Artemis Income Fund update

Source for all information: Artemis as at 31 March 2025, unless otherwise stated. 

Fund objective  

The fund aims to grow both income and capital over five years.  

Review of the quarter 

Global stockmarkets had a challenging first quarter, with the main US index the S&P 500 leading it downwards. Concerns around the US’s dominance in artificial intelligence (AI) and the threat of tariffs (a tax on imports) on some of its largest trading partners significantly dented investor confidence in the region during the period. 

Performance was better outside the US, with the FTSE All-Share returning 4.5%¹. The chancellor’s spring statement – despite highlighting challenges – did contain some bright spots, in the form of continued efforts by the government to cut bureaucracy as well as the announcement of plans to boost defence spending², providing a potential boost to the UK’s manufacturing sector over the long term.  

Despite some mis-steps thus far, we believe the government’s recognition of the importance of economic growth remains in place, with several management teams of the companies we hold citing positive engagement. Execution will not be straightforward, but we have seen enough to believe on balance that the intent is at least there, which is a significant change versus recent history. 

Performance  

The fund returned 2.7% over the quarter, underperforming its FTSE All-Share index³ benchmark, which returned 4.5%, but outperforming its Investment Association UK Equity Income sector benchmark⁴, which made 1.1%. 

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

Detractors

Tesco's shares (as well as those of other UK supermarkets) fell after Asda announced a programme of significant price cuts in an attempt to stem market share losses⁵. We believe this is a sign of desperation from Asda, as it has large amounts of debt⁶.

The supermarket price wars of a decade ago looked very different to the competitive environment we see today. Tesco’s market position, scale and strong balance sheet – as well as the enormous amounts of customer data it holds via its Clubcard – suggest it is well placed to remain dominant in the UK. We do concede that there could be some shorter-term pressures, though, and are conducting checks to see if Asda’s actions could damage our investment thesis.

Shares in SSP, which operates food outlets at stations and airports, fell along with the broader travel & leisure sector on concerns about economic growth. However, its first-quarter trading update (released at the end of January) was positive, with sales growing in North America.

The long-term prize for SSP – taking market share in a growing and very profitable industry – remains significant. However, execution has been poor in a number of areas in recent years and this, along with SSP’s investment into growth, has depressed both cashflows (the amount of money left over after all liabilities have been paid) and the share price. In the shorter term, we believe SSP’s stake in its Indian joint venture, which is likely to float on the stock market in the coming months, is significantly undervalued. As a result, we think its shares look cheap.

Educational publisher Pearson fell as investors took profits after a strong run of performance. The company's US higher-education division returned to growth in the third quarter⁷, defying its critics. Since then, more investors have woken up to the significant opportunity facing Pearson in digital learning, assessments and accreditation. As a whole, we believe Pearson is one of a relatively unusual group of stocks where AI offers an opportunity to enhance the user experience and expand revenue streams.

Contributors

Lloyds announced strong full-year results across the board. Profits continue to accelerate thanks to the impact of higher interest rates on net interest margins (the difference between the interest banks receive on loans and the interest they pay on customer deposits). The structural hedge (a means by which banks invest a portion of their profits in fixed income instruments to smooth volatility of revenues) should continue to drive further profit upgrades for several more years.

With respect to the ongoing news flow around compensation payments for mis-sold motor finance commission, the impact is now not expected to be as bad as was initially feared.

Aviva delivered strong revenue growth in 2024 and significantly increased dividends, too. We are optimistic about its purchase of Direct Line as the combined company has more than 20 million customers and is now more tilted towards areas with lower costs and therefore higher profit potential⁸.

Additionally, Aviva is in our view likely to return large amounts of surplus capital to shareholders after the integration of the two companies is complete.

Next’s most recent results (in the year to January 2025) showed more strong progress across the business, with profits up. The current year's trading is also ahead of expectations, with the retailer upgrading expected sales and profits⁹. Execution has been consistently strong in recent years, with the company investing sensibly in technology and innovation to “break free of historic constraints” (to quote the latest results commentary) and deliver growth.

Activity

In recent months we have been building a position in UK housebuilder Berkeley Group, which specialises in large, brownfield (previously developed land that is now unused) regeneration projects in London and the South East. We have always held the business and its management team in high regard. Given the cost and complexity of these projects, there are relatively few competitors, and strong execution of its plans (which has been of high quality from Berkeley in the past) can result in attractive returns. We have invested in the company before (we sold out in 2018) and we believe now could be another attractive entry point.

Outlook

In the wake of President Trump's announcement of a much harsher tariff regime, only for him to put it on hold several days later, stockmarkets have been very volatile. There has been little in the form of reassurance from the US administration, with Trump himself reaffirming the necessity of tariffs to ‘fix’ the US economy and reconfigure trade deficits (a higher value of imports than exports) with many international trading partners.

We do not profess to be experts in this area and as has been the case since the fund’s inception in June 2000, we would never position ourselves in accordance with any short-term, ‘heads or tails’ view on the economy. We remain focused on what we can control – which is whether our investment theses and assessment of companies’ cashflows are correct – and ensuring that the portfolio is diversified and not overly exposed to any one sector, industry or investment style.

The fundamentals of our portfolio look strong, in our view. We believe the competitive position of the portfolio holdings, in aggregate, is as strong as has been the case for a number of years, and this is supporting healthy cashflow generation and dividend cover (a measure of a company’s ability to pay future dividends).

We also believe the UK looks compelling at this juncture, with valuations still looking cheap. On the other hand, the US looks expensive. Even if tariffs are rolled back to some degree, confidence in the US has been (materially) dented. Given the US accounts for almost three quarters of developed market (more economically developed countries) stockmarkets globally, there is the potential for significant amounts of money to be removed from its shares and redistributed to other regions. The UK could benefit from this phenomenon.

With respect to portfolio activity, we are not looking for short-term trades as a result of recent volatility. However, if opportunities to improve the portfolio’s long-term quality present themselves – whether this be changes in capital allocation within the portfolio or adding new positions – we will, as usual, examine each case on its merits and the prospective risk/reward trade-off on offer and act where we see fit.