Artemis Income Fund
Q1 2026 update

Review of the quarter to 31 March 2026

Global stock market indices set several all-time highs in the first two months of 2026. Within that, the themes that characterised the latter part of 2025 – such as capital-intensive businesses outperforming capital-light software stocks, and weaker returns from the US market relative to its international peers – intensified.

This advance, however, came to a swift halt at the end of February when President Trump announced that ‘major combat operations’ in Iran had begun. The US-Israeli campaign and retaliatory Iranian strikes on energy infrastructure around the Gulf resulted in a more than 60% gain in the oil price in March and the biggest quarterly gain for crude since the first Gulf War. Amid worries of an inflation shock driven by higher energy prices, hopes of interest-rate cuts faded.

While the UK market had been among the world's best performing markets in the first two months of the year, it fell sharply in March. Given its significant weighting to oil & gas companies, the FTSE All-Share may have been expected to perform better, but gains for energy companies were offset by a significant sell-off in other parts of the market, particularly among the banks and in sectors exposed to any weakness in consumer spending

Performance

The first quarter of 2026 was a challenging period for the relative performance of our portfolio. This underperformance was initially driven by the market’s fears about the disruptive effects of AI on a range of incumbents and by investors' desire to protect themselves from this threat by owning companies with a high proportion of physical assets, such as commodity producers. As markets sold off in March, meanwhile, the fund's underperformance was caused by its underweight in energy stocks, together with the resilience of some of the larger, more defensive companies in the UK market, which we do not own.

Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 31 March 2026 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

Our underweight in Shell (2% in the fund versus 6% of the FTSE All-Share) was costly given the near doubling of the oil price. We prefer BP, as we explain below.

Our zero weightings in Glencore and Rio Tinto also detracted from returns as commodity prices rallied for much of the quarter. Expectations were that the ongoing surge of investment in building data centres by AI hyperscalers would tighten supplies of various metals and so push their prices higher.  Commodity producers present investors with a number of significant challenges. It is inherently difficult to assess their competitive advantages and to forecast their cashflows. The fund has therefore been consistently underweight in the natural resources sector. When commodity prices rise, this can be painful. History would suggest, however, that these commodity rallies tend to be relatively short lived.

Finally, not owning BAE Systems cost the fund about 50 basis points of performance. The shares rallied strongly in response to heightened geopolitical tensions both in the Middle East and Greenland. We do not believe BAE’s cashflow and return on capital characteristics are sufficient to justify its elevated valuation multiple.

In terms of stocks we do own, Informa, 3i and EasyJet detracted from performance.

Informa is the global leader in business-to-business events and has grown from organising 10 trade fairs 12 years ago to a portfolio of over 600 of the world’s leading exhibitions. Its shares fell in response to economic concerns and due to its exposure to events in the Middle East. We concede that the business could face shorter-term challenges but we believe Informa to be under-appreciated (and perhaps misunderstood) by the market. The events it organises are long-term, highly profitable with strong, recurring cashflows. They also generate huge quantities of valuable and unique first-party data. Informa – having invested materially in its technology stack – is increasingly beginning to monetise this data through improving the customer value proposition at its events. It is now making inroads into digital lead generation. For a global leader in an industry underpinned by structural growth that generates high returns on capital, Informa’s shares offer significant value, in our view. Its 8% free cashflow yield and its 13x forward price-to-earnings (p/e) ratio are higher and lower, respectively, than the FTSE All-Share.

3i underperformed due to softer-than-expected short-term sales trends at Action, its discount retailer, and the long-awaited announcement of Action’s entry into the US market. It plans to allocate €350-400 million to finance this expansion and aims to open 100 US stores by 2030, with the first store opening planned for 2027. We believe the market reaction to be harsh and would point to Action’s operational excellence in its impressive rollout across Europe thus far and to the substantial cashflow it has generated in the process. The risk/reward of Action’s foray into the US looks interesting in our view; failure would not pose an existential threat to its ongoing structural growth in Europe. But should there be signs that Action's offering is resonating with American consumers, this would represent a material growth opportunity and substantial long-term value could be created for 3i's shareholders. We topped up the position during March’s weakness.

