Artemis UK Future Leaders plc
Q4 2025 update
Source for all information: Artemis as at 31 December 2025, unless otherwise stated.
Review of the quarter to 31 December 2025
UK small caps lagged their larger counterparts by a considerable margin during 2025, which we think was mainly down to the lack of investor confidence in the domestic economy. Roughly 60% of small-cap revenues are earned in the UK, whereas it’s only 20% for FTSE 100 companies. This means that small caps are much more driven by how investors' views are influenced by media headlines, which were overwhelmingly negative in the run-up to November's Budget. We continue to see this as an opportunity to invest in market-leading brands on very attractive ratings, such as Dunelm, DFS, Moonpig, Greggs and Halfords.
Performance
The trust's net asset value (NAV) fell slightly (-1.25%) during the fourth quarter and its discount narrowed to 13.2%.
At the start of 2025, we were bullish about the prospects for UK small caps. So far, we’ve been wrong. Investor confidence in the sector remains lacking. Politics has been a headwind. Frequent policy changes and the delayed Budget sapped confidence. Yet despite the tricky politics and dismal investor sentiment, the companies we hold remain resilient, which we believe bodes well for the future.
| Three months | Six months | One year* | Three years* | Five years* | |
| Artemis UK Future Leaders plc (NAV) | -1.3% | -3.0% | -3.4% | -4.3% | -9.3% |
| Artemis UK Future Leaders plc (share price) | 0.7% | -1.7% | 0.0% | 0.0% | -11.5% |
| Deutsche Numis Smaller Companies plus AIM (excl. investment companies) TR | 1.6% | 4.6% | 11.8% | 21.2% | 13.6% |
Past performance is not a guide to the future. Source: Lipper Limited/Artemis to 31 December 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
The biggest stock-specific detractor in Q4 was Telecom Plus (a utility), which reported lower interim profits, as expected, due to a rephasing of metering and other energy-related costs. There was also speculation it would acquire fellow energy provider Ovo.
Future (specialist media) and Hilton Foods (food packager) also underperformed. Future's earnings estimates were unchanged but the multiple placed on those earnings has fallen further. For Hilton Foods, headwinds included high white fish prices and delays in getting one of its facilities signed off, having previously discovered traces of listeria.
Positive contributors
Norcros (bathroom and kitchen products), GB Group (fraud prevention) and Mears Group (housing) were among the strongest positive contributors.
Norcros saw earnings upgrades despite a continued tough bathroom market as margins benefited from previous warehouse consolidation, as well as an accretive acquisition of a wall-board manufacturer in Norway.
For GB Group, first-half results were merely in line with expectations, yet this was enough to prompt a modest rally, given how low its valuation had been.
Mears' share price made a partial recovery from weakness earlier in the year as it (yet again) increased its earnings expectations.
Purchases
We started new holdings in DiscoverIE and Bloomsbury Publishing during the quarter. DiscoverIE designs and manufactures specialist electrical components. These components typically represent a small portion of the total end product costs and can be expensive to replace mid-way through the lifecycle of the equipment. Since our previous meeting with the company a year ago, it has upgraded earnings forecasts by 5%, yet the share price has fallen by 15%. At the current valuation, we are buying into a group where management expects to grow earnings and free cashflow by double digits, yet the company is valued at under 15x earnings with a free cashflow yield of more than 6%.
With Bloomsbury Publishing, we felt an 8% free cashflow yield was attractive given its strong long-term record and the net cash position. Historically we had been put off by the hits-driven nature of the business, but we feel this is less of an issue now than in the past. Academic publishing is less lumpy than consumer sales and has increased to about one-third of the business. What's more, 70% of sales now come from the (more predictable) backlist. Harry Potter continues to account for more than 10% of revenues, 28 years after the first book was published, and the franchise should benefit from the new HBO series in 2027. Meanwhile, Disney has acquired the film rights for Katherine Rundell's novel Impossible Creatures.
Outlook
We are, if anything, even more excited about the future returns for UK small caps than we were this time last year. The operational performance of our companies has been solid if unspectacular, but their valuations sit well below their true worth.
Two pieces of evidence support this contention: first is the rate at which portfolio holdings are being taken over, at an average premium of close to 50%. In the past few months we have had cash bids for fund administrator JTC and a recommended offer for TT Electronics (albeit one that was subsequently voted down by shareholders).
Second is the number of portfolio holdings buying back shares, which has accelerated to a level we have never seen before. If the management teams allocating capital in this way anticipated a recession, they would retain their fire power rather than pushing the buyback button. The fact they are pressing on shows they do not believe the negative rhetoric. We also see a number of company directors buying their own shares.
What will be the catalyst that finally leads small caps to outperform? This only ever becomes apparent with the benefit of hindsight, but most likely in our view will be one of the following:
- If, as expected, there is no spike in unemployment, confidence should improve and consumer spending (which makes up 60% of the economy) would recover. The money is there – the savings ratio currently stands at 9.5%, close to twice its pre-Covid level. It is estimated that a single percentage point fall in this figure would provide a £17bn boost to the economy.
- As inflation trends lower, interest rates will continue to fall and mortgage rates will follow, stimulating the housing market. Savers will shift some of their now lower-yielding cash into higher-yielding alternatives such as shares.
If we are wrong and there is a major recession, small caps will take a hit. However, given low debt levels among most of our holdings (the median company in the portfolio is forecast to have no net debt this year), they will be able to trade through. While small caps tend to underperform in the year a recession starts, they also outperform in the subsequent year, making up all the lost ground.
FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.
CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.
Risks specific to Artemis UK Future Leaders plc
- Market volatility risk The net asset value of the trust, and the income it receives from its investments, can rise and fall because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency risk The trust’s assets may be priced in currencies other than the trust base currency. Changes in currency exchange rates can therefore affect the trust's value.
- Derivatives risk The trust may invest in derivatives with the aim of profiting from falling (‘shorting’) as well as rising prices. Should the asset’s value vary in an unexpected way, the trust value could reduce.
- Leverage risk The trust may operate with a significant amount of leverage. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested. A leveraged portfolio may result in large fluctuations in its value and therefore entails a high degree of risk including the risk that losses may be substantial.
- Charges from capital risk Where charges are taken wholly or partly out of a trust's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Smaller companies risk Investing in small companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.
- Income risk The payment of income and its level is not guaranteed.
Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.
