Artemis Future Leaders plc
Q3 2025 update

Review of the quarter to 30 September 2025

The takeover theme of recent years continued during the third quarter with US-listed corporate payments company Corpay’s agreed cash bid for Alpha Group – the B2B cross border FX solutions provider and our largest holding at the time. Meanwhile, FirstCash’s acquisition of pawnbroker H&T was completed in August.

Together with the record number of companies buying back their own shares, we see these deals as evidence that corporate management teams see the UK small-cap market as good value – a trend we expect to continue. These decisions are being made against a backdrop of continued negative media coverage, describing an anaemic UK economy with low consumer and business confidence. We continue to see value in our holdings, with the potential for substantial returns should sentiment improve.

Performance

Artemis Future Leaders plc (AFL) has had a challenging quarter from a relative performance perspective. Its net asset value (NAV) fell by 1.8% while the share price was down 2.4% in a rising market. A general deterioration in sentiment towards UK domestic stocks – where we continue to be overweight – has been unhelpful. Although this has been a drag on recent returns, we believe the lower valuation of these stocks creates an opportunity for the future. Real household disposable income remains strong in the UK, but consumers are deferring spending, choosing to save instead. Once confidence improves and spending picks up, we believe our holdings have the potential to make substantial returns. 

The trust was trading at a discount to NAV of 14% at the start of the quarter, which widened to 16% in August. We took this opportunity to add to our personal investment in AFL. September saw some recovery: the trust's NAV rose by 1.3% in the month and the discount narrowed back to 14%.

Past performance is not a guide to the future. Source: Lipper Limited/Artemis to 30 September 2025.

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 trust. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class.

*Artemis assumed management of the trust on 10 March 2025.

Negatives

Cosmetics company Warpaint London was the most significant detractor during the quarter, following a downgrade on lower US revenues due to tariffs and because a large Scandinavian customer reduced buying for two months.

Hilton Food, the meat and fish packager, warned that its full year results would be towards the bottom of the range on reduced demand for white fish, as prices spiked up by 60% and traces of listeria were identified in one of its facilities.

Package holidays provider On The Beach also detracted after cutting its profit forecasts due to later customer booking and the closure of its small B2B business.

Positive contributors

Alpha Group made the largest contribution to performance over the quarter as its share price climbed 31%, following Corpay’s aforementioned cash bid. At 4250p per share – a 55% premium to the undisturbed price – this feels like a reasonable offer to us. It values Alpha at a price-to-earnings (P/E) ratio of 45x (which does not include interest income) with a free cashflow yield of around 5%. We sold out of Alpha in August, pending the takeover.

Secure Trust Bank was another strong performer, gaining 42% in Q3 on the back of positive H1 results and increasing confidence that it will deliver on its near-term return on equity target. Medium term targets are likely to be revised higher later in the year, following the bank’s decision to exit its loss-making motor finance business.

JTC, the corporate services and fund solutions provider, rose 55% on the back of two cash takeover approaches from private equity firms Permira and Warburg Pincus. Conversations are ongoing and there is not, as yet, any formal bid. 

Consultancy group Next 15 gained 41% during the quarter. Investors could be speculating on the previous announcement of takeover interest in some of the group’s companies. 

Purchases

We initiated new positions in Greggs, Ashtead Technology and Science Group during the review period.

Greggs' 8% free cashflow yield is attractive for a company with an excellent long-term record, a strong balance sheet and significant scope to continue rolling out new stores (at high incremental returns) without cannibalising existing sales. The share price has suffered from challenging short-term trading, which was weather related to some extent, but we see this as an opportunity.

We also opened a modest position in subsea equipment-rental firm Ashtead Technology. The combination of forced sellers (about 20% of its shares were held by AIM funds which had to sell before the company moved to the main market on 6 October) and a modest earnings downgrade had driven the valuation to a P/E of 7x or a double-digit free cashflow yield. While this is a cyclical business, it operates in growth markets and the critical nature of its products (with a disproportionally high cost of failure) means it can sustain high returns.

Science Group has two main divisions: one is a Cambridge consultancy specialising in technical and scientific projects, with a global niche position in robotic surgery and drug delivery; the other sells kit that removes cardon dioxide from submarines and replaces it with breathable air. Around one third of the market cap is forecast to be in net cash next year, giving the company scope to continue accretive bolt-on acquisitions. A P/E of 14x or a 7% free cashflow yield for 2026 feels good value.

We also took part in a placing of new shares in thread manufacturer Coats, which raised money to fund its acquisition of Ortholite. Ortholite makes open-cell foam insoles for trainers, which are breathable and provide cushioning. It already has more than 35% of the global market in open-cell foam insoles (which in turn account for about 25% of the overall insole market) and it continues to grow its market share. Coats' shares have been supressed by concerns regarding US tariffs but trading has remained resilient so far. If it can achieve its medium-term targets of organic growth above 5% at 19 to 21% margins, the 10% free cashflow yield looks very attractive.

We added to several holdings during the quarter, including NCC, Harworth, Norcros, IntegraFin and Wilmington. 

We swapped some of our holding in J D Wetherspoon into Young's, reflecting relative share price performance.

Gearing in the trust ended the quarter at 8%, reflecting our optimism in the outlook.  

Sales

We sold out of Alpha ahead of the completion of its recommended offer. We also sold out of Auction Technology Group on concerns about current trading, relatively high leverage and the lack of a dominant brand.

We took some profits in Secure Trust Bank following very strong performance and trimmed Serco, Brooks Macdonald and Avon Technology on share price strength.

We also trimmed some of our consumer facing holdings (Dunelm, Wickes and J D Wetherspoon) to enable the purchase of Greggs without materially increasing our exposure to an area where we already have significant exposure. 

Outlook

We are expecting an increase in negative headlines in the run-up to the Autumn Budget on 26 November, which could affect confidence and therefore consumer spending in the short term. But ultimately consumer spending is dictated by economic fundamentals and we believe the fundamentals look solid.

Meanwhile, household debt (as a percentage of gross disposable income) is at its lowest since the late 1990s, while the savings ratio of about 11% is more than twice its pre-Covid level. In other words, the UK consumer is in a good position. People have money in their pockets; they just don’t have enough confidence to spend it. 

We estimate that every 1% change in the UK’s household savings ratio is equivalent to about £15bn of additional spending. At some point, sentiment will change and that spending will be unlocked, which we believe will be significantly more powerful than any tax rises in the Budget. 

Although the labour market has softened, we continue to believe a spike in unemployment and a resulting recession are unlikely. Instead, we think there are two other scenarios that are far more probable and represent something of an each-way bet for the small-cap sector.

On the one hand, if employment doesn’t collapse, consumer confidence and spending should slowly increase. This would push up economic growth in the UK at a time when it is faltering in the US. If the relative valuation disparity between US and UK stocks prompted a modest investor switch, fuelling flows into the UK, we anticipate that small-cap returns would be turbo-charged, given they benefit from greater domestic revenues.

On the other hand, if we are wrong, the status quo would continue: a rather moribund economy where, even though investors don’t return to UK smaller companies, low valuations would mean takeovers and share buybacks continue to drive returns. We believe our portfolio would continue to be resilient in such an environment.

The best time to invest in a stock is arguably when people are worried and the share price is low, before the recovery. Investors can potentially make a lot of money when things change and the share price bounces. So if you think of the UK small-cap market as like a stock, now would appear to be an optimal time to invest.