Artemis UK Smaller Companies Fund update

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

The fund’s objective is to grow capital over a five-year period. It made 0.3% over the quarter to 31 March 2024, slightly ahead of the 0.2% made by its Deutsche Numis Smaller Companies (-InvTrust) index¹ benchmark, but behind the 1.4% made by its second benchmark, the Investment Association UK Smaller Companies sector² average.  

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

Top contributors

• Financial services cloud-computing provider Beeks
• Defence company Babcock
• Social housing caretaker Mears

Beeks announced it had won two contracts with the potential to transform the business. It raised future profit forecasts.

Social housing caretaker Mears upgraded its profit forecasts and is seeking to use excess cash (about £100m) on further share buybacks³. Three other holdings have announced share buyback programmes so far this year, following on from 11 in 2023.

Of all our company meetings in March, we came away feeling most excited about the prospects for Alpha Group, a business-to-business provider of foreign currency exchange and banking services. Last year, it earned £73m in interest on £2bn of cash it was waiting for its clients to deploy. This was not included in last year’s adjusted profit before tax (one accounting method of interpreting profits) figure of £43m. While interest rates are likely to fall, we expect the cash balance to grow (new accounts were up by 54% last year).

The fund also benefited from avoiding Watches of Switzerland, financial services firm Close Brothers and engineer Dowlais, all of which saw falling share prices.

Biggest detractors

• Vanquis
• Translation services provider RWS
• Publisher Future

At times it felt like our holdings were stuck in treacle while other smaller companies were flying. We struggled to square our underperformance compared to the other funds in our sector with how the underlying businesses in our portfolio did during the quarter.

For example, a number of shares fell towards the end of the period, even though there was no news about them. These included online price comparison website MoneySupermarket, translation services provider RWS, drinks maker Britvic and identity verification company GB Group.

Admittedly, banking company Vanquis had a terrible time and the halving of its share price in March was responsible for a fifth of our underperformance. It slashed profit forecasts after a huge increase in complaints from claims management companies about its credit card business. Most came from one company and the vast majority are being rejected by the ombudsman. However, under current regulations, Vanquis must pay the ombudsman to investigate each claim, causing a huge increase in administration costs. The shares are now trading cheaply, while its balance sheet looks strong.

It’s hard to judge how long the burden of elevated claims will last, which is why we haven’t added to our holding. A recent proposal that would force the claims companies to pay for the cost of making a claim could make us change our minds.

Consumer goods company PZ Cussons generated 40% of its operating profit in Nigeria last year, so it was harmed when that country’s currency, the Naira, fell 71% against the pound.

We were also affected by not holding pharmaceutical Indivior, promotional products supplier 4Imprint and telecoms testing company Spirent.

Activity

We initiated a new holding in IG Group (derivatives trading), which we have tracked for many years and which is held in the Artemis Income and UK Special Situations funds.

We added to positions in TT Electronics, consultant Next 15, property developer Harworth and drinks maker Britvic, and took profits from Computacenter, outsourcing contractor Serco and defence company Babcock.

Outlook

Low UK share prices only make sense on a relative basis if the country remains an outlier from an economic perspective, a narrative that we see as difficult to sustain. Inflation is likely to fall below the 2% target following April's reduction in the energy price-cap, government debt levels are low relative to other major developed countries and consumer confidence is improving.

There is no longer much scope for domestic pension funds to reduce their UK holdings, but even if valuations don’t rise back towards historical and geographical averages, in our view, investors could potentially see a higher total return from cheaper stockmarkets. This is because when they reinvest dividends, they do so at a lower level, allowing them to buy more shares and compound returns at a faster rate.