Artemis UK Future Leaders plc
Q2 2026 update

Anna Pugh joined Artemis' UK smaller companies team as an analyst in May. Anna, who has 11 years’ experience, previously worked at River Global Investors, where she focused on UK small-cap and micro-cap strategies. She has a first-class degree in economics from the University of Bath and is a CFA charterholder.

Performance

Artemis UK Future Leaders bounced back strongly during the second quarter of 2026, returning 10.0% in NAV terms compared with 8.6% from its Deutsche Numis Smaller Companies plus AIM (excluding investment companies) benchmark index. 

Our performance over the past year has been poor – the trust has lost 6.7% in NAV terms compared with gains of 6.1% from its benchmark index. Crucially, however, this has been driven by a relative de-rating in the shares of the companies we invest in – their earnings have remained resilient. We believe the fund's holdings now appear extremely undervalued relative to the wider UK smaller companies market (which is itself undervalued relative to UK large caps).

Past performance is not a guide to the future. Source: Lipper Limited/Artemis to 30 June 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.

Contributors

Last quarter we pointed out that Mears, a provider of maintenance services for social housing, had seen its share price fall by 16% over the preceding year, even though expected earnings per share had risen by 36%. We felt the market would eventually notice this disconnect and, sure enough, the stock rallied over the quarter despite little material news flow. We took some profits.

Asset manager Tatton did well on continued strength in fund flows. This, along with favourable equity markets, drove a double-digit upgrade in earnings.

Consumer goods company PZ Cussons reported growth across each of its four primary markets.

Halfords saw a 10% earnings upgrade in June on the back of strong sales growth and higher margins.

Detractors

Many of the biggest detractors to our relative performance over the quarter were stocks we don’t own that did well. These included Tate & Lyle, Raspberry Pi and Watches of Switzerland.

Among the companies we do hold, Telecom Plus performed poorly. In response to growing competition in the energy and broadband markets, it cut prices to increase the number of customers who use more than one of its services. Consumers who take multiple products are more valuable and stay for longer than those who only take one. Although this led to a 40% cut in earnings expectations, the shares were already weak and now trade on a single-digit price-to-earnings (p/e) multiple.

While first-half takings at LBG Media (LADbible) grew strongly, there was a rapid shift away from high-margin Facebook revenues and towards lower-margin direct ones. Although the speed of change prompted a downgrade to expectations, reducing its dependence on Facebook should ultimately improve the quality of LBG's earnings.

Results at identity verification company GB Group were in line with expectations, but the company opted to increase investment in its GBG Go product, prompting a 10% earnings downgrade for 2027. The business is not growing fast enough to generate the operating leverage required to fund additional investment without downgrading future profits. However, management is confident the investment will pay off in the long term.

Purchases

We started a new holding in AB Dynamics, the global market leader in car testing. Its management team aims to double revenues and triple profits over the medium term, which we see as credible targets given that safety tests required by Euro NCAP standards are becoming more stringent and these tend to be replicated around the world. We believe AB’s strong growth outlook stands at odds with a significant derating in its shares. 

Another new position is Keystone Law. Keystone is a platform for self-employed lawyers, providing them with compliance, IT, finance and marketing support in exchange for 25% of the revenues they generate. Its user base continues to grow and its business model is asset-light, offering an attractive return on capital and strong cash generation (it only pays the lawyers after it has taken its share of their fee). Few businesses on such a low valuation have stronger earnings momentum.

We added to NIOX on share price weakness, which was at odds with strong full-year results in March. The company, which makes fractional exhaled nitric oxide (FeNo) sensors to test patients for asthma, also signed an exclusive 10-year deal with its supplier to increase manufacturing capacity. 

Sales

With the war in Iran threatening a prolonged increase in energy prices, we trimmed exposure to some of our consumer-facing companies in the early part of the quarter. These included Halfords, Greggs and Secure Trust Bank. In aggregate this amounted to little more than 1% of the fund. 

We trimmed our holdings in RWS and Keller as their share prices strengthened. Finally, we sold Morgan Advanced Materials when its share price rallied despite an earnings downgrade.

Outlook

Valuations on a different planet 

There is currently plenty of talk of a bubble in equity markets, with Panmure Liberum noting the cyclically adjusted p/e (CAPE) ratio for the S&P 500 is at its highest since the turn of the century. Meanwhile, SpaceX’s valuation of about $2 trillion is equivalent to 100 times its historic sales. 

Yet UK small caps are on a different planet. Their valuations are low relative to their own history. They are low relative to those of larger companies. And they are only a third of the level of companies in the US. Meanwhile, the dividend yield for the FTSE 250 has climbed above that of the FTSE 100 for the first time in more than 20 years.

Iran ‘resolution’ is positive

At the start of the quarter, we felt a prolonged war between Iran and the US represented the biggest threat to UK small caps. Although the outcome of this conflict is still far from certain, there appears to be a reduced likelihood of the worst-case scenario materialising. This means oil and gas prices are likely to be lower, which should be positive for UK consumers. Expectations that the Bank of England will raise interest rates are fading. In fact, we think the next movement in rates is more likely to be down than up. 

Political uncertainty remains, but may be overstated

Although it looks likely that Andy Burnham will soon be named prime minister, what happens after that is unclear. To us it seems probable that:

• Unlike Liz Truss, he will not need the market to tell him further borrowing risks instability and will be forced to operate within current fiscal constraints. Given bond yields in the UK trade at higher levels than the rest of the G7, there is a significant prize to be won if Burnham can convince markets that he can be a fiscally responsible prime minister. By committing to borrow less, he could use the interest savings to spend more.   

• He will pursue policies that stimulate economic growth. The housing market would be the most obvious area for targeted support as it would require little (if any) government spending. There has also been renewed speculation about using tax incentives for pensions and ISAs to promote investment in UK equities. 

Improving economic outlook 

The outlook for the UK economy has improved, but consumer stocks remain firmly out of favour. Halfords offers a useful example of what can happen when a stock in an unloved area of the market does better (or less badly) than expected: a 10% earnings upgrade in June prompted a 30% increase in its share price.

More buybacks, but a (temporary) pause in M&A

A record number of our portfolio holdings bought back shares over the first half of the year. We see this as evidence that their boards are 1) taking a more positive view on the outlook, 2) believe they have surplus capital and 3) see their shares as being materially undervalued.

There were no takeover bids for the companies in our portfolio during the first half of the year. Given that our median holding trades on a free cashflow yield of 9%, offers double-digit earnings growth and is forecast to have no net debt, further approaches are surely just a matter of time.