Artemis UK Special Situations Fund update

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

The fund’s objective 

To grow capital over a five-year period. 

Performance

The fund rose by 0.2% during the quarter, compared with 4.5% from its first benchmark, the FTSE All-Share Index¹, and 0.0% from its second benchmark, the Investment Association UK All Companies sector² average.

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

The rally in the US stockmarket that followed the presidential election reversed in the first quarter of this year, with President Trump’s unconventional approach causing considerable uncertainty for governments, company management teams and investors alike. One immediate outcome has been a big increase in European defence spending after the US hinted it would be less willing to come to the aid of its allies in future.

In comparison, the UK was relatively quiet, although the chancellor made some cuts to welfare to meet her own rules on spending because of a weaker economic situation. The most striking aspect of the UK market year to date has been how large caps (the biggest companies whose shares are sold on the stockmarket) have outperformed smaller listed companies, which has been the case in other markets as well.

Even though we think the stockmarket circumstances that caused large caps to outperform have now changed, their shares are still doing better and so we are taking advantage of opportunities to buy smaller companies at lower prices.

Positives

Aerospace & defence company Babcock has benefited from increased defence spending across Europe, although it is also taking steps to improve the quality of its business. It released a strong trading update³, increasing profit expectations, with its nuclear services division performing best. The company therefore remains on track to deliver its medium-term growth and profit targets, which it set before the recent boost to defence spending.

The banks we hold have been performing consistently well. Standard Chartered and Barclays both announced that their 2024 results were better than expected and are buying back shares while they are relatively cheap⁴.

Retailer Next reported strong Christmas trading, then at the end of March announced it expected its profits to rise⁵. Strong international sales are helping the company to overcome cost challenges and deliver performance that is ahead of expectations.

Engineering company Smiths Group announced it would break up its business⁶, something which had been long expected. It will sell its Interconnect division this year, before selling or separating from its Detection business. ‘FutureSmiths’, the remaining section of the business, will be made up of John Crane and Flex-Tek, the higher-growth, higher-profit divisions.

Insurance company Aviva reported strong results. Following its acquisition of fellow insurer Direct Line the company now has a base of more than 20 million customers⁷.

Negatives

Reinsurer Conduit gave a disappointing update after insurance claims made after the Los Angeles wildfires turned out to be costlier than expected. The company’s management responded by buying protection for the hurricane season to help it deliver positive financial performance into the future.

Our consumer-focused mid caps (mid-sized companies whose shares are sold on the stockmarket) had a difficult first quarter even though most reported healthy trading. Low-cost airline Jet2 expects its profits to grow substantially this year, while pub and restaurant chain Mitchells & Butlers reported a strong boost to profits over the peak Christmas period. Watches of Switzerland has seen its revenues stabilise in the UK and continue to improve in the US, helped by its recent purchase of jewellery brand Roberto Coin. All these companies have nevertheless seen a decrease in the value of their shares. Discount retailer B&M and hospitality business Whitbread also fell, although these companies have recently found the environment more difficult.

With growth in the electric vehicle market stalling, there are currently more cars than usual that have been built but not yet sold, affecting demand for the products of specialist manufacturer Morgan Advanced Materials. The company has therefore altered its future spending plans, while its management is taking further action to cut costs.

We believe that bookmaker Entain has started to change its fortunes for the better, so we were disappointed to see the departure of its recently recruited chief executive, Gavin Isaacs. However, we hold Stella David – who will take on the role again – in high regard, and the business significantly improved under her leadership last year.

Purchases

We added one new holding in the quarter: On the Beach. For many years, this online travel agent has been taking share in the holiday market by packaging up low-cost flights (from the likes of Ryanair and easyJet) with hotels. The hotels like this because it drives customers to their destinations and the airlines should like it because it increases passenger numbers.

However, Ryanair resisted this arrangement for a long time as it preferred to have a direct relationship with customers, leading to it banning online travel agents from accessing its flights last year. However, this caused Ryanair’s bookings to suffer, and so in the end a new partnership was signed.

The new deal will mean an improved experience for customers and allow On the Beach to reduce costs while also creating the potential for expansion due to the launch of city-break packages and entry into Ireland, which could potentially cause a huge increase in sales.

We continued to add to our positions in Aviva, WH Smith, Lloyds, Barratt Redrow and Entain. We also added to Watches of Switzerland, Grafton, Hill & Smith, Unilever and Oxford Instruments when their share prices were low.

Sales

During the quarter we exited tech company Computacenter, which we had bought in 2012 when many of its shares sold off. Since then the business has grown consistently and expanded into the US, making it one of our strongest contributors. However, we saw future profit risks for the company because it had become reliant on a small number of very large customers.

Over 2024 we reduced our position in Howden Joinery, then sold our remaining holding in the quarter. Although Howden continues to win market share, we think conditions remain difficult.

Within the banks we have been adding to a position in Lloyds but are mindful of having too much of the fund in the sector, so we have sold NatWest and trimmed our holdings in Barclays and Standard Chartered.

We have taken profits from Imperial Brands in recent months. We are conscious that its sales in the US remain weak and that its next-generation reduced-harm products (such as vapes) are still at an early stage. We also noted that its competitor Altria, the owner of Marlboro, lost a significant amount of market share when it raised prices.

We also trimmed our positions in pharmaceutical company GSK and manufacturer Bodycote.

Outlook

The world is still coming to terms with the high tariffs (taxes on imports) that President Trump imposed on the US’s trading partners. While the initial high tariff rates were soon postponed and reduced for every country apart from China, they will still damage the global flow of trade, affecting demand. This will have a far-reaching impact on the stockmarket, especially as a recession in the US is now more likely, which is why some investors are looking for safer places to invest their money, weakening share prices.

On the plus side, the pound has grown stronger. Also, a reduction of goods purchased by US consumers will mean that the companies selling those products will need to find alternative markets, so UK retailers should be able to pick them up on the cheap.

We believe periods of disruption like the current one are normally profitable times to consider investing in a different way to the majority of the market. We will continue to make investment decisions based on what we think will happen over the medium term, focusing on investing in companies which are trying to improve their performance and deliver value for shareholders.