Artemis UK Select quarterly review, 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.

A good quarter for the UK stockmarket

The UK stockmarket outperformed the majority of its global peers over the quarter. The FTSE All-Share index, one of this fund’s two ‘comparator benchmarks,’ rose by 1.9%, more than double the return from the wider global market. (The FTSE All-Share is a widely used indicator of the performance of the UK stockmarket, in which the fund invests. Management of the fund is not restricted by this benchmark.)

The (relatively) strong performance from UK shares was due, in part, to a fall in inflation. That, in turn, eased the pressure on the Bank of England to keep pushing interest rates higher. A rise in the price of oil, meanwhile, boosted the earnings of energy companies, which are a prominent feature of the UK stockmarket. At the same time, some of the extreme negativity towards the UK economy seen in recent years began to fade. The Office of National Statistics (ONS) published revised data showing that the UK was not, as was once thought, the weakest performer among the world's major economies in the wake of the pandemic. Instead, the ONS' new GDP estimates suggest that the UK's recovery was broadly in line with those of other G7 economies.

Performance

The Artemis UK Select Fund rose by 1.9%, a return that was in line with the UK market but ahead of its peer group.

The average fund in the Investment Association’s UK All Companies sector, the fund’s other ‘comparator benchmark’, returned 0.8% over the quarter. (This is the second of two comparator benchmarks against which the fund’s performance can be compared. It is a group of other asset managers’ funds that invest in shares of UK companies 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.

Risers and fallers

Housebuilder Vistry Group was the biggest positive contributor to the fund's strong performance over the quarter. Its shares rose by 38% after it announced it would run down its conventional housing business and re-purpose many of its sites to accelerate growth in its affordable housing division. As a result, Vistry will indirectly return £1 billion of capital to its shareholders by buying back its shares. (By reducing the number of shares they have in issue, UK companies like Vistry can increase the earnings per share that accrue to their remaining shareholders). We added to the fund's holding.

Elsewhere, BP benefited from Saudi Arabia and Russia’s cuts to oil production, which drove up the price of crude oil. Like Vistry, BP is also buying back its shares, which should boost returns to its long-term shareholders.

The fund's largest holding, 3i Group, continued its strong performance on the back of further progress from its holding in Action, a European discount retail chain.

On the downside, one of our biggest holdings, scientific-tool maker Oxford Instruments, fell by 19.7%. This was largely due to worries about the health of the Chinese economy, which weighed on the share prices of companies for whom China is an important export market. We believe strong growth in other areas of Oxford Instruments' business will more than offset any weakness in its sales to China so have added to our holding.

Elsewhere, bookmaker Entain had a run of bad luck: a higher-than-average number of its customers enjoyed big wins in low stakes, longer-odds ‘bet builder’ products. Meanwhile, its decision to tighten limits and increase the checks it applies to potentially 'at-risk' customers meant it lost market share to smaller competitors, who tended to apply less stringent measures.

Vanquis Banking Group posted a disappointing set of results. Its shares fell by more than 30%. It was not all bad news, though: there was no notable increase in bad loans, its funding position remains strong and its new chief executive has, in our view, made a promising start. We believe it has an attractive opportunity to serve around 15 million consumers who don’t meet the lending criteria of traditional banks

Activity

We built a holding in Rolls-Royce, whose engines power aircraft, submarines and military jets. We believe analysts are underestimating the profitability of its 'aftermarket' business, where it sells long-term maintenance and services contracts to its customers.

Elsewhere, we added to HSBC, whose profits are helped by higher interest rates. It increased its dividend - the regular payments through which it shares a portion of its profits with its shareholders - by 10%. It also announced it would indirectly return a further US$2 billion to its shareholders by buying back its own shares.

We bought more shares in Ryanair, which recently pointed out that airline capacity within the EU is still about 20% below its pre-Covid trends. That gives airlines like Ryanair pricing power (in other words, they can put their fares up and still sell seats). Supply constraints mean we expect that to continue.

In terms of sales, we sold more of our holding in car dealership Lookers following a revised takeover bid from Global Auto Holdings, which increased its offer price by 10%.

Outlook

The Bank of England has paused interest rate increases and as 'real' wage growth (the pace at which wages are growing over and above inflation) turns positive, the worst of the cost-of-living squeeze now appears to be behind us. As their confidence increases, UK consumers are likely to start dipping into their accumulated savings, providing support to economic growth - and to the UK's consumer-facing companies - going into 2024.

While sentiment towards the UK economy has begun to pick up from a very low level, that has yet to be reflected in the attitude of most overseas investors towards the shares of UK companies, which remain deeply out of favour. In many parts of the UK market, valuations - a company's share price to the profits it generates - are unusually low relative both to the UK market's own history AND relative to valuations in most of the world's other major stockmarkets.

What might cause that to change is not immediately obvious. The good news, however, is that UK companies are taking advantage of their historically low valuations to buy back their own shares. Just under 45% of the companies in our fund are buying back shares; we can’t recall a time when so many companies were doing so. Logic suggests that will, in time, result in their share prices moving higher. We remain optimistic on the prospects for the companies we hold and believe that, at some stage, global investors are likely to re-visit the UK as the relative outlook improves versus other markets.

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.

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