Artemis UK Special Situations 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. As economic growth began to slow during the quarter, stimulus (when governments and central banks try to boost growth) was front and centre of the agenda. The US’s central bank, the Federal Reserve, cut interest rates by 0.5 percentage points (interest rate cuts are generally positive for shares as they make competing assets such as cash and government bonds look less attractive) while the Chinese government announced a package of monetary (adjusting the money supply via measures such as raising or lowering interest rates) and fiscal (such as tax cuts or increased government spending) measures, prompting a sharp rally in Chinese shares. UK-listed companies with high exposure to the Chinese economy also benefited.  

The immediate outlook did however lead to less economically sensitive companies outperforming in the quarter, hindering the fund’s relative performance as it has less exposure to these shares compared with the stockmarket.  

Against this backdrop, the fund rose by 1.7% during the quarter, below its FTSE All-Share index¹ benchmark and Investment Association UK All Companies sector² average benchmark, which both returned 2.3%. 

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

Negatives 

Babcock reported good results, with sales growth and profit margins ahead of expectations. This was offset by news earlier in the quarter that management had to set aside a further £90 million for an existing impairment³ (a reduction in the estimated value of an asset). Its shares gave back some of their year-to-date gains, but on balance we believe the positives outweigh the negatives. 

Many industrial companies such as TT Electronics and Essentra (neither of which we hold) have warned of tough trading, with anticipated second-half recoveries failing to appear. A China resurgence remains elusive, the European Union is slowly exiting an industrial recession and the US market for their products has softened. Against this backdrop, our holdings in Oxford Instruments, Morgan Advanced Materials and Bodycote underperformed. 

Positives 

Banks continued to deliver strong performance in the period as interim results provided more evidence that returns are improving in line with management teams' targets. Share buybacks (where companies use spare cash to buy back their own shares, increasing the share of profits for remaining shareholders) are continuing at pace. 

Bookmaker Entain bucked its recent run of poor results and increased profit guidance after a strong second quarter. The Euro 2024 football tournament this summer certainly helped, but product improvements were of more significance to us and an increased marketing budget should further strengthen growth in the second half. Gavin Isaacs has now joined as chief executive, bringing with him a strong track record in the industry. We were impressed upon meeting him. 

Spread-betting firm IG Group has also appointed a new chief executive, Breon Corcoran, who sees potential for the business to build sales by speeding up decision making and increasing marketing and acquisitions. The shares rallied from their low valuation on this renewed confidence in the company’s ability to deliver growth. 

Purchases 

New idea generation remains strong and we introduced four new holdings to the portfolio in the quarter.   

Rosebank Industries is the new venture launched by Melrose’s previous management team, which aims to acquire underperforming industrial assets and implement its 'buy, improve, sell' strategy. The position is currently modest but will increase when the team finds its first target company. 

Having met specialty insurer Beazley in March, we were impressed with the track record of growth. We feel its potential is not adequately captured in the valuation.   

Domino's Pizza, a past darling of the UK mid-cap market, has underperformed in recent years. Entry into non-UK markets and friction between the PLC and the franchisees have weighed on returns. However, Domino's remains the market leader in UK pizza delivery and has now partnered with both Uber Eats and Just Eat. It has also resolved the impasse between the franchisees and the PLC. The new chief executive, Andrew Rennie, is a veteran of the industry and a previous Domino's franchise operator. He expects an acceleration in store growth and improved order frequency via the introduction of loyalty programmes, new menu options and a refreshed national advertising campaign.  

Hunting serves the energy, aerospace and general industrial market with precision tooled products. Serving many different markets has been a challenge for the business and it lost focus on profit margins. However, after coming through a period of restructuring, the company has just introduced an ambitious strategic plan.  

Sales 

We sold our holding in airline Ryanair on concerns that price increases pushed through since 2019 could lead to lower sales. The sharp reduction in airfares over the summer suggests that supply is now outstripping demand at these higher ticket prices.  

We also sold our longstanding holding in educational publisher Pearson after a valuation re-rating. A new chief executive aims to improve revenue and margin growth, but we see greater upside elsewhere.  

Outlook 

The new UK government's desire to clean the slate and apportion blame to the prior regime has led to some depressing headlines on tax increases and spending austerity. Animal spirits are being kept in check. By emphasising an uncertain outlook, we can understand why someone might delay that new sofa until next year, stick with the same car or downgrade the holiday budget. While consumer sentiment has improved from its lows, the UK savings ratio (the proportion of households' total resources that are available but have not been used for consumption) now sits above 10%, even though Covid savings remain intact⁴. Timing is uncertain, but the setup for a consumer recovery remains attractive. Our portfolio reflects that confidence.