Artemis Income Fund
Q4 2025 update

Review of the quarter to 31 December 2025

UK equities delivered another strong quarter of returns in Q4, with the FTSE All-Share gaining 6.4%. This takes 2025 total returns for the index to 24.0%, its best annual performance since the 2009 recovery from the Global Financial Crisis and the first time it has surpassed 20% in a calendar year in more than a decade.

From a domestic perspective, the UK served up its standard portion of negative news, with lashings of uncertain politics, pressures on public finances and a sluggish economy. Once again, however, the narrative proved too pessimistic, with consumer spending remaining resilient and growth beating expectations. More importantly, the undervaluation together with the ‘global not local’ nature of many of its constituents (with the majority of revenues derived from overseas) was enough to propel the UK market to the upper end of equity returns in 2025.

Domestic outflows have continued, but there have been net inflows into UK equities from international investors. A theme observed in the latter half of 2024 was the emergence of large US-based investors appearing on the shareholder registers of UK companies and this has continued for much of 2025. Such has been the weakness of the dollar over the past year (the US currency had its weakest first half in 50 years and its worst calendar year since 2017) that returns on UK equities for US-based investors have been much higher, with the FTSE All-Share making 33% in dollar terms.

M&A activity also accelerated in 2025, with the total value of completed deals in the UK reaching £49bn. Portfolio holding Spectris was the subject of a bidding war between two US private equity firms and was eventually taken out by KKR towards the end of the year at a premium above 100%. We believe a bid approach remains likely for several other holdings, such is the undervaluation of many areas of the UK market.

Performance

The fund returned a healthy 5.8% in the fourth quarter, but lagged behind the FTSE All-Share, which returned 6.4%. This brings year-to-date portfolio returns to 21.7%, versus the index return of 24.0%. It is unusual to be disappointed by a portfolio return of this magnitude – the fund’s best annual performance since 2019 – but as active managers our aspiration is of course to outperform the index. It is inevitable however that a differentiated portfolio with positions sized by the risk/reward we believe to be on offer – with less attention paid to benchmark weightings – will on occasion underperform. Nevertheless, it is always frustrating when we do.

Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 31 December 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.

Contributors

The UK domestic banks capped off a strong year of performance (Lloyds up 87.9%, Barclays up 82.0% and NatWest up 71.0%) in the fourth quarter. All three continue to benefit from a step-change to profitability from higher rates, with the structural hedge set to drive earnings upgrades over the next few years.

In addition, the Bank of England reduced its Tier 1 capital requirements for banks from 14% to 13% towards the end of the year, which should leave more excess capital and in turn result in more distributions to shareholders through dividends and buybacks.

The UK banks have performed phenomenally well recently – NatWest has outperformed the Magnificent Seven in local currency terms over the past five years – and we think it is important to recognise that the potential risk/reward trade-off has shifted, with all three now trading at or above their book value. Nevertheless, they look well placed to continue grinding out decent returns through a combination of dividends and share buybacks from here and we would note that they are all heavily provisioned for any rise in unemployment and/or deterioration in economic growth.

IG Group shares made several all-time highs in 2025, with total returns for the year of 39%. A December trading update showed good progress across the group, with double-digit customer growth, 46% year-over-year revenue growth at IG’s US business Tastytrade and management suggesting the company will hit medium-term revenue growth targets ahead of schedule. We believe IG continues to offer an attractive balance of risk/reward despite a strong run and prospective cashflow growth could be significant if IG is able to take market share in the structurally growing self-directed trading industry. The company, like many in the UK, has been buying back shares in significant fashion – its share count has fallen by more than 22% since 2022 – and there is more of the same to come. With all of this in mind, we consider a free cashflow yield of more than 10% to be compelling.

Detractors

Whitbread shares – like many UK domestic businesses – were weak going into the Budget and sold off sharply as the company estimated an 8 to 10% hit to profit before tax from the 2027 financial year onwards, given an increase in the rateable value of its hotels. There are a number of reasons why we believe this weakness to be overdone. First, even if this worst-case scenario does play out, it is unlikely to affect profits for the next four years or so thanks to the appeals process and it could be that consultations with the government result in the eventual hit to profitability being less than expected. We have added some capital to the position and still believe the risk/reward to be attractive: the shares trade significantly below Whitbread’s asset value and we still see a path to improved earnings growth, returns on capital and cashflow. Whitbread’s scale is a significant competitive advantage and we believe uncertainty and a more challenging tax regime to pose a larger threat to independent hotel brands in the UK, which still account for about a third of the market.

3i's shares sold off sharply in response to slower growth for discount retailer Action in France, likely as a result of macroeconomic weakness. At one point they had de-rated by as much as 30% in response to a slowdown in one of its markets; growth was up 13% for Action France in the previous October, so a tough comparator, and Action’s headline like-for-like revenue growth was 8%, which suggests there were no material issues outside France.

However, given 3i’s much wider ownership and higher valuation compared with a few years ago, we have been reminded of the importance of risk management (we have been reducing the position for some time) and how harsh share price reactions can be when growth disappoints.

Nevertheless, we think the market’s reaction has been excessive and do not believe there is any evidence that Action’s model – of rolling out at scale, offering materially lower price points than its competitors and generating high returns on capital and substantial amounts of cash in the process – is challenged. The US opportunity will be outlined at a capital markets day in spring 2026; were Action to open successfully in the world’s largest economy, this could represent a step-change in revenue and cashflow growth. We have added to the position in response to the weakness.

Informa shares fell by 8% in December, perhaps as a result of profit taking after a rally of more than 50% in the shares post-Liberation Day. Informa remains underappreciated in our view, as the world leader in the structurally growing events industry. We also believe the economics of these events – and their high incremental returns on capital – to be misunderstood. With this in mind, an 8% free cashflow yield looks very attractive.

Significant activity 

We sold out of our Spectris holding ahead of its takeover by US private equity giant KKR.

In recent months, we have been building a position in industrials business IMI, which has diversified exposure across a number of fluid and motion-control applications. It is a high-quality business generating mid-teens returns on invested capital that we believe is well equipped to deliver attractive medium-term cashflow growth. IMI’s mission-critical products are being digitalised and can therefore provide a continuous and valuable stream of data that can be used to reduce downtime and improve efficiency.

Outlook

Despite domestic outflows and a pessimistic narrative, UK equities posted their best returns in 16 years in 2025. While we never profess to have any particular insight that allows us to predict the macro or markets with any accuracy or consistency, we think the ingredients remain in place for further gains. Much of the UK remains undervalued when compared with peers and there are increasing signs that international investors are seeking to profit from this imbalance. Share buybacks continue apace, which we believe to be a more significant driver of dividend and EPS growth than the market gives them credit for. We also saw some tentative signs of a revival in the much (and fairly) maligned UK IPO market towards the end of the year, with the potential for some large listings in 2026.

The portfolio – like the UK market – offers attractive value. Many of our companies continue to deliver robust fundamental performance, take market share and equip themselves to raise cashflows and dividends over the medium to long term. Despite a strong year of returns in 2025, a portfolio that in aggregate offers a free cashflow yield of around 7% (covering a dividend yield of a little more than 3.5%) that can grow over time is a compelling proposition.

The total market capitalisation of US equities is not far off $70tn (£53tn). The figure for the FTSE All-Share, in comparison, is around £3tn. Such is the scale of the US equity market today – and its prevalence in investors’ portfolios – it would not take a particularly pronounced rotation away from US equities to significantly benefit other markets. This, combined with a portfolio of interesting companies that we believe offer a good balance of risk/reward in their own right, results in an interesting set-up for the year ahead.