Artemis Income Fund
Q3 2025 update

Review of the quarter to 30 September 2025

In a period when most investors seemed drawn to worship at the altar of artificial intelligence, UK equities ground out a respectable return of almost 7%. A (perhaps justified) narrative around a challenged Labour government and impending tax rises – not to mention a volatile and unpredictable global economy characterised by tariffs, conflict and tense international relations – has not stopped UK equities hitting multiple all-time highs this year (the large-cap FTSE 100 index has achieved that feat precisely 30 times in 2025 thus far). 

The benefits of low valuations plus the drumbeat of M&A and share buybacks that continue to be material have powered the FTSE 100 and All-Share indices to year-to-date total returns of 19.6% and 16.6% respectively.

Performance

While our longer-term returns remain robust, September capped off a challenging quarter for the portfolio, in which our performance was not dissimilar from the income sector but materially lagged the UK market. We would attribute our recent underperformance to two broad themes: a sell-off in some data and analytics companies that investors are concerned could be disrupted by AI; and strong performance from large positions in the index that we do not own.

Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 30 September 2025 for class I distribution 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.

Detractors

LSEG, Wolters Kluwer and Sage all sold off in the third quarter. The market has become concerned about AI challenging their competitive advantages and barriers to entry – and as a result, affecting revenue growth and pricing power. We believe our holdings will not only survive these challenges but will likely benefit, although we acknowledge that this cannot be taken for granted and we are conducting in-depth analysis to ascertain how AI is affecting our companies’ competitive moats.

We have been steadily reducing our exposure to higher valued ‘digital winners’ for the past two years and this has accelerated during the third quarter. We recognise that the current period of uncertainty may be prolonged, so in this part of the portfolio, we believe it is right to have ‘a short neck rather than a long neck’ for now.

LSEG has been a strong performer for more than a decade but recent developments in AI-native data and analytics offerings have led us to reappraise our investment case. On the one hand, we believe LSEG’s proprietary data becomes more valuable and it can replicate much of what emerging disruptors are offering. However, it is difficult to know what data can be replicated by new entrants (and whether it will be trusted by financial market participants which require 100% accuracy) or what the implications for LSEG’s profitability could be. We have reduced our allocation to LSEG and recycled to other areas but remain invested.

We have significantly reduced our weighting to Wolters Kluwer from a peak of more than 4%. The shares have generated strong returns for the portfolio: roughly five times our money in less than 10 years. Like RELX, Wolters Kluwer has transitioned from being a print publisher to becoming a software and data business and it has transformed its fundamental characteristics in the process. This digital transformation over time has been rewarded with a share price that meaningfully outperformed cashflow growth, reflecting investor willingness to pay higher prices for the story. We see Wolters as being at the more threatened end of software models from new AI developments. OpenEvidence, an AI-native challenger to Wolters’ UpToDate clinical reference tool, has emerged at scale in short order and is enjoying a buoyant funding market. 

Sage has transformed from being an on-premise accounting software provider to a cloud-native provider of a wide range of accounting and finance services that are mission critical to its customers and deeply entrenched in their workflows. This incumbency creates strong barriers to entry and pricing power, and most importantly, Sage is a trusted and essential part of how its customers do business. The pushback to concerns of AI disruption is that total accuracy of data is critical to customers and we have observed through our own analysis that large language models (LLMs) are fundamentally and inherently predisposed by their probabilistic modelling to lack accuracy. The risk/reward trade-off therefore remains strong for Sage, given a large and structurally growing market for digitisation and automation of business and the high incremental returns on capital the company can generate as its revenues grow. 

The second reason we lagged our benchmark during the third quarter was that Rolls-Royce and HSBC, which now account for 10% of the FTSE All-Share, delivered strong returns and we don't own them.

Rolls-Royce has doubled this year, with improved investor sentiment around aerospace & defence, and better-than-expected delivery of free cashflow driving strong share-price performance. We will concede that we have well and truly missed the boat, which is frustrating: perhaps we were influenced by having seen many previous false dawns, in which cashflow was promised but never materialised. Our analysis of the economics actually leads us to believe that earnings per share (EPS) are a better indicator of economic value than cashflow in this specific case because the profit and loss (P&L) captures an estimate for future liabilities on engine maintenance which cashflow does not. On this basis, the shares trade on a prospective earnings yield of over 3%, which calls into question the capital allocation decision to be buying back shares at the current valuation. We see better value elsewhere in the market.

