Artemis Income (Exclusions) Fund update

Source for all information: Artemis as at 30 June 2025 unless otherwise stated.

Market review

The second quarter was one of the more action-packed in recent memory. Equities sold off sharply in the wake of ‘Liberation Day’, only for the S&P 500 to record its fastest ever comeback from a 15% drawdown, with investors choosing to focus on improving sentiment around trade negotiations rather than a debt-busting 'Big Beautiful Bill'. As geopolitical tensions continued to escalate, worries about fiscal sustainability manifested themselves in rising government bond yields and a falling dollar, which had its worst first half of the year for more than five decades.

The UK economy – in similar fashion to 2024 – made a bright start to the year with respect to growth (this has tailed off a little in recent months as uncertainty has understandably increased) as well as announcements of a trade deal with the US and a reset in relations with the EU. However, most recently, welfare-reform issues have highlighted the challenge of pushing through spending cuts, increasing the probability of more tax rises in the next Budget. 

In among all of the above, Artemis Income (Exclusions) enjoyed a strong quarter of relative returns, delivering more than double the gains of the market. The fund made 10.3% over this period, compared with 4.4% from the FTSE All Share.

Performance

The Artemis Income (Exclusions) fund returned 1.7% (net of fees, sterling) in the first quarter, underperforming the FTSE All Share index which returned 4.5%.

Contributors

Spectris was the top contributor as news broke of a £3.8bn bid for the company from Advent. This represented an 80% premium to the closing price on the previous trading day. A slightly improved offer was recommended by the board thereafter, however in early July Advent was outbid by KKR, which valued Spectris at £4.7bn (with £4.1bn of the bid in equity). This represented a 96% premium to the close before any offer was made. Despite the scale of the premium, we believe the bidding war could well continue, not least in the form of Advent returning with a revised offer (its silence in recent weeks is deafening) but also from a number of trade buyers.

There are several large industrial companies in the US, Europe and Japan that in our view could extract more value out of an acquisition: Spectris has a high-quality collection of assets that operate in attractive niches in precision measurement and testing across a wide range of industrial processes. These processes are becoming more technologically enabled and the services that the likes of Spectris provide can help to find faults before they cause costly production issues. If ever there was a poster child for the undervaluation of UK equities, then this has to be it.

Tesco shares have recovered all their losses incurred in the wake of Asda’s declaration of (price) war in March, as it committed to cut prices in a last-ditch attempt to stem a long-running decline in market share. Conversely, Tesco has continued to gain share, with the latest industry data suggesting it controls more than 28% of the market. Importantly, Tesco is taking share across the value spectrum, suggesting that its proposition is resonating with a wide range of consumers.

Outside this, we believe Tesco’s Clubcard dataset – which we would argue is the best consumer behaviour dataset in the UK – wields significant growth optionality going forward. As such, despite some mild recent profit taking, Tesco remains a key position in the fund and looks well set to continue compounding cashflows and dividends.

Burberry’s turnaround continues in earnest. The new strategy is centred on re-focusing the brand on its highly successful core attributes of protection from the weather, Britishness/the Royal Family and Burberry’s iconic check. Initial ‘soft’ indicators suggest that recent marketing campaigns have landed well with consumers and ‘brand heat’ metrics are beginning to trend upwards. Burberry's shares have doubled from their post-Liberation Day low in April, yet the company’s market cap remains just £4.5bn (Burberry is also nearly debt-free excluding leases).

If annual revenues can recover to £3bn (which we believe – subject to execution – is possible) and operating leverage aids a recovery in profitability, there remains significant further upside in the shares in our view, despite this strong recent performance. And yes, Burberry used Glastonbury as the setting for its latest campaign.

Detractors

Pearson’s share price performance has been subdued in 2025 thus far, constrained by sterling strength (most of its revenues are in dollars), prompting earnings downgrades and weaker sentiment around US higher education funding. In late June, Pearson announced a deal with Google (having recently announced similar partnerships with both AWS and Microsoft) that will allow it to use Google Cloud for product development purposes and Google to use Credly (a Pearson business) for certification. Though unlikely to be evident in profits in the short term, partnerships like this can help Pearson to improve the cadence of its innovation and product launches and ultimately further expand its addressable market and profit opportunity.

We still believe management to be executing well, while the quality of Pearson as a business has improved materially in recent years. As a result, we do not see this period of share price performance as any major cause for concern. A 6% free cashflow yield and a market capitalisation of just £7bn suggest to us that the risk/reward from here is attractive.

London Stock Exchange Group (LSEG) has, like Pearson, succumbed to shorter-term earnings downgrades from unfavourable currency moves. Again, like Pearson, the fundamentals of the business remain healthy in our view. LSEG has a unique collection of high-quality assets with very strong barriers to entry that have plentiful opportunity for long-term earnings growth. Two particularly interesting areas are tokenisation (LSEG is planning a blockchain-based exchange to tokenise a wide range of assets) and Tradeweb (in which LSEG has about a 45% stake), which is well placed to benefit from the digitalisation of fixed income trading. With all of this in mind, a 5% free cashflow yield (and cash conversion of more than 100%) looks to be good value in our view.

Real estate investment trust (REIT) SEGRO fell slightly. In the list of 10 largest relative detractors over the quarter, the other seven names were all stocks we don't hold that did well.

Activity

We exited our holding in Nintendo. The fundamentals of the business have improved significantly in recent years as software and the monetisation of Nintendo’s world class bank of intellectual property have accounted for a growing proportion of group sales. Nevertheless, Nintendo’s valuation has increased substantially with the shares now trading on a 2.5% free cashflow yield. As such, we thought it prudent to exit the position (which we have been trimming for some time in any case) and recycle the capital into other areas offering better value, but the company will remain on our watchlist.

Elsewhere, we have been trimming some of the better performing names (the likes of Tesco and Next) and recycling this capital into other areas (some examples would be SEGRO, Whitbread and Berkeley Group) where valuations and the balance between risk and reward are more attractive.

Outlook

The outlook remains as difficult as ever to predict and there is very little we can say with any authority about what the future course of the macroeconomic environment might be. This is why, even in calmer times, we steer clear of positioning the portfolio to benefit from any heads-or-tails macroeconomic outcome and instead focus on where we believe our skills lie: assessing individual investments and the risk/reward they offer.

From this perspective, we continue to see robust fundamental performance from the majority of our companies and competitive positions that continue to improve. This is translating into healthy free cashflow that almost twice covers the portfolio dividend, which we believe is well placed to grow at mid-single digits this year.

In recent months, some areas of the portfolio that have long been challenged have begun to deliver strong investment performance (the three contributors outlined in the commentary above are examples of this), whereas a few of our longer-term winners have been more muted. To us, this is an advert for style-agnostic, active portfolio management: we cannot – and did not – try to predict when the scales would tip from one end of the portfolio to the other and instead have worked to ensure that it is made up of a diversified collection of cashflows. In the face of such a wide range of market environments over the fund’s more than 25-year history, this approach has served us well. We believe it will continue to do so in the future.