Artemis Income Fund
Q2 2026 update

Stock markets appeared indifferent to geopolitical developments, which have been volatile and numerous. The stop/start conflict in the Middle East, concerns about inflation and the prospect of interest rate increases, not to mention UK political developments, were largely brushed off.

Investors have, however, continued to worship at the altar of AI, with all things tech hardware and capex sucking flows and attention away from the rest of the market. This powered one of the strongest rallies in the tech sector in recent memory, although in June we started to see evidence that some of the optimism could be easing.

Sir Keir Starmer's resignation as prime minister and Andy Burnham's emergence as his likely successor raise many questions about the political and fiscal direction of the country. While there will be plenty of detail revealed in the coming months, it is unlikely that political developments will bring about any sea change in the fortunes of the economy and the consumer. The good news is that the market expects little change.

As always, we are focusing on analysing companies' long-term cashflows and do not seek to position the portfolio to bet on a particular heads-or-tails macroeconomic or political outcome. We aim to build a diversified portfolio of businesses that we judge to be well placed to improve their relative competitive positioning through market cycles.

Performance

The fund had a strong second quarter, outperforming its benchmark and sector to return 8.9%. This compares with 4.7% for the FTSE All-Share and 7.0% for the average fund in the IA UK Equity Income sector.

Above and beyond stock selection, the fund benefited in the period from being underweight miners and oil & gas. As the hype around AI capex eased and an albeit tenuous ceasefire in Iran was announced, these sectors performed poorly.

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

Contributors

IG Group shares hit an all-time high in May after a positive trading update. Assets under administration passed £20bn and management upgraded revenue growth guidance to between 10 and 15% for the full year. Improvements in culture and innovation introduced by IG's relatively new management team, which has been in situ since 2024, are now manifesting in operational performance. Revenue growth is accelerating and active customers have increased for the fifth consecutive quarter. 

Chief executive officer Breon Corcoran announced a strategic review in March "to make sure IG maximises shareholder value", which was well received by investors. Notwithstanding some recent profit taking thanks to a run of strong performance, we think the setup going forward looks attractive. IG has an undemanding valuation with a 10% free cashflow yield and a strong balance sheet, with about 20% of the company’s market capitalisation in cash.

Segro shares performed strongly following an unsolicited bid from US logistics giant Prologis. The bid took the form of an all-paper offer at net asset value (NAV), to which the board has raised a robust and welcome defence. Despite the real estate investment trust's shares consistently trading at a discount to NAV, it has highlighted numerous avenues for value creation that are not reflected in the accounting valuation.

Informa recovered as sentiment improved regarding its exposure to the Middle East. We think the market underappreciates (and perhaps misunderstands) the economics of Informa's industry events. These are long-term, highly profitable assets with strong cash conversion. They also create huge amounts of valuable and unique first-party data. Having invested materially in its technology, Informa is beginning to monetise this data by improving the customer value proposition at its events and by offering digital lead generation, all of which serve to make its events 'unmissable'. Informa has an 8% free cashflow yield and a 13x forward P/E. We think it offers significant value, considering it generates high returns on capital and is a global leader in an industry underpinned by structural growth.

EasyJet's shares performed strongly after the airline was approached by US private equity firm Castlelake. EasyJet rejected Castlelake’s first four proposals before agreeing in principle to a sweetened offer in early July. Apollo Global Management then entered the race on 8 July with a higher proposal, which easyJet has backed. We are reassured to see more widespread recognition of the undervaluation in easyJet's shares.

UK banks extended their rally during the second quarter. NatWest and Barclays were among the fund's top 10 contributing stocks, while we also own Lloyds. Higher-for-longer interest rates continued to manifest in improved profitability, feeding through into earnings upgrades from the structural hedge, yet there is little sign of any financial stress among borrowers. Although the banks have re-rated, we think they still look favourable with respect to valuations, returns on tangible equity and growth rates versus European peers. Therefore, we believe they are still well placed to generate attractive total returns through a combination of dividends and share buybacks.

Being underweight Shell was a significant contributor to our relative returns, as the price of oil fell in reaction to ceasefire negotiations in the Middle East. Being overweight BP detracted for the same reason, but the balance of the two was positive for fund performance.

Detractors

Our lack of exposure to HSBC, Rolls-Royce, Compass Group and International Consolidated Airlines was detrimental to our relative returns, but to reiterate, their absence from the portfolio reflects our belief that we have found better ideas for the fund's capital.

