Artemis UK Select Fund update

Source for all information: Artemis as at 31 March 2024, unless otherwise stated.

2024 started off well for the UK stockmarket – and for the fund. Share prices continued to push higher through the first three months of 2024. Strong economic data on both sides of the Atlantic offered support to the hope that a ‘soft landing’ – a scenario in which central banks push up interest rates far enough to cool inflation but not enough to trigger a recession – is being successfully delivered.

In the UK, meanwhile, a sequence of strong company results and an increase in share buybacks (where companies use their spare cash to repurchase and retire their own shares, so increasing their ‘profits per share’) helped the FTSE All-Share index, one of this fund’s two ‘comparator benchmarks’, to move 3.6% higher on the quarter¹.

Against this positive backdrop, and in the context of the fund’s objective to grow capital over a five-year period, the Artemis UK Select Fund continued to outperform, returning 9.8%, beating both the index and the average fund in the Investment Association’s UK All Companies sector, which returned 2.8%². 

The fund enjoyed strong returns from its holdings in Rolls-Royce, NatWest and Barclays

Having spent the second half of 2023 seeing our holdings in banks come under pressure, it was gratifying to see a distinct improvement in returns here in early 2024. Equally, weakness in some of those areas of the market where our fund has relatively little invested, such as the mining sector and fast-moving consumer goods stocks, was also helpful.

On a stock level, meanwhile, Rolls-Royce (up 42%) continued to perform well. Another strong set of results showed it beating expectations on sales, profits and free cashflows³.

At times last year, our holdings in domestic UK banks such as NatWest frustrated us. But, like its peer Barclays, NatWest has begun to put those frustrations behind it. The main disappointment last year surrounded its lending margins, which fell despite the support higher interest rates should have offered. We felt confident that this was a timing issue and that things would soon improve. Better-than-expected results from the domestic banks, including NatWest, suggest that this process is now starting to unfold. Its shares returned 27% on the quarter.

Meanwhile, the story at Barclays (up 23%) is similar to the one unfolding at NatWest: its lending margins disappointed last year. But, as with NatWest, this is now starting to change. It is aiming to return £10 billion to its shareholders through dividends and share buybacks over the next three years. And it has offered a clearer explanation of its vision for its investment bank, something that investors had hitherto struggled to grasp.

Housebuilder Vistry reported a new win for its ‘partnerships’ business

A trading update from housebuilder Vistry (up 34%) indicated that it has seen a material increase in reservations across its business. Consumer sentiment towards housing is clearly being aided by lower mortgage rates and by an expectation that the next move in interest rates will be down. It also announced further success for its partnerships business, where it collaborates with housing associations and public bodies to build affordable homes. It was named as the preferred bidder on a £276 million scheme for 739 new homes in Barnet⁴. We continue to see the move towards this partnership model as leaving Vistry well placed to take advantage of a renewed focus on affordable housing.

DS Smith attracted bid attention

Paper and packaging group DS Smith (up 29%) received a merger proposal from Mondi. Shortly after the quarter ended, it accepted a counteroffer from International Paper which represented a 48% premium to its share price on 7 February, just before the approach from Mondi became public⁵.

There were relatively few negatives over the quarter but Vanquis, Oxford Instruments and Mitchells & Butlers came under pressure

Vanquis’ share price came under pressure (down 59%) as it warned that its profits would be significantly lower than the market had expected. This was due to the cost of processing complaints in the wake of the FCA’s motor finance review. Most of the claims that Vanquis is receiving come through claims-management companies and are being lodged despite the fact that it does not use the variable-commission model that the FCA is investigating. Vanquis believes that most of these claims are spurious (in many cases, the complainants have never been its customers). But, as we saw when the banks addressed the mis-selling of PPI (payment protection insurance), the cost of processing claims is significant. If those claims are not answered and resolved within 50 days, they must be referred to the Financial Ombudsman Service (FOS) at a cost to Vanquis of £750 per case regardless of the outcome. The net result is that the profit recovery that Vanquis had hoped to deliver in 2024 will be entirely negated by the cost of processing claims.

If there is good news, it is that there is currently a consultation on whether claims management companies should pay the processing fee on unsuccessful claims. If that were to be enacted, it would clearly reduce the costs for Vanquis materially and could also significantly reduce the number of claims it receives. In the meantime, we are holding onto our small (0.3%) position.

Oxford Instruments' share price drifted lower (down 7%) on no particular news. We used the weakness to add to our holding.

Mitchells & Butlers (down 12%) gave back some of the gains it made last year. As with Oxford Instruments, there was no stock-specific news. Falls in energy costs and food prices since the start of the year should, however, provide a tailwind for its margins and we retain the position.

It was a quiet quarter for activity

We added modestly to our existing holdings in International Airlines Group (‘IAG’) and Evoke on weakness. IAG, which is the parent company for British Airways and Iberia, has been weak due to fears of a capacity glut in long-haul, transatlantic routes. We believe these fears are misplaced and that capacity growth on the key London-US route looks modest heading into the summer. Recent problems at Boeing, meanwhile, suggest that the airlines industry will remain capacity-constrained for a number of years.

In the case of Evoke, a sports betting and online gaming company formerly known as 888, we took encouragement from the quality of its recent hires.

We sold out of Prudential, the Asia-focused financial group. We now prefer to gain our exposure to Asia through banks focused on the region, such as Standard Chartered.

We sold our small holding in Virgin Money following the bid from Nationwide. We bought this holding close to the lows of the pandemic, so it has proven to be a profitable investment. Equally, however, it has been somewhat frustrating that its poor delivery on costs and IT investments have weighed on its profits.

Outlook

Whether the Bank of England feels able to cut interest rates before its US counterpart will partly depend on inflation. But, given the Bank’s historic reluctance to go out on a limb relative to its peers, we may see only one cut this summer, with improvements in growth giving it room to take a wait-and-see approach. We continue to believe that economic growth and consumer spending will accelerate from here, which should support returns from companies whose fortunes are attuned to the health of the domestic UK economy.