Artemis UK Special Situations Fund update

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

The fund’s objective is to grow capital over a five-year period. Politics have dominated discussions in the quarter, with surprise elections announced in the UK and France and the US presidential campaign kicking off in earnest. While the UK political landscape moves towards the centre, France looks fractured between two extremes and the odds of a second Donald Trump presidency shortened dramatically after this year's first televised debate.   

The UK market still looks cheap relative to international peers¹, so it is no surprise that M&A (merger & acquisition) activity remains a feature. There has, however, been a noticeable shift towards larger deals in recent months, with those of more than £1 billion becoming commonplace². 

Against this backdrop the fund rose by 4.1% during the quarter, ahead of the 3.7% return from its FTSE All-Share index³ benchmark and the 3.9% return from its Investment Association UK All Companies sector⁴ average benchmark. 

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

Positives 

There were several positive contributors to the fund’s performance in the quarter. Of note: 

• Britvic, the soft drinks maker and UK bottler for Pepsi, turned down an offer from Carlsberg to buy it at a 29% premium to its pre-offer share price, which we felt undervalued the business and its prospects. An improved offer at a 36% premium has since been approved. 

• Johnson Service Group is focusing on rebuilding profit margins. While wage inflation remains a problem, energy costs are now falling. The workwear and protective clothing company has raised profit forecasts by more than 10% for 2025 and 2026.
• UK banks continue to perform well, with interest rates in something of a sweet spot – high enough to support net interest income (the difference between the interest they pay on deposits and the amount they receive on loans such as mortgages) but not high enough to trigger defaults. We feel NatWest and Barclays continue to offer good value.
• Oxford Instruments’ new chief executive Richard Tyson unveiled his strategic update in June. The provider of high-tech research tools is being restructured into two divisions with the aim of delivering sales growth of 5 to 8% and profit margins of more than 20%.

Negatives

The following companies detracted from performance during the quarter, for the reasons specified:

• Poor weather may be affecting retailer B&M European, which is selling less garden furniture. But costs are being tightly controlled and a store-opening programme supports future growth. We remain focused on the long-term opportunity.
• Transport franchise FirstGroup did poorly, with Labour’s manifesto pledge to nationalise the railways in focus. Bus franchising has also been highlighted by Labour, but there are opportunities as well as threats.
• GSK (GlaxoSmithKline) fell in early June on the back of a Delaware court ruling affecting cases that argue its drug Zantac increases the risk of cancer. The company will appeal the decision.
• A trading update from precision instrumentation provider Spectris revealed a slow start to 2024 following strong performance last year. We reduced our holding as a result. Management later warned that trading has not improved as much as anticipated and lowered full-year profit expectations.

Activity

We introduced four new holdings to the portfolio in the quarter.

• Pub operator Mitchells & Butlers has made a strong recovery since Covid. Revenues have rebounded as the business has been able to push through higher prices in response to industry cost inflation, while sales volumes have also started to recover.
• Man Group, the alternative asset manager, has delivered strong investment performance, with major funds near high watermarks. This will likely trigger sizeable performance fees.
• DFS, the furniture retailer, has been affected by weaker sales volumes which have declined significantly from pre-Covid levels. Yet it has taken substantial market share since then and a recovery to 2019 volumes would lead to materially higher profits.
• WH Smith's shares have underperformed the UK stockmarket over the last 12 months, with its US stores lagging behind expectations. We believe management will be able to improve the business and expect it to continue taking market share in airports.

On the flip side, we sold out of four positions.

• The portfolio of private equity firm 3i is dominated by European discount retailer Action, which remains in great health. Yet following strong performance in the share price, we now see more upside in other portfolio holdings.
• Ashtead, the equipment-rental company, has grown strongly over the years, but has reduced profit forecasts more recently. When shares continued to rise, we sold out.
• We exited Burberry after a period of sustained poor trading. A difficult environment for the luxury sector was admittedly unhelpful, but the turnaround being implemented by the new chief executive and chief designer is not generating the expected improvement.
• Shares in Genuit, a manufacturer of plastic piping systems, hit their price target, so we sold out.

Engagement

We held meetings with the sustainability teams of several holdings in the quarter, including: Britvic, miner Anglo American and vehicle distributor Inchcape.

Outlook

A new Labour government with a comfortable majority offers a stable political backdrop for the UK. Economic data for the country is also supportive. Q1 GDP (gross domestic product) was recently revised upwards⁵ and inflation has hit the Bank of England’s 2% target, paving the way for interest rate cuts.

The UK market’s valuation discount is becoming more difficult to justify, so we are unsurprised that M&A activity remains high. We see early signs of interest in UK equities, which we expect to increase, and are looking forward to the second half of the year.