Seven simple lessons from 25 years of Artemis Income

Investment professionals have an unfortunate tendency to overcomplicate matters, which is ironic because complexity and indecision are common bedfellows. In our experience, while investing is never easy, it certainly helps if you start simple and stay simple.

To that end, we have developed some relatively straightforward investment principles during the decades we’ve been managing the Artemis Income Fund, which celebrated its 25th anniversary on 6 June 2025.

1. Validation before value

Show an eternal optimist a 15-foot-high pile of horse manure and they will dive in, shouting “there’s gotta be a horse in here somewhere!”

And so it is with stocks. Show an investment manager a low valuation and there is a temptation to find the good and ignore the not so good. Valuation is the enemy of objectivity.

This dynamic also plays out in the world of equity income investing. Starting with an attractive yield can tilt the argument, which is why dividends are an outcome of our investment process, rather than central to it. Instead, free cash flow – which offers an objective picture of a company’s health and profitability – is our North Star.

2. The benchmark is an unreliable ally

The benchmark has no place in any investment case. It tells you nothing about a stock. Worse than that, deciding how to position a fund by referring to the benchmark is the start of a slippery slope.

The benchmark imparts false comfort. Some fund managers might think having 5% of their portfolio in a stock with a similar benchmark weighting is ‘low risk’. Granted, the tracking error would be low but nonetheless, 5% of their clients’ capital would still be at risk (or reward) in that stock.

This is fine if the stock happens to be an idea in which the manager has huge conviction. However, let’s imagine that like villains in a Bond movie, we were able to seize control of the FTSE All-Share overnight and we summarily decided to halve the index’s weighting in, say, HSBC (which was 6.2% of the FTSE All-Share as of 30 May 2025¹).

In the days that followed, we wouldn’t be surprised to see many fund managers lowering their positions, uncomfortable with the notion of suddenly becoming significantly overweight HSBC.

Ideally stock positions should reflect conviction rather than the comfort blanket of the index, although we concede it is a mightily comfortable blanket.

3. Look up, not down

Imagination is an under-rated investment skill. Imagine what a company could be in three to five years’ time and you’ll soon find that trying to discern this from the crackling static of the beats and misses of a trading statement or quarterly update doesn’t make you any wiser as to the longer time horizon. Added to that, the consequent share price volatility is akin to a playground brawl.

By and large, the investment community has become too short-term in its focus but no matter, as that creates opportunities for us as long-term investors. We see ourselves as owners of a business – the antithesis of short-term traders, which is why we leave the trading statements to them.

Company management teams, on the other hand, have no trouble imagining how their business could develop in the next three to five years and when we meet them, it’s easy to tell how excited they are about their company’s long-term future.

4. Hotter or colder?

An analyst’s common reaction after meeting with a company is to go away and put what has been learnt into a model or spreadsheet, and to revise their estimates of a company’s financial metrics. Fair enough, but while spreadsheets have their place, they are not renowned for their emotional intelligence, instinct or judgment.

After spending time with a company, we ask ourselves a question that’s not in the least bit technical – do we feel hotter or colder about our investment thesis?

This is as simple as it gets, but the question helps us articulate how we feel about stocks, express our level of confidence and decide how to move capital around within the fund.

As a result of discussions like this, we have a high batting average, which means we usually make more money on our winners than we shed on our losers.

5. Don’t invest if the file’s too thick

Another unsophisticated expression from our ‘lessons learnt’ repository is ‘when the file gets too thick’. You can tell a stock isn’t a good idea when it involves too many meetings and there is too much complexity in the argument. There comes a tipping point when we conclude that the ‘file’ is getting very thick for something which should be a straightforward investment idea. Regrettably there have too been too many occasions when this was said with hindsight rather than foresight.

6. Have a departures and arrivals board

We continually try to improve and refine the investment process and one of the tweaks we’ve made in the past decade is to carry very little cash. Therefore, if we have a new idea or want to put more capital to work in an existing position, our weakest stock has to go. And when we sell something, we replace equity with equity, not with cash.

Generally speaking, fund managers spend a lot of time searching for the next great idea and not enough time thinking about which is their weakest position.

7. Be open-minded

Condensing two and a half decades into a handful of principles is no mean feat but we would like to believe these ideas will continue to hold true for the next quarter century. However, they should be subject to scrutiny, and we will be open-minded and flexible enough to evolve or even change them.

A healthy dose of imposter syndrome and remaining aware that we will never know everything has served us well in the past and is our welcome guardian of the future.