over the impact of generative-AI platforms, such as ChatGPT, have led it to fall to a low valuation. We believe customers and cashflows will prove to be more resilient.
• Marks & Spencer has struggled for many years and lost market share against competitors such as Next. More recently it has been the victim of a cyberattack that led to the suspension of online orders. The share price correction was over-done in our view and the incident masks underlying improvements in brand perception: M&S is fashionable again. We see opportunities for further investment into value and quality, leading to sustained volume growth and therefore sustained earnings-growth potential in the years ahead.

Outlook

The UK looks likely to be a relative winner from US tariffs. Ours is primarily a service-based economy and, with the trade deal signed off, a tariff rate of 10% looks comparatively low even before significant exemptions that are also in place. The company management teams we speak to are confident in their ability to mitigate the impact, with their relative competitiveness improved if anything.

On the domestic front, we remain more positive than most on the UK consumer. In aggregate, they have been saving consistently since Covid and, unlike in the US, these savings remain largely unspent. This represents pent-up demand in the economy. Consumer confidence remains muted but another explanation for the high savings rate is that interest rates remain high. While this is good for savers, restrictive rates are effectively acting as a handbrake on the economy. We expect interest rates to be cut further with a weak dollar and falling oil prices both easing concerns over inflation.

The UK market has performed well in recent years, but valuations are still attractive. The UK market remains cheap compared with other international markets and we would expect that gap to close as UK growth and inflation converge with other major economies. A weak dollar also lessens the appeal of US assets for domestic investors.

Overall, we are still seeing many opportunities to buy good companies with strong operating momentum at attractive valuations. We have recycled capital to preserve the value credentials of the fund, so we remain optimistic about the potential for further strong returns.