EasyJet sold off along with airline stocks worldwide, due to travel disruption and higher jet fuel prices. The sell-off is understandable but we believe it to be overdone. EasyJet has no direct exposure to the Middle East and, like most airlines, it is relatively well-hedged against increases in fuel costs. The shares now trade on c.0.85x book value – in other words, less than the replacement cost of EasyJet’s fleet of aircraft. They ascribe zero value to its brand, its desirable slots at busy, capacity-constrained airports, and a holidays business that continues to grow rapidly and which is likely to achieve profitability targets well ahead of schedule. With all of this in mind – as well as a net cash balance sheet and more than 13% growth in dividends per share year-on-year – we believe the risk/reward looks attractive and added to the position in March.

Contributors

The top contributor to returns – perhaps unsurprisingly – was BP, which benefitted from the conflict-induced rally in oil prices. Beyond this shorter-term windfall, the company continues to re-focus on its core competencies. We would also note that BP has sufficient proven oil reserves to maintain production at current levels for 23 years. By contrast, Shell’s production is likely to begin declining in 2030.

Part of BP’s reserves are accounted for by Bumerangue, the significant discovery it made last year off the coast of Brazil. Its full extent is still being appraised, but it seems reasonable at this stage to suggest that Bumerangue could be worth in the region of 15% of BP’s current market capitalisation. BP is more levered than Shell but has been attempting to pay down debt and strengthen its balance sheet. We believe the risk/reward looks interesting and we think oil prices could remain elevated.  

Renewable energy generator SSE was another strong performer. Its shares have re-rated in recent months given its low risk of AI disruption and robust earnings guidance. In late 2025, SSE announced plans to invest £33 billion over the next five years, the majority of which will be allocated to regulated networks. As a result, the company’s earnings will increasingly be skewed to index-linked and regulated sources, which should ultimately lead to higher quality, more predictable cashflows. We have been taking some profits given the re-rating in the shares, with SSE now yielding less than the UK market.

Like SSE, Tesco has been attracting investors' attention because there would appear to be little risk that it is disrupted by AI. It was also a beneficiary of a flight to the more defensive parts of the stock market. There were no fundamental improvements over the quarter, but its competitive position continues to strengthen, with higher bond yields representing a challenge to some of its highly indebted, private-equity-owned peers. It remains highly cash generative, with a dividend yield of over 3% supported by significant share buybacks; Tesco has bought back 15% of its market capitalisation over the past five years.

Activity

We took advantage of share-price weakness to added to a number of holdings including EasyJet and 3i, as described above. 

On the other side of the ledger, we reduced our holding in Next, which has been an excellent performer since we invested in 2020, with a total return of 127%. The market is beginning to recognise that Next is no longer primarily a high-street retailer but rather a retail aggregator with a global portfolio of brands. With its p/e multiple approaching 20x in the early part of the quarter, we decided to take some profits. We would not be surprised to see the shares affected by fears of disruption to Next’s platform from agentic AI.

Outlook

This has been one of the more difficult patches for the fund's performance in recent memory but we continue to believe our portfolio offers better long-term return potential than the UK market. While we are always alive to ways we can improve and better implement an investment process that has served us well for 25 years, we have not made wholesale changes in response to the underperformance. In fact, in many cases our resolve and conviction in our holdings has only grown stronger.

The core beliefs that underpin our investment process will not change. We remain focused on cashflows first, on dividends second, and on identifying business whose medium-to-long-term cashflow potential we believe is under-appreciated. We remain long-term investors, with an average holding period of more than eight years. In times like these, when the ebbs and flows of geopolitics dominate market sentiment and investor positioning, we think it is essential we stick to our approach. This is based on our belief that cashflows, dividends (cash returns) and returns on capital are what drive share prices over the long term. Sticking to our knitting has helped us to recover from periods of underperformance in the past. We do not believe chasing performance by making wholesale changes to the portfolio to be the correct course of action. 

We continue to see evidence of robust fundamental performance from our companies. Many have met or exceeded expectations and have chosen to reflect this progress via increases in their dividends per share (DPS) in the latest reporting season. To give some examples: NatWest increased its DPS by 48%; Imperial Brands by 27%; 3i by 20%; Next and LSEG by 16% apiece; EasyJet by 14%; and Tesco by 13%.

As a result, our forecasts suggest the portfolio’s dividend is likely to grow by as much as 14% in the current financial year, which is well in excess of our long-term dividend growth rate of 5% per annum. We also believe it is important to view this strong dividend growth in the context of the portfolio’s characteristics versus the market. A near 7% free cashflow yield covers a dividend yield of 4%, which is a 15% premium to the market yield of 3.5%. With a p/e multiple of 11.7x, the fund is more than 10% cheaper than the market, which trades on a p/e multiple of 13x.