Artemis Funds (Lux) – UK Select
Q2 2026 update

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

Review of the quarter to 30 June 2026 

For much of the second quarter, the headlines were dominated by news around the conflict in the Middle East and the reopening of the Strait of Hormuz. In response to the initial announcement of a ceasefire, the price of Brent crude fell from a peak of over $130 per barrel to less than $100. Energy prices then continued to fall, albeit fitfully, through the quarter. This eased fears of a recurrence of the inflationary episode we saw in 2022, pushed equity markets higher and prompted a sharp rotation out of energy stocks and into financials, consumer cyclicals and other interest rate-sensitive sectors.

The quarter's other theme was a surge of outperformance by companies benefiting from the wave of capital expenditure by the AI hyperscalers, such as semiconductor stocks. In this environment, the UK market's bias away from technology and towards commodity and energy companies was unhelpful for its relative returns: it lagged some way behind global indices. 

Artemis Funds (Lux) UK Select returned 12.9% during the three-month period, compared with a return of 4.7% from the FTSE All-Share index and an average return of 7.0% from the UK Flex-Cap Equity sector. This strong performance reflected a combination of stock-specific news (which we outline below) and our underweight to oil & gas.

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

Contributors

Standard Chartered 

The fragile ceasefire between the US and Iran eased fears around the bank's exposure to the Middle East, allowing it to recover the losses it suffered in March. Its first-quarter results were extremely positive, with earnings coming in around 15% ahead of expectations. Although all parts of the business performed well, the standout was its wealth division, which reported a 32% increase in revenues compared with the previous year. The success of this high-returning capital-light unit forms a key component of our investment thesis.

International Consolidated Airlines Group (IAG)

The higher jet-fuel prices that resulted from the closure of the Strait of Hormuz weighed heavily on sentiment towards IAG and other airlines. As the Strait partly reopened and oil prices declined, however, IAG's shares rallied to a post-Covid high. First-quarter trading was robust, demand for premium and long-haul flights remained resilient and strong cash generation is supporting IAG's share buyback. 

Barclays, Lloyds and NatWest 

The shares of our UK-focused banks recovered sharply as fears the Iran war could lead to stagflation eased. Their results, meanwhile, demonstrated the resilience of their loan books, their improving net interest income and the scope they have to continue returning capital to shareholders. 

Oxford Instruments 

We regard Oxford Instruments as one of the most exciting companies in the UK market. Its equipment for manufacturing compound semiconductors is gaining commercial traction. Compound semiconductors are increasingly being used in data centres and other applications that require high speeds coupled with low power consumption, such as the uLEDs found in smart glasses. 

Shell and BP (underweights) 

The fund's underweight positions in Shell and BP weighed on relative returns as the oil price spiked higher in response to the Iran war but then became significant positives as it began to fall.

Detractors

WH Smith 

A new executive chairman announced a 20% share placing to bolster WH Smith's balance sheet and improve its negotiating position with airports and suppliers as it looks to exit some loss-making international airport contracts. In addition, the placing gives it more breathing space should higher airfares lead to a fall in air passenger volumes in the US. While the conflict in the Middle East has clearly not provided the ideal backdrop for this company's turnaround, we supported its share placing. Taking the right steps to improve the business today should lead to a better outcome for its shareholders on a two- to three-year view. 

Melrose Industries 

Instability in a chemical storage vessel prompted the closure of a GKN Aerospace plant in California that makes canopies for F-35 fighter jets. 

Unilever (not held) 

Globally there was a rotation into more defensive parts of the market towards the end of the quarter. Investors took profits in the AI supply chain trade and investment banks encouraged their clients to move into so-called ‘HALO’ (heavy assets, low obsolescence) names instead. 

Vistry 

Vistry suffered from a weaker housing market, a change in management and, more recently, from concerns around the strength of its balance sheet. We significantly reduced our holding at the start of the year ahead of the management change. With the benefit of hindsight, however, this was not enough. More recently, we have started to add back to our holding as we believe the new management team is pulling the right levers to reduce leverage. In the fullness of time, demand for affordable housing should improve as government funding finally reaches councils and housing associations.

Activity 

Bridgepoint

We added a new holding in private capital group Bridgepoint following extreme weakness across the sector. Its shares simply looked too cheap given the strength of its balance sheet, particularly at a time when its core mid-market private equity and US infrastructure offerings are performing exceptionally well. Fortunately, this addition came before it announced its acquisition of Kayne Anderson Real Estate in a deal that should be highly accretive to its earnings.   

RELX

We added repeatedly to the holding in RELX on periods of weakness. We think fears that generative AI will displace the company's specialist information and analytics products are significantly overstated.

HSBC 

To manage risk, we rotated some capital out of Standard Chartered, whose strong performance had left the position size looking slightly too large, and into HSBC. The possibility of higher interest rates in the US along with continued strong growth in both trade finance and wealth management in Asia play well to HSBC’s exceptional deposit franchise.

International Personal Finance

We sold the fund's holding in International Personal Finance, which agreed to be bought by BasePoint Capital of the US.

Lloyds, Barclays and NatWest

Although we remain enthusiastic about potential returns from all three banks, we took profits following a powerful recovery in their share prices. We rotated some of this capital into HSBC to reduce the fund's exposure to UK domestic political risk and to gain exposure to its large deposit franchise.

National Grid

We reduced the position through April and May and sold the small residual holding entirely in June.

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 

The central focus for investors continues to be the Middle East and whether ships are passing through the Strait of Hormuz. Correlations between energy prices, inflation expectations and bond yields remain high and are driving rapid rotations within markets. In the short term, a further escalation of the conflict seems possible. Longer term, however, we think both sides will eventually bow to domestic and international pressure to get oil flowing again. How they get there remains uncertain, although the existing memorandum of understanding gives both sides a framework for their future negotiations. 

Away from the Middle East, the AI capex trade continues to dominate equity markets globally. The second quarter saw global equity market indices being driven higher by a handful of stocks in the AI supply chain. This is part of a growing tendency for short-term capital flows to follow factors (particularly 'momentum') and themes, rather than company fundamentals. This, along with the changing structure of markets, including the increased participation by retail investors in the US and the use of leveraged ETFs, appears to be storing up the potential for sharp corrections, higher volatility and significant rotations when sentiment turns.  

When the AI capex trade starts to reverse, we are confident that global asset allocators will diversify their portfolios into other sectors and regions. The sheer scale of capital that will need to be moved will mean the resulting re-ratings could be swift. Given the UK market's relatively low starting valuation and modest exposure to technology, it looks to be one potential home for capital raised from profits taken on the AI trade.

We have spent a lot of time seeing companies over the last couple of months and are encouraged that these have either reinforced our conviction in our existing insights or highlighted new investment opportunities. M&A activity remains elevated and we are seeing more companies proactively taking advantage of investors' apathy by retiring material amounts of equity, with Jet2 and Barratt Redrow being two recent examples in our portfolio.

Today, the fund trades on a forward price-to-earnings multiple of 11.1x versus the UK market on a forward p/e of 12.4x. We expect that gap to widen as analysts catch up with the recent moves in commodity prices. We believe the outlook for both energy prices and for UK government policy will become clearer over the coming months. In both cases, that should allow investors' time horizons to lengthen and the risk premia currently being applied to UK equities to fall.