Artemis UK Special Situations quarterly review, December 2023

Andy Gray and Henry Flockhart, managers of the Artemis UK Special Situations Fund, report on the fund over the quarter to 31 December 2023.

Andy Gray

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

Fund objective 

To grow capital over a five-year period. 

Performance

Despite a number of profit warnings across a range of sectors, the UK equity market ended 2023 on a positive note. Markets are relentlessly forward-looking and, during the final quarter, they chose to look ahead to the welcome prospect of lower interest rates in 2024. 

Over the quarter, the fund rose by 4.0%, ahead of the 3.2% return from the benchmark FTSE All-Share index. (A widely-used indicator of the performance of the UK stockmarket, in which the fund invests. It acts as a ‘comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by this benchmark. 

Although the fund outperformed the UK market, it lagged the return from second comparator benchmark, the average fund in the Investment Association’s UK All Companies sector, which returned 4.5%. (A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. Management of the fund is not restricted by this benchmark.)

Over 2023 as whole, the Artemis UK Special Situations Fund returned 13.6%, ahead of the return from the FTSE All-Share index (up 7.9%) and from the average fund in the IA UK All Companies sector (up 7.2%). 

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

Intermediate Capital Group (up 23%) benefited from investors’ renewed interest in private credit markets, an area in which it has a strong heritage and an impressive record of delivering returns.

Watches of Switzerland (up 33%) presented its updated long-range plan, in which management set out its aspiration to more than double sales and profits over the next five years. We believe these targets are credible and that its management have a proven record of delivering on their promises.

Jet2 (up 16%) continues to perform well, with strong bookings for the summer 2024 holiday season. It is reaping the benefits of looking after its customers, staff and suppliers through the challenges posed by the pandemic.

This quarter’s biggest negatives

Burberry (down 25%) suffered amid poor trading across the wider luxury goods industry. A new management team is now in place and refreshed product from a new design team is appearing in its stores. We are waiting for evidence that these changes are having a positive impact.

Our UK bank holdings – NatWest (down 4%) and Barclays (down 3%) – performed poorly. NatWest suffered as investors focused on the higher-than-expected migration of its customers into higher-paying deposit accounts elsewhere. This was exacerbated by NS&I offering a 6.2% one-year fixed-rate deal, which attracted over £10 billion in deposits. Importantly NS&I’s funding target was left unchanged in the Chancellor’s Autumn statement easing the pressure on it to compete with the banks for deposits.

Quarterly profits at Standard Chartered (down 12%) were lower than expected. It is feeling the impact of weakness in the Chinese economy and made provisions against the risk of losses on loans to that country’s real estate sector.

Changes to the fund

We established a new holding in Unilever, which recently appointed a new chief executive. It is selling off its slower-growing brands and placing renewed emphasis on its top 30 brands in a bid to accelerate its growth and deliver fatter profit margins.

We sold the holdings in Restaurant Group and Dowlais. Restaurant Group was the subject of a recommended takeover bid from Apollo at 65p per share. With the owner of Pizza Express declining to make a counteroffer - and with the shares trading at close to Apollo’s offer price - we sold to invest in better opportunities elsewhere.

We sold auto parts company Dowlais, which has recently been spun out from Melrose as a standalone company. With ongoing restructuring costs and pension payments limiting its ability to pay down debt we feel there are better opportunities within the industrial sector. We retain the holding in Melrose.

Outlook

A number of important elections are due to take place in 2024. This seems likely to include a general election in the UK. The usual pre-election giveaways should provide another boost to the disposable incomes of UK consumers. Lower mortgage rates, meanwhile, should also be supportive for consumers and for the UK housing market, which plays an important role in UK economic activity more broadly.

Lower interest rates also raise the prospect that private equity will gain fresh interest in buying UK-listed companies. That’s not to say there has been a lack of takeover activity in the UK. Far from it. But US companies have been more prominent buyers than private equity operators in recent times. That may now change.

Discrete performance, 12 months to 31 December
 2023 2022 2021 2020 2019
Artemis UK Special Situations Fund 13.6% -9.3% 14.1% 0.0%

28.0%
FTSE All-Share TR 7.9% 0.3% 18.3% -9.8% 19.2%
IA UK All Companies NR 7.2%  -9.3% 17.1%  -6.3% 22.4%
*Past performance is not a guide to the future.
Source: Artemis/Lipper Limited, class I accumulation GBP to 31 December 2023. Data prior to 7 March 2008 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 FTSE All-Share 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. 

Special situations risk

The fund invests in companies that are in recovery, need re-financing or are suffering from lack of market attention (special situations). These companies are subject to higher-than-average risk of capital loss. 

Concentration risk

The fund may have investments concentrated in a limited number of holdings. This can be more risky than holding a wider range of investments. 

 

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Andy Gray

Manages:

‘UK special situations‘ strategy

Andy works alongside Henry Flockhart managing Artemis’ ‘UK special situations’ strategy.

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Henry Flockhart

Manages:

‘UK special situations‘ strategy

Henry works with Andy Gray managing Artemis’ ‘UK special situations’ strategy.

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