Artemis Income quarterly review, September 2023

Fund objective  

The fund aims to grow both income and capital over five years. 

Review of the quarter to 30 September 2023

The resilience of the global economy and continued high inflation resulted in a belief over the summer that interest rates would remain ‘higher for longer’. As a result, the more expensive, growth-oriented areas of the global stock market relinquished their earlier gains. The weakness in the share prices of a small group of very large US technology companies (Apple, Microsoft etc.) that had led the market for much of the first half of the year was particularly notable.  

Higher interest rates and therefore borrowing costs remain a challenge for businesses with a lot of debt. Once again, we have been reminded of the importance of sensible balance-sheet management and the creation of cashflows. While such cashflows are abundant in the UK equity market, share prices remain depressed. 

 Undoubtedly, a number of enduring challenges continue to face the UK economy but the picture is brighter than it once appeared. Revised economic growth figures published by the ONS in September showed output climbing back above its pre-pandemic levels by the end of 2021– far sooner than previously thought. The UK no longer appears to have been the slowest-growing economy in the G7 since the pandemic¹.

Performance

The Artemis Income Fund returned 2.8% in the third quarter, slightly ahead of the 1.9% return from the FTSE All-Share index. The IA UK Equity Income Average returned 2.3% over the period.  

For full five-year discrete performance, please see below. Please remember that past performance is not a guide to the future.

What worked…

Private equity group 3i continues to feature among the top contributors to the fund’s returns. Its holding in Action, a discount retailer, continues to deliver exceptional growth in both sales and cashflow. We see huge scope for Action to continue to expand in Europe; it could comfortably add several thousand more stores to its network.  

BP shares added 17% in the third quarter, supported by an oil price that climbed to its highest level since November 2022. We continually weigh and debate the relative merits of BP and Shell. As a result of lower debt and a business mix that is more heavily skewed to liquefied natural gas, we decided to transfer some of our oil & gas allocation into Shell. And while we are confident that BP’s strategy and commitments remain unchanged in the wake of the departure of its chief executive, we would acknowledge that there are increased uncertainties around both future leadership and company culture. 

Direct Line’s shares added more than 25% over the quarter. After a tumultuous 12 months for the business, selling commercial insurance business NIG to Canadian insurer Intact Financial for £520 million² eased some of the market’s worries. Furthermore, after a lengthy search, it appointed what appears to be a strong chief executive in Adam Winslow, who had led Aviva’s UK and Ireland general insurance business since mid-2021.  

What didn’t work…

SSP Group operates catering and retail units at airports and railway stations. Its shares fell nearly 20% after the market focused on a downgrade to profits as a result of currency movements. These headwinds from sterling’s strength masked the continued progress being made across the business. We have long articulated the US opportunity in front of SSP³.  

Corbion’s shares endured another tough quarter, falling 14%. Corbion is a sustainable ingredients company based in the Netherlands. The market continues to worry about the amount of debt on its balance sheet. Its management, however, remains committed to fixing this by selling some of its ‘non-core’ assets. The intellectual property Corbion has developed remains of material value, especially its algae business (a source of lower-carbon fish feed). The shares currently trade at a nine-year low.  

EasyJet’s shares fell by 11% in the third quarter. Those falls, however, were broadly in line with those seen across the travel sector, an area that had been among the market leaders in the first half of 2023. Several airlines have suggested that demand this winter is likely to be strong. This could provide a material boost to earnings in the short term. Looking further into the future, an industry that remains heavily capacity constrained versus pre-pandemic levels should mean the pricing environment remains favourable.  

Activity

We added one new position in the quarter: Lloyds Bank. As with NatWest, we believe the market is underestimating Lloyds’ earnings power and the potential for it to return cash to its shareholders through a combination of dividends and share buybacks. This addition was partially funded through our sale of Nordea, which has delivered healthy total returns for the portfolio since we invested over five years ago.  

Elsewhere, we continued to reduce the holding in 3i following continued strong performance. We also reduced Phoenix Group.  

Outlook

Indiscriminate selling continues in the UK market. As a result, valuations across the UK stockmarket remain depressed, at a discount both to its own history and relative to other international markets. 

As a result, many of our companies are buying back their own shares. This is when companies pay shareholders to buy back their own shares, cancel them and, ultimately, reduce share capital. As companies’ share counts are shrinking, their earnings and dividends per share are growing. This growth could be amplified if our companies grow their earnings. All we have to do is hold onto our shares (and let other impatient sellers sell their holdings back to the company) to benefit from this trend. To this point, this growth in cashflows and value per share has been roundly ignored by the market. This neglect won’t last: the market will eventually wake up to the ever more extreme valuation discount on which UK equities trade – a discount that is being amplified by this buyback activity. 

Risks specific to this fund

Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.

Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.

Income risk: The payment of income and its level is not guaranteed.

Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth. 

THIS IS A MARKETING COMMUNICATION. BEFORE MAKING ANY FINAL INVESTMENT DECISIONS, REFER TO THE FUND PROSPECTUS, AVAILABLE IN ENGLISH, AND KIID/KID, AVAILABLE IN ENGLISH AND IN YOUR LOCAL LANGUAGE DEPENDING ON LOCAL COUNTRY REGISTRATION, FROM WWW.ARTEMISFUNDS.COM OR WWW.FUNDINFO.COM.

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