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Artemis Income Fund update

Nick Shenton, Andy Marsh and Adrian Frost, managers of the Artemis Income Fund, report on the fund over the quarter to 30 June 2025.

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

Review of the quarter to 30 June 2025

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. 

We have argued for some time that several of our companies are vulnerable to M&A and in June, Spectris became the target of a bidding war between two private equity houses. BP also rallied mid-month around rumours that Shell was preparing a bid. Given the undervaluation of much (but not all) of the UK market, it is reasonable to expect there is more activity to come.

Performance

In among all of the above, Artemis Income enjoyed a strong quarter of relative returns, delivering more than double the gains of the market. The fund made 9.2% over this period, compared with 4.4% from the FTSE All-Share and 7.8% from its IA UK Income peer group average.

Three months Six months One year Three years Five years
Artemis Income Fund 9.2% 12.1% 18.2% 51.5% 86.3%
FTSE All-Share index TR 4.4% 9.1% 11.2% 35.5% 67.3%
UK Equity Income Average  7.8%  9.0%  10.5%  31.6%  64.6% 
Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 30 June 2025 for class I distribution GBP. All figures show total returns with dividends and/or income reinvested, gross of 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

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. Its 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.

BP shares were weak thanks to yet more lacklustre earnings despite commitments from management to re-focus the company on its higher-returning operations and roll back some of what has been an ill-fated transition plan. Since early 2023, BP’s market cap has fallen by more than 40% (£103bn to £60bn), so we were not at all surprised to see reports of a possible approach from Shell, which spurred a brief rally in the shares. Though Shell released a statement suggesting that no offer had been made, it is likely that several possible suitors are currently looking at the company. After a challenging period of fundamental and share price performance, the risk/reward from here does look attractive, thanks to this spectre of M&A as well as the continued retirement of cheap equity through share buybacks.

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, Aviva and Next) and recycling this capital into other areas (some examples would be SEGRO, Whitbread and Berkeley Group) where valuations and the risk-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.

Benchmarks: FTSE All-Share Index TR; A widely-used indicator of the performance of the UK stockmarket, in which the fund invests. IA UK Equity Income NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. These act as ’comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information on sustainability-related aspects of a fund, visit the relevant fund page on this website.

For information about Artemis’ fund structures and registration status, visit artemisfunds.com/fund-structures

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any statements are based on Artemis’ current opinions and are subject to change without notice. They are not intended to provide investment advice and should not be construed as a recommendation.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
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