Artemis UK Future Leaders plc
Q1 2026 update

Performance

In the first three months of this year, the trust's net asset value (NAV) decreased by 12.6% versus a decline of 6.6% in the benchmark index. The trust's weak absolute performance was mainly driven by concerns about the conflict in Iran and the wider repercussions of higher inflation, higher interest rates and weaker business and consumer confidence. Its weak relative performance was due to several of its media and technology holdings being seen as threatened by AI.

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

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.

Detractors

Some of our media and software holdings suffered from the perceived threat of AI, including Future, Next 15, LBG and GB Group. We see the risks as being overstated and not reflecting the importance of these companies' proprietary data, the opportunities that AI may create or their valuations, which in some cases are now extremely low.

Some of the trust's consumer-facing stocks were also weak (for example, MJ Gleeson, On the Beach and DFS). Although we do not believe the Iran war changes the three-to-five-year outlook for these businesses, it has affected the near-term prospects. Consumer confidence has been hit, inflation is higher and interest-rate expectations have changed. We met DFS towards the end of March and the company is already responding to a weaker backdrop by reducing capex on mezzanine extensions and cutting marketing spend.

Contributors

There were no obvious themes among the trust's winners during the quarter:

• Ashtead Technology's results were slightly better than expected (the market had feared an earnings downgrade). 

• Oxford Instruments confirmed that it had met expectations for the year to March, which was reassuring given the first half of the year had been weak. We have since sold our holding on valuation grounds.

• Young & Co.’s Brewery reported strong Christmas trading. Its share buyback is focusing on its non-voting shares (which the trust owns). These had been trading on a historically wide discount to the voting shares.

• Bloomsbury Publishing (a new holding) announced the publication dates for the next two novels by bestselling author Sarah J Maas, prompting an upgrade in earnings expectations.

Purchases

We started new holdings in Tristel and PZ Cussons. We also added to our existing holding in NIOX, which had lagged despite strong results. 

• Tristel supplies chlorine dioxide for high-level disinfection of medical devices (for example, ultrasound probes) in hospitals. Although the shares are not especially cheap (around a 5% free cashflow yield or 20x p/e) it has attractive financial characteristics. The company is growing revenues at 10 to 15% (all organically) and makes an 82% gross margin, which drives strong earnings growth. It is in the early stages of entering the US market, which has the potential to transform its business.

• PZ Cussons is a consumer goods business focused on four main markets: the UK, Australia, Nigeria and Indonesia. It has market-leading positions in several niches – for example, Cussons Baby is the top brand for baby personal care in Indonesia. The business has something of a chequered past but we felt a 9% free cashflow yield was attractive, given the progress it has made in addressing its historic issues, its strong balance sheet and cautious consensus forecasts.

Sales

We sold out of Oxford Instruments because we saw better value elsewhere following its strong relative performance. 

A rally in SSP's shares led us to sell the trust's holding. Costs are being treated as 'exceptionals' (and therefore not affecting the ‘underlying’ profits) and profits are not being converted into cash due to higher capitalised intangible costs. We were not comfortable with its use of supplier finance deals, which improve the headline leverage and cashflows but do not always match the economic reality.

We also sold the trust's small residual holding in Videndum, having decided not to participate in its refinancing. 

Most other sales involved trimming strong relative performers, including Serco, Coats and Secure Trust Bank.

Outlook

Events in the Middle East may have deferred a recovery in the UK smaller companies market. Higher inflation means interest-rate cuts may be delayed, weakening consumer sentiment. The Iran conflict does not, however, change our three-to-five-year outlook. We think it is worth emphasising the differences between the current situation and the 2022 inflation spike.

• The risk of knock-on inflationary impacts is lower than at the start of the Ukraine war because the labour market is significantly looser.  

• The movement in gas futures is (so far) much smaller than it was in 2022.

• The impact on non-energy related commodities (for example, agricultural commodities) is far lower.

With regards to the trust's portfolio, the main risk comes from its overweight to UK consumer discretionary stocks. We have trimmed its exposure to that part of the market at the margin. Real incomes are now likely to be broadly flat this year because of higher inflation. Any growth in consumer spending will thus be reliant on the savings rate falling. Because of the high starting point for the UK household savings ratio (around 10%, double that of the US), there is still scope for consumer spending to exceed expectations once confidence recovers.

AI threats are overstated

The recent sell-off in 'AI-threatened' stocks is overdone, in our view. No one yet has clarity as to how disruptive AI will prove to be (and we will need to continue to test our views). Our belief that shares have been oversold is based on the following factors:

• Proprietary data: As agentic AI hoovers up public data, we think first-party proprietary data will become more valuable. That should benefit the trust's holdings in companies such as GlobalData and YouGov.

• Low valuations: Valuations of the trust's holdings in stocks that are seen as ‘at risk’ are very attractive. If a stock valuation is high, you have to be very confident that your bull case is correct; but if it trades on a low valuation, you only need to believe the bear case might be wrong. 

• Overlooked opportunities: Small caps typically underperform in the early stage of a ‘crisis’ and then bounce back strongly thereafter. Part of this is due to their ability to be nimble – it is easier for them to adopt a new way of working or pivot to find new opportunities. Many of the companies that are seen as being most affected also have some of the biggest potential opportunities from using AI.

Opportunities when stock specifics are overlooked

Share-price moves in March (and in early April) have been dominated by geopolitical macro events, which are both fast changing and difficult to take a differentiated view on. At times like this, share prices can get disconnected from fundamentals and stock-specific news can easily be overlooked.

Social housing maintenance provider Mears is one example. In March, Mears reported strong results, upgraded its expectations for the year ahead and reported that its order book (of contracted future revenues) had increased by 38% to £4bn. Yet the shares were down 8% over the month. Over the past year, Mears’ 2026 earnings per share expectations have increased by 36% but the share price has fallen by 16%.

We believe the disconnect between Mears’ share price and its fundamental performance should be seen as an opportunity for active investors with a long-term perspective. We intend to take advantage of this and other similar situations that the current market environment is creating.