Artemis Funds (Lux) – UK Select
Q1 2026 update

Objective 

The fund is actively managed. Its aim is to increase the value of shareholders’ investments primarily through capital growth.

Review of the quarter to 31 March 2026 

It was a frenetic quarter. Investors' initial preoccupation was with the potential for a new generation of AI tools to disrupt large parts of the technology sector, particularly software companies. The de-rating was stark and was mirrored by a corresponding surge of enthusiasm for 'old economy' businesses with real assets deemed less vulnerable to AI. The sell-off in 'AI losers' vividly illustrated how brutally price-to-earnings multiples can be compressed when sentiment turns in today's thematically driven, short-term market. The pool of capital controlled by investors whose decisions are guided by bottom-up company analysis is now dwarfed by flows from market participants trading between thematic buckets of stocks. 

At the start of March, the market's attention shifted away from AI and towards the conflict in the Middle East and its implications for the global economy. As energy prices soared, there was a rapid re-appraisal of the outlook for inflation and interest rates and the FTSE All-Share retreated from its record highs.

The biggest underperformers in the March sell-off were sectors deemed sensitive to higher interest rates, such as consumer discretionary stocks and real estate companies. More surprisingly, the consumer staples sector, usually a defensive area, also came under pressure. Some disappointing earnings and higher input costs reignited fears over these companies' growth. At the same time, mining and industrial companies outperformed despite worries about slowing growth in the global economy. This may have reflected a belief that the drive towards electrification would be accelerated by events in the Middle East.

The moves were magnified because the positioning of commodity trading advisor (CTA) funds had reached extreme levels before the conflict. These funds' long positions in European and UK banks had been popular and profitable trades, so share prices in these areas fell sharply as the CTAs de-risked their portfolios. They also rushed to unwind their short positions in stocks deemed to be potential ‘AI losers’, leading to a bounce in the share prices of companies such as RELX, LSEG and Experian. 

In this environment, our underweight position in energy stocks, combined with our overweight in financials, consumer cyclicals and housebuilders, acted as a significant drag. 

Artemis Funds (Lux) UK Select lost 6.4% during the three-month period, compared with gains of 2.4% from its FTSE All-Share benchmark and 6.7% from its UK Flex-Cap Equity sector average.  

Past performance is not a guide to the future. Source: Artemis/Lipper Limited, class I accumulation GBP 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 fund. Returns may vary as a result of currency fluctuations if the investor’s currency is different to that of the class.

Detractors 

Being underweight in the oil majors Shell and BP was unhelpful for relative returns. Shares in both companies rallied along with the oil price. BP outperformed on news that some of Shell’s assets in Qatar had been damaged by Iranian attacks and could take some time to fix. 

Shares in private equity group 3i fell in response to a poorly received presentation from Action, the discount retail chain that is its largest portfolio holding. The weakness was a response to two things. First, disappointing sales in France, which accounts for just under a third of its business. Second, the announcement of a pilot project in the US, where Action intends to open its first stores towards the end of 2027. Structural differences in supply chains in the US mean these will not be cookie-cutter replicas of the successful store format Action has rolled out across Europe. This created fears that the new venture would add costs and potentially distract management from its core European business. Memories of Tesco's unsuccessful attempt to expand in the US continue to linger among UK-based investors. But there are examples of European retailers finding success in the US, such as Primark, Inditex, Ikea and Lidl. We see the costs of this expansion (€350 to 400m) as reasonable given the potential size of the market. In the meantime, Action's expansion across Europe continues apace. 

The market reacted badly when Vistry announced that Greg Fitzgerald, its chief executive and chairman, would relinquish his role as chair at its AGM and then stand down as chief executive once a successor is found. Fitzgerald was the architect of its merger with Countryside and the re-focusing of the business on a partnership model. His departure from both roles before this new model is fully proven was poorly received. In addition, the company offered a more cautious outlook on 2026, with weaker trading in London and the south-east resulting in an increased level of discounting to spur sales. We subsequently saw similar messages from Berkeley Group and portfolio holding Barratt Redrow. Higher mortgage rates and higher input costs will provide a headwind to earnings across the housebuilding sector this year. After their recent falls, however, the valuations of housebuilding companies on a price-to-book basis are now at levels similar to those seen in the global financial crisis. 

The launch of an AI-powered app for financial advisers in the US was seen as the first step in AI disintermediating financial advice. This was expected to threaten the future revenues of wealth managers such as St James’s Place, which found itself put in the basket of 'AI losers' along with data and software providers. The picture painted by its full-year results, however, was rosier, suggesting that its rehabilitation under its new management team continues. A new charging structure has been successfully implemented and client numbers, client retention and fund flows are all showing progress. The company also announced that it would begin returning 70% of its cash profits to its shareholders through share buybacks and dividends a year earlier than had been expected. We believe the free cashflow this business is generating remains compelling, bottoming out this year but doubling to around £900m by 2030.