HSBC recently overtook AstraZeneca to become the largest company in the FTSE 100 by market cap and has benefited from higher-for-longer US rates, as well as better sentiment around the Chinese economy and equity market. Like the banking sector more broadly, HSBC has enjoyed strong profitability from normalised rates and has been able to buy back large swathes of its own equity as a result. Our main argument for holding the UK domestic banks (which have also performed well) over HSBC was our ability to understand them better. Given HSBC’s significant presence in Asia (particularly China and Hong Kong), there will always be an element of the business and balance sheet into which we have little insight. This has been all but confirmed by the company’s recently announced plans to buy out minority investors in Hong Kong-based Hang Seng bank.

Contributors

Informa shares have continued to recover and in early October hit a new all-time high. Informa is the world leader in face-to-face events and we believe its core business is well insulated from the risk of AI disruption. What’s more, the ‘value add’ to its customers through the data these events create can be enhanced by AI, thanks to its well-invested technology stack. The global events industry looks well underpinned by structural growth and the economics of these events – which from Informa’s perspective are capital light and therefore generate high incremental returns on capital – are misunderstood. A 7% free cashflow yield therefore offers attractive value, in our view.

Confidence is quietly building in Dr. Martens' new management team and its efforts to turn the business around thus far. Chief executive Ije Nwokorie has highlighted product diversification as a key strategic priority and we note with interest that the Adrian loafer (we are yet to persuade our own Adrian to buy a pair, but rest assured we are trying) was Dr. Martens’ best-selling product for a three-month period earlier this year. Cost discipline initiatives have been positive thus far and the other key pillar of the new strategy – which is to focus on ensuring the distribution channels used in each geography are appropriate (and thus recognising that in some markets wholesalers play a key role) – makes a lot of sense. 

The revenue opportunity for Dr. Martens remains significant, in our view, thanks to strong growth in markets such as Japan and lots of ‘white space’ opportunities in the likes of China and India. Cost discipline should help to support margin expansion and free cashflow and as such from this juncture – a valuation of less than 1.2x enterprise value (EV) to sales – we think the risk/reward looks attractive and have been adding to the position. 

Aviva shares have continued to grind higher, with several large overseas (particularly US) investors boosting their presence on the shareholder register. The benefits of the company’s multi-year simplification of its portfolio – as well as a significant investment into technology – have begun to manifest in more recent years. Aviva is skewed towards more capital light and profitable business lines and its technological capabilities (which are well ahead of competitors) allow it to better serve and create value for its 21 million customers. Looking forward, Aviva looks well set to continue taking market share and, as a result, a 6% dividend yield that should be able to compound in the mid-single digits is compelling.

Activity 

We reduced some of our data and analytics names during the quarter, including RELX. Although AI is delivering an appreciable acceleration in revenue growth in RELX’s legal business and it is the highest calibre of our ‘digital winners’ with respect to its technology, it is also (perhaps rightly) the most expensive. As such, we thought it prudent to reduce our position as a free cashflow yield under 4% provides little downside protection.

We also took profits in 3i Group. Our analysis suggests that the discount retailer Action – which remains a fantastic business – trades on a look-through valuation of almost 20x EV/EBITDA. Given this valuation and Action's performance wielding an increasingly large influence over 3i’s share price (it accounts for about 70% of net asset value [NAV]), we thought it made sense to trim the position.

We have added to a number of positions which we believe to offer a compelling risk/reward:

• BP, which looks attractive given a significant hydrocarbon discovery off the coast of Brazil, planned cost savings and the prospect of bid rumours that surfaced over the summer returning
• SEGRO, which trades at about a 25% discount to NAV and offers a 5% yield that we believe can grow at mid-single digits
• Dr. Martens, given progress on the company’s turnaround by the new management team and a valuation of 1.2x EV/sales
• Berkeley Group, whose valuation at or just below book value offers an attractive risk/reward for a high-quality business with a desirable landbank that is retiring equity (buying back shares)

These changes have led to the portfolio increasing its price-to-earnings (P/E) discount to the FTSE All-Share with a higher dividend yield.

Outlook

We prefer to focus on structural trends as opposed to the shorter-term ebbs and flows of the macro. To that end, we will continue to assess the extent to which AI presents a threat or an opportunity to our holdings; this is not confined to the obvious (data companies, for example) as AI may affect company fundamentals where investors least expect it.

Although we are disappointed by the fund’s short-term performance, we understand why it has occurred and, in our view, it does not require any change in our investment approach. From here on in, it is for us to approach the portfolio with a characteristic mix of confidence and paranoia, and above all, an open mind. We are testing and re-testing investment theses and attempting to assess where we could be wrong, while making sure the portfolio contains a diversified collection of cashflows. We believe the fund’s cashflow and dividend growth will continue to compound steadily over the longer term.