Artemis UK Select Fund update

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

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

Review

The third quarter was a rollercoaster ride for the UK stockmarket, albeit one that ended with it back in positive territory. The ride became particularly bumpy in early August, when weaker manufacturing numbers in the US and a decline in payrolls data prompted sudden fears of recession in the world’s largest economy. This coincided with a decision by the Bank of Japan to raise interest rates, catching some investors off-guard. 

As markets fell, our view was that the changes in the outlook were comparatively modest. We therefore regarded the sell-off as an opportunity to add to the fund’s holdings in some of our favoured names, such as bank Standard Chartered and private equity firm Intermediate Capital.

Helped by the Federal Reserve’s (the US’s central bank) emphatic cut in interest rates, stockmarkets subsequently regained their composure and, by the end of the quarter, were setting new highs.

Performance

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

With a return of 4.6%, the Artemis UK Select Fund outperformed both its FTSE All-Share index¹ benchmark (up 2.3%) and its IA UK All Companies² peer group bennchmark (up 2.3%) on the quarter. Over the year to date, meanwhile, it has returned 19.7% versus 9.9% for the FTSE All-Share and 9.3% for its peer group. 

Contributors 

International Consolidated Airlines Group (IAG)

Results from airline holding company IAG beat expectations thanks to strong trading by British Airways (on routes to North America) and by Iberia (on routes to Latin America). In addition, its debts are now significantly lower than expected thanks to a combination of higher profits, strong bookings and lower capital expenditure (a result of delays in the delivery of new aircraft).

WH Smith

An encouraging trading update highlighted both the continuing strength of WH Smith’s UK travel business and its improved performance in the US. The business is steadily returning to its pre-Covid model of rolling out concessions at travel hubs while slowly shrinking its legacy high-street business, all the while returning a steady stream of cash to its shareholders through dividends and by buying back shares.

NatWest

In late July, NatWest reported an impressive set of earnings for the second quarter. It has now delivered a total return of 67%³ to its shareholders over the year to date. We remain highly positive on the prospects for the group, partly because the interest rate on its 'structural hedge', a risk-management tool used by banks to manage their exposure to fluctuations in interest rates, will continue to rise over the coming years.

Detractors

Oxford Instruments

There was no concrete news from high-tech toolmaker Oxford Instruments to explain the decline in its share price over the quarter. If we were to look for an explanation for the weakness, we might cite the sell-off in some industrial shares in response to weaker survey data and increased fears of recession in the US. Equally, the recent strength of the pound represents a slight headwind for this export-focused business. We believe this is largely noise and retain our holding in this unique company.

Melrose

Aerospace company Melrose came under pressure as it signalled its future cashflows would be weaker than expected. Melrose needs to increase its capital expenditure to support its new business it has recently won (which we view as a good thing) and to pay for fixing problems in Pratt & Whitney engines, in which it is a minor partner. In addition, some hedge funds called Melrose’s accounting practices into question. These questions surrounded the way it accounts for future earnings from its partnerships with engine makers. Having discussed this matter with the company, we believe its accounting assumptions make sense.

Evoke

Evoke, the bookmaker formerly known as 888, warned profits would be lower than expected. The main disappointment would appear to be that promotions around events such as the Cheltenham Festival and the Euro 2024 football tournament did not deliver the hoped-for returns. Some customers took up Evoke’s introductory ‘free bet’ offers but did not return to bet again. The company’s management expects to see a much stronger performance in the second half of the year.

Activity

Add: Entain

We added to our holding in gaming group Entain. Recent management changes are beginning to show signs of stabilising its operating performance.

Add: Morgan Sindall

We added to the fund’s holding in construction group Morgan Sindall after another set of strong results. We believe this business is well placed to benefit from the new government’s focus on housebuilding.

Add: Smurfit Westrock

This global packaging company was formed by a merger between Irish-based but UK-listed Smurfit Kappa and US-based WestRock. We continue to believe that the deal will deliver value to shareholders.

Reduce: DS Smith

We part funded our addition to Smurfit Westrock by selling some of the fund’s holding in DS Smith, one of its rivals.

Reduce: NatWest

We remain extremely positive on the prospects for NatWest. The shares’ strong performance over the year to date, however, had seen the holding growing to account for more than 6% of the fund. We have taken some profits.

Sale: Tyman

We sold our holding in door-and-window producer Tyman when the takeover bid from Quanex completed. This was a part-cash, part-stock deal and the fund now has a small holding in Quanex’s US-listed shares. In these situations, it is typically a good idea to ‘warehouse’ the residual equity positions for a few months to try to maximise value rather than immediately rushing for the exit.

Outlook

We have become more cautious on the outlook for the global economy in recent months. Economic data in a number of countries has looked weaker. Businesses in some sectors, such as recruitment and industry, are reporting tougher trading conditions.

Over the last six months, we have sold Ashtead, Tyman and M&G and added new holdings in National Grid and Plus 500. This should make the fund slightly less sensitive to a potential economic slowdown. For now, we continue to watch economic and company news closely to decide if we should move further in this direction.

Closer to home, we continue to believe that, in a global context, the UK economy is a relative bright spot. British consumers are well-placed to spend more, and the cut in interest rates should feed through to improving activity in the housing market. Historically, the health of the UK housing market has been a big driver of consumer confidence. Having been in the relative wilderness for the best part of a decade, we are hopeful that the changing narrative on the UK economy – particularly at a time of increased uncertainty elsewhere – will provide the catalyst for the UK market to begin to attract overseas investors.