Among the stocks we do own, Imperial Brands was the biggest detractor, as ‘risk on’ sentiment returned and investors rotated away from more defensive areas. A weaker-than-expected first-half update also played a part, with management making cautious comments around market share losses in the company’s top five markets. 

As we have discussed in the past, we continue to scratch our heads over our allocation to tobacco. On the one hand, valuations are undemanding, cash generation remains substantial and shareholders stand to make decent returns through a combination of dividends and share buybacks. (Imperial Brands has bought back about 15% of its market cap in the past three years). On the other hand, we see mounting risks of a more stringent regulatory environment for next-generation products, particularly vapes, where a growing number of studies point towards more acute health risks than previously appreciated. At a free cashflow yield of more than 10% – which could grow rapidly through operational execution and share buybacks – we believe the shares offer attractive value.

Smith+Nephew sold off along with healthcare more broadly. We believe the market continues to mis-analyse this company and is too focused on its admittedly challenged orthopaedics business, which contributes about 40% of Smith+Nephew's revenues and a third of its cashflow. However, its other divisions – sports medicine and wound management – are high-quality, high-margin businesses that are among the market leaders in industries underpinned by structural growth. As these two divisions continue to grow, they should account for an ever-larger proportion of group sales, earnings and cashflows. Furthermore, we have seen signs over the past 12 months that the orthopaedics division is stabilising and we believe more ‘self-help’ measures could be enacted. All in all, we believe the current valuation (a P/E of 14x and a 6% free cashflow yield) offers attractive long-term risk/reward.

Tesco shares declined in May, largely in response to the market remaining extremely competitive. We believe Tesco possesses the scale, balance sheet and management team to remain the market leader. Perhaps contrary to what one might expect, Tesco has a much higher online market share (35%) than Ocado (15%). Its command of technology is a particular advantage and we think the value of its Clubcard data is significantly underestimated. We were not surprised to see the shares sell off – they have been strong performers of late, as investors have favoured companies with little risk of AI disruption. Nonetheless, we continue to view Tesco as a core holding that looks well placed to compound cashflow, dividends and total returns.

Activity

We have been building our allocation to two relatively new positions, Glanbia and Diageo, and we started a holding in Reckitt Benckiser.

Glanbia is the global market leader in sports nutrition through its Optimum Nutrition brand. The core product range consists of whey-based bulk powders, with the key benefit for users being their high protein content. As consumers become more aware of the benefits of increasing protein in diets (GLP1s are influencing positively here), this is broadening out the addressable market for Glanbia’s products. The growth prospects for the Optimum Nutrition brand are supplemented by the company's other operations, which are focused on dairy and dairy-based ingredients. This gives Glanbia a competitive advantage as it can internally produce most of the whey it needs for its consumer brands, which leads to security of supply and some protection in margin, especially given there has been a shortage of whey in recent years. We believe Glanbia’s growth prospects are not factored into its valuation, with the shares trading on a 2026 FCF yield of 7%. 

Diageo’s underperformance in recent years has been well documented, with the stock’s multiple compressing from more than 30x in late 2021 to less than 13x today; this is as cheap as the shares have been since the Global Financial Crisis. Dave Lewis's appointment as chief executive was the catalyst for us to start analysing the business more closely (we know him well from his successful tenure at Tesco). We think Diageo could be run far more efficiently. We also feel that concerns about alcohol being in structural decline, with fewer young people drinking, could be overdone. With all of this in mind, a 7% free cashflow yield offers value. 

We initiated a holding in Reckitt Benckiser following a sharp negative reaction to the conflict in the Middle East. The company looks unfairly maligned to us. We think it has plenty of opportunities to improve its operations and increase its sales in emerging markets. We purchased shares at a dividend yield approaching 5% and a P/E of less than 15x.

Outlook

The Artemis Income portfolio continues to trade at a meaningful yield premium to the UK market and a similarly attractive P/E multiple discount. These gaps relative to the wider market have emerged during a period where the attractions of the businesses we invest in have not deteriorated, in our view. In the short term, the portfolio's performance has been driven primarily by large factor swings in the market, with AI and Iran being the two strongest forces. Over the medium and long term, we believe the advantages and characteristics of the businesses we invest in will win out and we therefore remain optimistic about the fund's potential to deliver attractive total returns and income growth.