Artemis Income (Exclusions) Fund
Q1 2026 update

Review of the quarter to 31 December 2025

Global stockmarket 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 Artemis Income (Exclusions) Fund fell by 5.2% in Q1 2026, underperforming the FTSE All-Share, which returned 2.4%.

This was a challenging quarter for the portfolio, which lagged the benchmark significantly. This underperformance was initially driven by the market’s fears about the disruptive effects of AI and by investors' desire to protect themselves from this threat by owning companies with a high proportion of physical assets, such as commodity producers. Thereafter, our underperformance was due to the zero weight in oil, together with the resilience of some of the larger stocks in the benchmark, which we do not own.

It is inevitable that, when sectors in which we cannot participate – such as oil & gas – perform well, it will be reflected in the fund's relative performance. That was the clearly case over the past quarter, with around half of the fund's underperformance relative to the market being a result of strong returns from stocks and sectors that we are not permitted to 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

Informa sold off given macroeconomic concerns, particularly with reference to its growing portfolio of events in the Middle East. We concede there could be some shorter-term challenges for the business but believe Informa to be under-appreciated and perhaps misunderstood by the market. 

Informa is the global leader in business-to-business events and has grown from 10 trade fairs 12 years ago to a portfolio of over 600 of the world’s leading exhibitions brands. The events it organises are 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. We 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

IG Group traded higher as a beneficiary of recent market volatility. Perhaps more importantly, it reported some strong FY25 results, with 10% growth in trading revenue and 15% growth in profit before tax, year-over-year. Significant progress has been made with respect to efficiency gains and cost savings. This has freed up resources for additional marketing spend, which should help the business to grow more quickly. We feel the risk/reward to be attractive from here, given strong and improving momentum in the business, with the shares on a 10% free cashflow yield, with a net cash balance sheet. Having said this, the shares rallied some 50% between late November and early April so we have taken some profits.

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 £33bn 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 of it being 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 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. 

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. 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, hence the additions to some positions (albeit modest).

The core beliefs that underpin our investment process will not change. We remain focused on cashflow first, 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 would 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%; 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 10% cheaper than the market, which trades on a p/e multiple of 13x. 

We continue to believe our portfolio offers better long-term return potential than the market and these characteristics therefore give us cause for optimism after what has been a difficult period for the portfolio.