Artemis UK Special Situations Fund
Q3 2025 update

Review of the quarter to 30 September 2025

The fund continued to make progress in Q3, returning 2.4% and finishing the quarter at an all-time high. From a relative point of view, however, it underperformed its FTSE All-Share benchmark, which made 6.9%, and its IA UK All Companies sector, which made 3.0%. It is well ahead of both measures over five years. 

Past performance is not a guide to the future. Source: Lipper Limited to 30 September 2025 for class I Acc 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.

Detractors

WH Smith surprised us and the market with the announcement of a £30m overstatement of supplier income in its North American division. Supplier income is a known feature of the business model, with high footfall and relatively captive customers in its airport operations. Deloitte has been appointed to conduct a thorough independent investigation. We don’t think this invalidates the US growth strategy, but it will clearly take time for credibility to be rebuilt.

Jet2 and On The Beach both cited later booking patterns from consumers. This is partly attributed to caution ahead of the November Budget, but with prices up year-on-year, there is also less incentive for travellers to book early. Jet2 has trimmed capacity in response, but as an online travel agent, On The Beach has no inventory. Both companies remain confident in their long-term growth plans.  

Mitchells & Butlers reported continued outperformance versus the wider pub sector with like-for-likes of +5.0% and +3.1% in the third and fourth quarter respectively. While flagging continued cost pressures, management remains confident of meeting consensus profit expectations.  

Barratt Redrow noted that continued planning delays will affect home completions in 2026. The government understands that housing supply remains well below the targeted 300k homes per annum, hence the Planning and Infrastructure Bill that comes into law later this year. While later than expected, we expect the housing market to remain a focus area and for planning restrictions to ease. The Redrow integration continues to progress as expected.

Switzerland’s US tariff rate of 39% was unexpected and Watches of Switzerland suffered as a result. The luxury watch brands are passing the price rises on to US customers, but the strength of the underlying market suggests trading momentum is being maintained. An AGM trading update in September supported that view.

Contributors

Our two largest bank holdings Barclays and Standard Chartered both reported good first-half results. Barclays saw good growth in its investment banking division while Standard Chartered beat expectations with its wealth business growing by 20%. Both are delivering on their ambitions for higher returns and continue to buy back shares at attractive levels. 

Babcock continued to perform well with defence names benefiting from increased spending commitments from EU countries. We visited its dockyard in Rosyth where the company showcased its shipbuilding capabilities and the marine business more broadly. The Type 31 frigate building programme is now on track and a strong bid pipeline underpins belief in sustainable growth and margin targets for the division. A positive trading update from the company in September confirmed an active start to the financial year.  

Anglo American agreed a merger of equals with Canadian mining company Teck Resources to form Anglo Teck. The combined group will have six world-class copper assets representing more than 70% of group production. Two of those assets, Collahuasi (Anglo American) and Quebrada Blanca (Teck), are in close geographic proximity, allowing infrastructure to be shared. This will unlock higher profits and lower capital intensity in comparison to running the mines on a standalone basis. Financially, the deal looks attractive to us.

Hill & Smith delivered solid interim results and maintained guidance for the year end despite a headwind from the weaker US dollar. Under a new chief executive, the business is continuing to transition towards higher growth and less cyclical markets, with infrastructure demand in the US continuing to support the revenue outlook. It also announced an unexpected £100m buyback.

Activity

We added two new holdings in the quarter, Coats and 4imprint.

Coats is the global market leader in industrial threads and structural components for the apparel and footwear industries. Over the past few years Coats has rationalised its portfolio, consolidated its manufacturing footprint and de-risked its pension liability such that it now has a strong platform for growth. The company has just announced the acquisition of insole technology provider Ortholite for $770m. The acquisition is highly complementary, adding scale to its footwear division while being accretive to growth and margins.   

4imprint is the largest distributor of custom-printed promotional merchandise in North America. Over time it has built its share to around 5% of this highly fragmented industry. Because many of the items distributed by 4imprint are manufactured in Asia, the share price was harmed by Donald Trump's new tariff regime. Higher product costs will either need to be absorbed by the distributors or passed on to customers. 4imprint has historically taken share during tough times for the industry as it has buying power to negotiate with suppliers, greater marketing efficiency and higher brand awareness. Recent share price weakness, in our view, reflects the short-term issues but ignores the long-term market growth and 4imprint's ability to take increased share.

Outlook

The UK market continues to climb a wall of worry with the fiscal position again in the spotlight ahead of the forthcoming Budget and the prospect of further tax rises. These worries have weighed on the UK domestic stocks that now sit at a large discount to international earners. 

However, we believe UK consumers are in a strong financial position in aggregate. People continue to save and household balance sheets are strong. This represents pent-up demand as and when confidence improves. Surveys of sentiment are interesting in that regard. Consumer confidence remains muted overall and it is this that grabs the headlines and deters spending. But under the surface, confidence in consumers’ own personal circumstances is more positive. 

So, the market has performed strongly but there remains plenty of value in the UK and even more in the fund. This, coupled with the mood of prevailing pessimism, makes us optimistic about the potential for further good returns.