Artemis UK Select quarterly review, December 2023

Source for all information: Artemis as at 31 December 2023, unless otherwise stated.

Fund objective 

The fund’s objective is to grow capital over a five-year period.

A strong end to 2023 for the UK stockmarket – and for the fund

Despite it being a quarter marred by conflict in the Middle East, the dominant event from many investors’ perspective was that the US central bank, the Federal Reserve, acknowledged that easing inflation would allow it to cut interest rates in 2024.

Markets responded enthusiastically, sending stockmarket indices in much of the world -– including in the UK – higher. The FTSE All-Share index, which is one of this fund’s two ‘comparator benchmarks’, rose by 3.2% (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.)

Within the UK market, meanwhile, shares of companies whose profits are sensitive to wider economic conditions (so-called ‘cyclical’ stocks) performed better than those ‘defensives’ (whose fortunes are less responsive to ups and downs in the economy). That, in combination with positive news on a number of our holdings, helped the performance of our fund, which returned 5.0% over the quarter, beating both the FTSE All-Share index and the average fund in the Investment Association’s UK All Companies sector, which returned 4.5%. (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.)

Over 2023 as whole the Artemis UK Select Fund returned 19.1%, more than double the return from the FTSE All-Share index (up 7.9%) and from the average fund in its peer group (up 7.2%).

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

Holdings in Rolls-Royce, 3i and airline companies were among the quarter’s major positives

Rolls-Royce continued its strong run into the end of 2023. Its shares moved 36% higher on the quarter as it announced new financial targets that were significantly more ambitious than investors had expected. Rising defence budgets are supporting demand and airlines are adding to their fleets. There is also the prospect of the UK government providing support to help Rolls-Royce commercialise its small modular nuclear reactors.

3i, the private equity group, delivered another set of impressive results. These were driven by the continued strong performance of its largest asset: European discount retailer Action. Over the first nine months of the year, Action’s total sales grew by 30%. A virtuous circle is in place here: growing sales are allowing Action to invest more in keeping its prices low, thereby attracting more shoppers to its stores.

Airlines Ryanair (up 26%) and Jet2 (up 16%) moved higher on good results and the fall in the oil price. Ryanair reported seeing limited impact on bookings from the turmoil engulfing the Middle East. Jet2, meanwhile, did see a brief slowdown in bookings but these have since recovered. Although it is still early days, both companies are reporting strong demand for the coming summer holiday season.

There were relatively few negatives over the quarter

The fund’s holdings in banks lagged the wider UK market over the quarter. Shares in NatWest (down 5%) and Barclays (down 3%) fell as lending margins were weaker than expected. Standard Chartered, meanwhile, made a substantial provision against potential losses on its Chinese commercial real estate loans. Its shares ended the quarter 12% lower.

Energy group BP’s shares fell by 11% as the oil price moved lower. Over the coming months, we believe Opec’s decision to increase production cuts and the tendency of demand for crude to pick up seasonally over the summer should offer some support to oil prices. We continue to like BP (and its rival Shell) for their dividend payments. But we also see them as a hedge against the risk that the war in Ukraine intensifies or the conflict in the Middle East spreads. Either event would be likely to push oil prices higher.

Activity

We used weakness as opportunities to add to our positions in Ashtead and Anglo American

Ashtead has been one of the fastest-growing companies in the UK market over the last 10 years. It rents industrial equipment to a range of industries and customers, many of them in the US. During the quarter, it warned that its profits would be lower than expected. In part, this was due to the Hollywood writers’ strike, which reduced rental demand for its film equipment. A relatively quiet hurricane season also hurt by reducing demand for concrete mixers and diggers. We think both factors will prove to be temporary.

Meanwhile, the production issues seen at miner Anglo American were disappointing. But they did little to diminish the long-term attractions of its portfolio of large, low-cost mines producing copper, platinum group metals and diamonds. So we added modestly to the fund’s small holding after its share price fell.

We added to our holdings in Tesco and Legal &General

Both companies are trading well and could be beneficiaries should investors become more positive on the outlook for the UK economy. To fund these additions, we took some profits in 3i and sold our small position in AstraZeneca. We viewed its recent results as slightly disappointing in terms of the sales growth of some of its newer oncology drugs.

Outlook

It looks likely that the UK general election will take place in the second half of the year. If it results in a clearer medium-term plan for domestic policy and a less confrontational approach to relations with Europe, it could potentially encourage international investors to take a fresh look at the UK stockmarket, which they have tended to spurn in recent years.

We continue to be more optimistic on the prospects for UK consumers than many commentators – and some investors. We would concur with recent comments from Lord Wolfson of Next: “On the face of it, the consumer environment looks more benign that it has for a number of years.” Indeed, we expect consumer discretionary spending to increase as real wages rise, utility bills fall and as tax cuts kick in. Together, this should more than offset the squeeze from higher mortgage rates. A stronger domestic economy would be supportive for the fund’s holdings in consumer cyclical stocks, such as Next, Whitbread and Mitchells & Butlers as well as the airlines. Higher demand for loans and a reduction in impairments, meanwhile, would help our UK banks.

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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