Artemis Funds (Lux) – UK Select
Q3 2025 update

Objective 

The fund is actively managed. Its aim is to increase the value of shareholders’ investments primarily through capital growth. 

Review of the quarter to 30 September 2025 

Global equity markets performed well throughout the quarter as fears over the impact of tariffs abated and expectations rose that the Federal Reserve would cut interest rates more aggressively through the second half of 2025.  

At a sector level the strongest performance globally was seen in US tech, while financials, aerospace and defence also did well. In the UK, pharmaceuticals, staples and tobacco outperformed while housebuilders and domestic consumer cyclicals struggled. 

Long-dated gilt yields reached a 20-year high during the middle of the quarter, causing a sell-off in domestic stocks where the fund is overweight. Meanwhile, the upcoming Budget cast an increasingly long shadow, with talk of a £50bn black hole and speculation around changes to inheritance tax, stamp duty, national insurance on buy-to-let income, gaming duty, bank taxes, landfill taxes and wealth taxes.  

However, the UK market rallied towards quarter-end, aided by a more dovish message from the Fed that in turn led to a reversal of the recent rotation into more defensive sectors.  

Artemis Funds (Lux) – UK Select made 5.9% during the three-month period, compared with 6.9% from its FTSE All-Share benchmark and 2.4% from its UK Flex-Cap Equity sector average.  

Past performance is not a guide to the future. Source: Artemis/Lipper Limited, class I accumulation GBP 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 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 overstated US profits from accrued supplier income (payments from suppliers for in-store promotions). While very disappointing, we take some comfort that its non-US businesses are run, and accounted for, on a separate basis, so believe this issue is contained. We await the results from Deloitte's forensic audit into the US operation to get a better understanding of the future return potential of that business. In the meantime, we believe that the UK and rest-of-world businesses support the current valuation.   

Airline and package holiday operator Jet2 saw weak 'late' bookings. A dip in consumer confidence and the addition of new bases at Luton, Bournemouth and Liverpool saw the company forced to discount seat-only fares to clear inventory. While this is disappointing in the short term, we expect the company to return to growth in 2026. In the meantime, a P/E of 6.5x and a third of the market cap in cash support its valuation. 

Delays in new site openings saw homebuilder Barratt Redrow downgrade its volume guidance for the fiscal year to June 2026, taking 10% off consensus forecasts. It also increased its building safety provision which will remove an additional £400m of cashflow out of the business over the next two years as it remediates historic buildings. We continue to believe that the business remains well placed to benefit from more supportive government policy around planning and, in time, lower interest rates.  

From a relative point of view, not owning AstraZeneca, British American Tobacco and Rio Tinto acted as a drag on performance as the former two benefited from the rotation into defensive sectors, while the latter was aided by the rally in copper prices.  

Contributors 

Banking stocks continued to perform well for the portfolio. The fund's largest holding, Standard Chartered, released strong interim results which, combined with better-than-expected capital generation, supported a further extension of its buyback programme. We continue to believe that strong performance in the less capital-intensive parts of the business such as wealth management leaves the shares offering an attractive combination of strong growth and rising returns.  

Closer to home, Barclays upgraded its full-year guidance by about 5%. Encouragingly, the strategic re-focusing of the investment bank into higher-returning areas where it has a competitive advantage looks to be building some momentum. Despite the strong performance, the bank remains one of the cheapest in Europe.  

International Airlines Group (IAG) had a good summer, reporting results that were significantly ahead of expectations. Despite heavy investment into the business, leverage continued to fall, leaving IAG well placed to add to its €1bn buyback programme later this year.  

International Personal Finance's results showed geographic and product diversification is gaining traction with customers. We believe this to be one of the most exciting and misunderstood growth stories in the UK small-cap index. Private equity appears to share this view as the shares benefited from an approach from Basepoint Capital during the quarter. 

Melrose saw a modest re-rating as the civil aerospace cycle at Boeing and Airbus began to ramp up. However, it continues to languish on a significant discount to its peers, despite recent strong results, so we added to our position.  

From a relative point of view, we benefited from avoiding LSE, RELX, Unilever and Haleon, all of which underperformed. 

Activity 

We continued to add to retailer Marks & Spencer as evidence builds that it is recovering well from the cyber-attack.  

Elsewhere we continued to add to positions in companies that will benefit from lower interest rates, namely housebuilders Bellway and Vistry and property developer Shaftesbury. 

We topped up our holding in bookmaker Entain as momentum in the business remains strong and the shares have fallen by more than 15% since former prime minister Gordon Brown called for taxes on the sector in the UK to be more than doubled. Such a move is in our view unrealistic as it would likely cause a sharp fall in tax take as betting moves offshore.  

Sustainable packaging company Smurfit Westrock has been weak on falling paper prices. In response, Smurfit and its peers in the US have announced significant capacity cuts. Historically these have marked the turn of the pricing cycle and we believe it will be no different this time so added to our position.  

In mining, we added to Anglo American, following its merger with Teck, and Weir, which should benefit indirectly from the rally in copper and precious metals as its customers look to maximise short-term production to benefit from high metal prices.   

We funded the additions above by taking profits in Barclays and Rolls-Royce to keep overall position sizes in proportion following strong performance. 

Fund 10-year discrete performance

Past performance is not a guide to the future. Source: Artemis/Lipper Limited, class I accumulation GBP 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 fund. Returns may vary as a result of currency fluctuations if the investor’s currency is different to that of the class. 

Outlook 

The focus in the UK remains on the forthcoming Budget. We believe meeting the fiscal rules is a long way from being an insurmountable challenge and it is hard to see how the Office for Budget Responsibility can do much more than tweak its forecasts – both for its own credibility and to avoid becoming the effective driver of UK fiscal policy.  

We expect a combination of tax rises and deferred spending restraint that will see the UK limbo under the fiscal bar for another year. With the government so far having little to show for its ‘growth, growth, growth’ mandate, perhaps there is an outside chance of some stimulative policies on housing/business rates? 

In the meantime, we remain confident in the portfolio. The companies we own are well positioned to continue raising earnings over the coming year, offer a distribution yield (buybacks and dividends) of just under 6% and trade on an average of just 10.9x forward earnings (the market is on 12.9x on the same basis as at 10 October 2025), offering scope for a re-rating once the uncertainty around the Budget clears.