Flutter was weak after it lowered its earnings guidance by 18%. This was largely driven by weaker revenues at FanDuel, its US division. At the same time, the company decided to ramp up investment in its prediction markets offering. The combination of lower growth in its traditional sports betting businesses and higher investment in its prediction markets business was seen as confirming the market's fears that the latter was cannibalising the former. FanDuel remains the market leader in the US and is still delivering strong growth as more US states legalise sports betting. We added to our modest holding in a company whose shares trade on 10x forecasted earnings for 2027 and which is making significant investment into building its presence in prediction markets.

Contributors 

Oxford Instruments confirmed it was on track to deliver materially higher profits as its order book recovered from the disruption caused by 2025's trade tariffs. Its Advanced Technologies division reported a 44% increase in orders. Oxford is a leader in many of the technologies needed to build the next generation of compound semiconductor chips. When we visited its new, state-of-the-art facility outside Bristol in January, we came away feeling that the biggest challenge facing it in the near term would be keeping up with demand.

Having zero exposure to two significant underperformers, Unilever (not held) and Reckitt Benckiser (not held), made a materially positive contribution to relative returns. Consumer staples stocks were weak as sales of branded goods continued to disappoint.

In the case of Unilever, its proposed de-merger of its food business was poorly received. The transaction will allow its management team to focus on its faster-growing personal care division. Unilever's shareholders, however, appear unenthused by the prospect of receiving shares in McCormick, a highly levered, slower-growing food company listed in the US. 

Reckitt Benckiser, meanwhile, is in talks to dispose of Mead Johnson, its infant-nutrition division. Having already disposed of its ‘essential home’ business, the company's management appears to view exiting slower-growing categories as an easier way to deliver shareholder value than investing in product development or marketing. 

Activity 

We initiated a new position in RELX at the start of February when it found itself unjustly lumped in with the ‘AI losers’ trade. We had followed RELX for a long time, having been an admirer of its transformation from a slow-growing, old media company into a high-returning, fast-growing data business. Having seen its valuation multiple halving in a matter of months, we initiated a position. The subsequent results showed that, far from harming RELX, AI was accretive to its top-line growth. In addition, the management provided reassurance that its audited, high-quality data sets remained highly valued by its customers. The company demonstrated its confidence by announcing a £2.25bn share buyback – around £1bn more than the market had expected. Although we are wary of declaring victory too soon, we see this as a clear example of the way in which short-term trading into and out of thematic baskets of stocks can create opportunities for fundamental investors with longer time horizons.

We supported Rosebank Industries when it issued new shares worth £1.9bn to fund its acquisition of two businesses in the US. These deals follow its acquisition of ECI last year and leave it with three industrial turnaround stories in the US. The strategy of Rosebank's management should be familiar to anyone who followed its work at Melrose Industries. It will restructure and invest in the acquired businesses, increasing top-line growth and boosting margins before selling them on. Alongside the transaction, the company announced it would move its shares from AIM to the main market, which should improve liquidity and encourage more interest from analysts.

We added to the holding in International Consolidated Airlines Group (IAG). The war in Iran triggered a sharp spike in energy prices and worries about shortages of aviation fuel. In our view, IAG is better placed to cope with the uncertainties facing the aviation industry than its peers thanks to its cautious approach to hedging its fuel costs and the high returns that its airlines – BA, Iberia, Vueling and Aer Lingus – produce.

Fund 10-year discrete performance

Past performance is not a guide to the future. Source: Artemis/Lipper Limited, class I accumulation GBP 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 fund. Returns may vary as a result of currency fluctuations if the investor’s currency is different to that of the class.

Outlook 

We expect higher energy prices and inflation to lead to slower real economic growth. With wage pressures easing, we see interest rates as likely being closer to 3% at the end of 2027 than the 4% level the market is currently anticipating. As such, we see the extreme sell-off in the shares of real estate companies and housebuilders as representing an opportunity to investors whose time horizons are longer than three months. 

The Middle East remains the primary focus for investors, with news from the White House and Mar-a-Lago determining short-term movements in markets. At the time of writing, energy prices have fallen and stocks have rallied as the US and Iran have reached a tentative ceasefire. Markets are trying to balance the medium-term imperative for both sides to see the Strait of Hormuz re-open against the reality that the negotiating positions of the US and Iran are some distance apart. In the short term, this makes for a volatile backdrop. Our response has been to do what we always do at times of increased volatility. We are sticking to our focus on cashflows across our three-year investing horizon and on relative, rather than absolute, moves in share prices. In particular, we are looking for any anomalous moves in individual share prices that occur as short-term investors trade into and out of thematically linked baskets of stocks. 

The fund continues to trade on a significant discount to the UK market, at 10.8x forward earnings versus 13x for the FTSE All-Share. We see this as attractive from both an absolute and relative basis, particularly given that we expect the companies in our portfolio to grow their earnings faster than the market.