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Artemis Institutional Equity Income Fund

All data as at 30 December 2016 except where specified
  • Summary
  • Performance
  • Composition
  • Key facts
  • Investment insights
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The fund’s aims

The fund aims to produce a rising income stream combined with capital growth, primarily from UK equities but also overseas equities and corporate bonds.

Current prices and yield

As at noon, 22 March 2017
Distribution units85.15p
Accumulation units141.20p
Historic yield (acc units)3.74%
Historic yield (dist units)3.86%

Investment information

Ongoing charge (acc units)0.77%
Ongoing charge (dist units)0.77%

The ongoing charge includes the annual management charge of 0.75%.

Fund manager review

Performance
During the fourth quarter, the UK equity market extended its recovery from its post-Brexit slump, with the FTSE All-Share rising by 3.9%. The Artemis Institutional Income Fund, meanwhile, returned 2.8%.

... it is clear that the world of QE and monetary largesse will be replaced by more direct stimulus and higher borrowing.

Review
The market’s advance was again driven by the sectors that had been the laggards of 2015: mining and oil. However, in this period they were joined by the banks, which have been long-term underperformers while their capital reserves were rebuilt and regulation was tightened. It now looks as though the Prudential Regulation Authority is happy with the capital adequacy of the UK banks and consequently they can begin growing their loan books again. Perhaps it is no coincidence that the UK economy is showing surprising strength…

More pertinent to the relative performance of sectors in the quarter was the election of Donald Trump. Although his policy intentions have thus far been confined to the constraints of 140 characters on Twitter, it is clear that the world of QE and monetary largesse will be replaced by more direct stimulus and higher borrowing. This change, at a time when inflation is showing signs of picking up, meant that bond markets suffered a rude awakening from their ‘low rates forever’ complacency. This led to defensive ‘bond proxy’ stocks retreating in sympathy and the formerly less popular miners, oils and banks continuing to rise.

Despite the strength of the UK economy, some caution remains around domestic stocks as the impact of the higher living wage and imported inflation will continue to squeeze margins.

The fund’s underperformance was largely for reasons that prevailed earlier in the year, namely being underweight in oils and miners. This quarter, however, our ability to counter this sector effect through good stock selection was hindered by setbacks in Laird and IG Group. The former was the result of a balance-sheet and trading issue which is being resolved. IG Group fell in response to a harsh set of proposals to regulate the online spread betting industry. We expected regulatory action to benefit the more conservative operators at the expense of others. This may yet be the outcome when the consultation closes in 2017.

Our exposure to ‘expensive defensive’ shares was minimal and therefore we were not affected by the setbacks in these areas. In addition, we have been reducing our pharmaceutical exposure during the year and although Mr Trump’s victory was initially seen by some as a sort of salvation for the industry, it is likely that the era of price scrutiny in the US will continue.

Activity
We added to our holding in Berkeley Homes. This may seem counterintuitive, given Brexit and the debate over London’s prospects, but the shares have given up a lot a ground and the company’s strong balance sheet together with forward bookings underpin the stock’s attractive cashflow and yield. We increased the weighting in Microsoft given the momentum in the web services business and increasing signs that, having moved to the cloud, its legacy business is stabilising.

We took a new holding in Sanofi, comfortably Europe’s worst-performing pharmaceutical company because of pricing pressure on its diabetes business in the US. It has a strong balance sheet, a safe yield of over 4% and, given universal bearishness about its prospects, we see a valuation opportunity here.

We also used the weakness in BAT’s shares to start a holding. Its acquisition of Reynolds is supportive for the dividend and brings needed new products. Although BAT sold off in sympathy with the bond market, unlike a bond it offers the prospect of good - if modest - growth.

Our major sales were BAE Systems and Lockheed, despite some saying that the defence industry will benefit from higher spending under a Trump presidency. In both cases, valuation was the key factor. In particular, BAE now yields less than 4% and its modest dividend growth could be curtailed by pension obligations. At the time of writing, bond yields have risen thus relieving the pressure on pension deficits. However, in the light of the pension problems at BHS and others, we would expect the regulator to become tougher on deficits and ‘make good’ periods. The other sale of note was the last of our holding in Reckitt Benckiser. This has been a great success but we felt that valuation was asking too much of the growth the company is likely to achieve. We also reduced Tui, 3i, Rentokil and Spie.

Outlook
As you will know from past commentaries, we are not in the habit of positioning the portfolio around likely macro events given their sheer unpredictability - and 2017 looks likely to present us with an extra helping of uncertainty. It would appear not even Mr Trump is sure of what he is going to do or say next, but it seems that his actions will continue to be unwelcome for bond markets and so we would expect yields to move higher in 2017. Uncertainly over Brexit will persist and this means that sterling will reflect the latest sentiment - again not something to hang your investment hat upon. We will continue to focus on cashflows, paying particular attention to the winners and losers in a world where the ability to do business via digital channels is lowering the barriers to entry and altering the economics for many industries.

04 November 2016

Adrian Frost: Diversified cashflows are key…

Dividends are under pressure, not least from rising pension deficits. Stock-pickers with a long term view can still find opportunities, Artemis’ Adrian Frost tells Lawrence Gosling.

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Adrian Frost: Diversified cashflows are key…





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