Artemis UK Smaller Companies Fund quarterly review, September 2023
Mark Niznik and William Tamworth, managers of the Artemis UK Smaller Companies Fund, report on the fund over the quarter to 30 September 2023.
Source for all information: Artemis as at 30 September 2023, unless otherwise stated.
Fund objective
The fund’s objective is to grow capital over a five-year period.
Measuring the fund's performance
The fund fell by 0.4% over the third quarter. This was better than the average fund in its peer group, the Investment Association’s UK Smaller Companies sector, which was down 1.9%. (This is a group of other asset managers’ funds that invest in UK smaller companies. It acts as a ‘comparator benchmark’ against which the fund’s performance can be compared.)
The fund’s performance was, however, behind its second ‘comparator benchmark’, the Numis Smaller Companies (ex-IT) index, which rose by 0.3%. We explore the reasons for this underperformance below. (This is a widely-used indicator of the performance of UK smaller companies market, in which the fund invests. Management of the fund is not restricted by this benchmark.)
For full five-year discrete performance, please see the table below. Please remember that past performance is not a guide to the future.
Top contributors
Wilmington – was the biggest positive contributor over the third quarter. It provides training and data in the governance, risk and compliance markets. It is becoming a faster-growing business with higher margins as it shifts to digital training (rather than face-to-face).
Babcock – rose by 46.4% on the quarter, as the market reacted positively to a trading update which said that its financial performance was ahead of last year.
Computacenter – gained 11.6%. In part, this was a response to interim results that were seen to have increased the chance that it will reward its shareholders with a significant cash return in early 2024.
Future (specialist media) – such was investors’ concern that it might lower earnings forecasts, its shares added 29.6% over the quarter after indicating that its profits would be in line with expectations. Even after that rally, its share price is only around half level it was back in February; we have been using this weakness to add to our holding.
Biggest detractors
RM – fell by 39% over the quarter as the education technology group warned on profits. That profit warning made us uneasy so we sold the position.
Videndum – fell by 51.9% in response to an announcement that the writers’ strike in the US had a larger impact on profits than had been expected, raising the spectre that it may need to issue new shares. The company makes hardware and software for the film industry.
Brooks Macdonald – ended the quarter 20.9% lower. Investors have been worried about lower inflows to the funds it manages as well as the possible impact of the FCA’s new Consumer Duty regulations.
Explaining an anomaly: Why every fund in the IA’s UK Smaller Companies sector is lagging the index this year
The Numis UK Smaller Companies index, the most commonly used benchmark for funds in the IA’s UK Smaller Companies sector, has performed better than every single fund in our peer group this year. How are we to explain this anomaly?
An unusually narrow market – the index is up 1.7% over the year to date. Most of this has been driven by just two stocks: Aston Martin (up 86%) and Carnival (up 72%).
So why don’t we own these two companies?
- Poor track records - Despite its strong performance over the year-to-date, Carnival is down 76% over the last five years. Aston Martin is down 92%.
- These stocks are currently lossmaking – Carnival expects to record net losses of $50-$150 million during the current financial year. Aston Martin, meanwhile, recorded net losses of £260 million over the first nine months of 2023.1
- Both companies have what are, in our view, rather high levels of debt: £750 million for Aston Martin and $29 billion for Carnival.
Activity: Regaining our appetite for Hilton Food
The fund has invested in Hilton Food Group before, holding its shares from 2009 to 2018. We sold that position when we felt its share price fully reflected the strength of the business, reducing the scope for it to make further gains. More recently, the business has struggled to pass on cost inflation at Seachill, a business it acquired a few years ago, to its customers. We believe these issues are temporary and will ease as cost inflation abates and as automation/efficiency projects come to fruition.
Elsewhere, we added to our existing holdings in:
- On The Beach
- Alpha Group
- SSP
- GB Group
- Future
- FDM
We took profits in Computacenter and Babcock.
We sold the holding in EMIS Group whose share price had approached the price offered by United Health, whose bid has now received provisional approval from the Competition and Markets Authority (CMA).
Outlook: Reasons for optimism
The Office for National Statistics recently revised its assessment for the performance of the UK economy in 2020 and 2021. The cumulative impact was to increase GDP by 1.8%, meaning the UK economy is now estimated to be 0.6% bigger than its pre-Covid levels rather than 1.2% smaller. This matters: once the narrative that the UK is an economic outlier no longer holds, investors will recognise the merits of UK-listed companies.
Despite the gloomy tone of many discussions of the UK economy, businesses are increasing their capital expenditure. Investment slumped in the wake of the global financial crisis and then was stalled by the uncertainty surrounding Brexit. The Covid-19 pandemic and lockdown dealt it another blow. Since then, however, business investment has surged and is 35% above the nadir reached in the second quarter of 2020. This increase in capital investment should boost productivity, increase the economy’s supply potential and help to hold down inflation.
| Discrete performance, 12 months to 30 September |
2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| Artemis UK Smaller Companies Fund | 5.7% | -17.5% | 64.4% | -23.4% |
-3.3% |
| Numis Smaller Companies (-InvTrust) TR | 11.8% | -25.1% | 45.9% | -9.6% | -4.1% |
| IA UK Smaller Companies NR | 1.7% | -32.4% | 51.3% | 0.5% | -6.8% |
Source: Artemis/Lipper Limited, class I accumulation GBP to 30 September 2023. Data prior to 1 September 2010 reflects class R accumulation GBP. All figures show total returns with dividends and/or income reinvested, net of all 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.
Benchmark is Numis Smaller Companies (-InvTrust) TR.
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.
Smaller companies risk
Investing in small and medium-sized companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.
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