Artemis UK Select Fund update

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

Review of the quarter to 30 June 2025

Donald Trump’s ‘Liberation Day’ tariff announcement on 2 April kicked off the second quarter with a sharp sell-off in risk assets and a loss of confidence in the US government bond market. 

These developments prompted Trump to capitulate, as more pragmatic voices in the US administration took control of the agenda. Most tariffs (except for autos, steel/aluminium and Chinese goods) were dialled down to 10% for 90 days to provide time for trade deals to be negotiated, with a 9 July deadline that has now been pushed back to 1 August.

Stock markets quickly recovered their losses as hedge funds ‘re-risked’ and US retail investors bought the dip, banking on the ‘TACO trade’ (Trump always chickens out). Markets continued to edge higher through June, despite elevated geo-political uncertainty as direct conflict between Israel and Iran resumed.

Having initially felt the market was far too bearish on tariffs around Liberation Day, it now feels as though the pendulum of sentiment has swung too far the other way. We remain of the view that the costs will ultimately fall on the US consumer and so see the biggest risk to consensus economic forecasts on that side of the Atlantic. 

Here in the UK, the government's botched welfare bill and U-turn on the winter fuel allowance pushed Chancellor Rachel Reeves ever closer to breaching her fiscal rules. With spending cuts looking politically impossible and the UK bond market likely to react unfavourably to any loosening of the fiscal rules, further tax rises in the Autumn Budget are now seen as inevitable.  

In more bad news for the government, the Office for Budget Responsibility (OBR) downgraded its UK productivity forecasts, yet there is a silver lining. If growth does disappoint, we would expect inflationary pressure to ease, allowing the Bank of England to cut rates more aggressively. On £2trn of debt, a lower re-financing rate would take some of the pressure off the fiscal rules.

Despite all of this turmoil, the Artemis UK Select Fund made 14.6% during the quarter, compared with 4.4% from the FTSE All-Share index and 7.5% from its IA peer group. 

Contributors

Our holdings in the travel & leisure sector did well this quarter, with International Airlines Group (IAG), Jet2, Ryanair, sports betting company Entain and the restaurant and pub group Mitchells & Butlers all among our top-10 relative contributors.

IAG (the holding company for British Airways, Iberia, Aer Lingus and Vueling) posted strong first-quarter results and announced a significant order for long-haul aircraft from both Boeing and Airbus. It also confirmed it would start the second €500m tranche of its €1bn buyback.

The airline generates a strong return on invested capital, leading to robust cash generation, which we believe is significantly undervalued. It trades at a significant discount to both Ryanair and its US peers, with a 2025 price-to-earnings (P/E) ratio of just 6x.

Jet2’s story is similar: it has a strong balance sheet, is on an attractive valuation and has just announced a £250m share buyback programme. The weaker dollar provided another tailwind given that it buys fuel, spare parts and planes in dollars.

Other strong performers in the second quarter included housebuilder Morgan Sindall, Rolls-Royce, Barclays and St. James’s Place.

Detractors

On the other side of the ledger, not owning BAE Systems hurt us as it soared on the back of euphoria around all things defence-related, although we participated in some of this uplift through our holding in Rolls-Royce. We believe BAE Systems is less likely to deliver exceptional earnings growth compared with Rolls-Royce as more than half its business is exposed to the US Department of Defence, where we expect spend growth to be far slower than in central and eastern Europe.

Amongst our holdings, sustainable packaging company Smurfit Westrock detracted most from performance during the quarter. It got caught up in fears around weaker paper pricing and cost pressures from tariffs, due to having large exposures to Canada, Mexico and the US. We believe industry consolidation will act as a tailwind for Smurfit Westrock and used the post-tariff weakness to add to our holding.

Activity

Marks & Spencer was our largest addition to the portfolio this quarter and accounted for almost 3% of the fund as at 30 June. We began buying the stock before the mid-April cyberattacks and continued increasing our exposure afterwards on the back of share price weakness.

We expect the impact of cyber disruption on earnings to be material this year due to lost sales, but M&S is using the crisis to accelerate the transformation in its supply chain and IT systems and we are optimistic that the business can regain its momentum.

We also took part in Rosebank Industries’ capital raise to buy Electrical Components International (ECI), a US business. Rosebank’s co-founders previously led Melrose and we have successfully backed this team many times over the past 20 years. We believe they have the ability to significantly improve ECI’s profitability.

Elsewhere, we increased our exposure to property companies, which will benefit from lower interest rates and improvements to the planning system. We added Bellway and West End REIT Shaftesbury Capital to the portfolio and increased our exposure to Barratt Redrow, which has a low price-to-book multiple.

For housebuilder Bellway, significant investment into land and working capital coming out of Covid leaves the company well placed to increase volumes and cashflow over the next two-to-three years. With the shares trading at a discount to tangible book value, with net cash on the balance sheet and margins below long-run averages, they offer asymmetric upside.

Shaftesbury has a strong balance sheet after selling 25% of its portfolio at historic book value to the Norwegian sovereign wealth fund. The REIT is trading at a 25% discount to its net asset value and any narrowing could provide significant upside to shareholders.

In terms of sales, we took profits from Rolls-Royce and reduced our holding in Man Group, whose AHL suite of quantitative funds faced a difficult backdrop due to the twists and turns of US policy.

Outlook

Across the Atlantic, the passage of the ‘Big Beautiful Bill’ has brought with it tax cuts, higher fiscal deficits and, in turn, a steeper yield curve and a weaker dollar. With fiscal discipline sidelined for now and Treasury issuance picking up, we expect the dollar to drift lower and the yield curve to continue steepening.

Uncertainty over tariffs persists, which we expect to have a negative impact on global supply chains and end-market demand. It will take a while for the ripples of de-stocking and re-stocking to pass through supply chains and as a result it will probably not be until the autumn that we get a clearer picture of the underlying economic impact. This will weigh on global growth, although ultimately, we believe US consumers will bear the brunt of the tariffs in the form of higher prices.

By comparison, we perceive the UK as a relative winner within the new economic order. With a trade agreement already signed, those British companies that are affected by tariffs can at last plan their medium-term response.

Tariffs have indirectly led to lower commodity prices and stronger sterling, two trends we expect to ease inflation pressures on the UK economy, enabling the Bank of England to continue reducing interest rates through the second half of this year.

Additionally, we continue to believe that in a tougher macroeconomic environment, strong companies will get stronger, so our portfolio is focused on franchises that are dominant within their sectors – for example large domestic banks and Whitbread, Tesco and Next.

The FTSE All-Share is currently trading on circa 12.7x forward earnings, while the Artemis UK Select Fund is cheaper still, at 10.6x forward earnings. We expect portfolio earnings to grow in the mid-to-high single digits and when combined with a close to 6% all-in distribution yield (dividends plus share buybacks), we believe the low multiple ascribed to these earnings leaves the fund well placed to perform.