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Artemis UK Select Fund

All data as at 31 March 2017 except where specified
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The fund’s aims

The fund aims to provide long-term capital growth by investment in companies listed, quoted and/or traded in the UK and in companies which are headquartered or have a significant part of their activities in the UK which are quoted on a regulated market outside the UK.

Current prices and yield
(class I)

As at noon, 21 April 2017
Bid price (acc units)527.95p
Bid price (dist units)513.10p
Offer price (acc units)537.23p
Offer price (dist units)522.13p
Historic yield (acc units)2.40%
Historic yield (dist units)n/a

Investment information
(class I)

Minimum lump sum investment£250,000
Ongoing charge (acc units)0.83%
Ongoing charge (dist units)0.83%

The initial charge is currently waived. The ongoing charge includes the annual management charge of 0.75% and is shown as at the date of the Key Investor Information Document (KIID), where a full explanation of the fund's charges can be found.

Fund managers’ update

In March, the FTSE All-Share index made further progress, supported by a results season that had more positive surprises for corporate earnings than negatives ones. In the case of many ‘early cycle’ industries, the figures came with optimistic comments on end-markets. The combination of rising share prices and increased confidence in the outlook has traditionally been the green light for ‘animal spirits’ to return to the boardrooms of UK plc - in this regard 2017 looks to be no different. During the month, we saw mergers agreed between Aberdeen Asset Management and Standard Life as well as Wood Group and Amec Foster Wheeler. In the house-building sector, Redrow and Galliford Try announced that they were exploring possible combinations with Bovis Homes, while at the end of the month Canadian company SNC-Lavalin agreed to buy WS Atkins. Coming soon after Kraft Heinz’s bid for Unilever, mergers & acquisitions (M&A) activity looks set to continue to underpin the market.

At the close of the reporting season, we are encouraged that the improvement seen in economic surveys over the last few months is filtering through to stronger sales for many early-cycle companies.

At the sector level, personal and household goods strengthened in anticipation of further M&A. Elsewhere, life insurance did well, aided by strong results from Aviva and Prudential. The mining and oil and gas sectors drifted in sympathy with the underlying prices of commodities and so underperformed over the month.

Winners

3i Group was the fund’s top contributor to performance, following another set of good results from European discount retailer Action, which now accounts for over 25% of 3i’s portfolio by value. Action is similar in concept to B&M in the UK, and is currently growing its top and bottom line at over 30% by opening around 200 stores a year in Europe. The business is one of the only retailers we have seen where opening a new store openings pays for itself in less than one year. This puts the business in the enviable position of being able to pay out significant dividends to 3i while still funding its own growth. We remain very happy to hold 3i and believe that investors are overlooking the merits of Action and a number of other assets in its portfolio.

Elsewhere our holding in Arrow Global (debt management) reported strong earnings. Its strategy of diversifying into new markets in Europe and into third party debt management (which is less capital-intensive) is showing promising results. The geographic diversification has increased the company’s opportunities for growth while the movement into third party debt management has allowed it to improve its return on capital. European regulators are still forcing peripheral banks to build capital and offload non-performing loans, providing plenty of opportunities for Arrow.

Housing-related stocks continued to perform well on the news that Redrow and Galliford Try had approached beleaguered Bovis Homes about a possible merger. It appears that the management of both companies share our view that the current returns in the sector are well underpinned by the government’s policies.

Losers

The main negative contributor to returns was RPC (plastic packaging). It came under pressure following a ‘bear raid’ on the stock by a small research house making a number of unsubstantiated claims and/or factually incorrect statements about the company. We used the weakness as an opportunity to increase our holding significantly. The shares are now trading on just over 11x this year’s earnings. This looks too cheap in absolute terms and is at a significant discount to international peers. In a rapidly-consolidating sector, we believe it is unlikely the shares will remain on this rating for long.

Activity

Although it was a relatively quiet period for the fund, we made a few small trades within sectors to take advantage of relative moves in price. In housebuilding, we took some profits in Crest Nicholson and Galliford Try and continued to add to our holding in Countryside Properties which has materially lagged its peers. Similarly, in the airlines we took some profits in International Airline Group and re-invested the proceeds into Ryanair. For the first time in over 18 months, it appears that growth in capacity in the market for short-haul flights in Europe is moderating. The benefit of the lower oil price has been absorbed and the budget airlines continue to gain market share, putting pressure on fares. As a result, many of the second tier airlines are scaling back their ambitions to increase capacity.

Elsewhere, we finished selling the small legacy holding in Digital Barriers (security services). The company has some interesting technology for surveillance but is struggling to sell its products to government agencies. Without a sharp pick-up in sales, the company is likely to require a further injection of capital from shareholders. Given the small size of the position and very limited liquidity in the shares, we used some rare interest in the stock from another investor to sell it.

Outlook

At the close of the reporting season, we are encouraged that the improvement seen in economic surveys over the last few months is filtering through to stronger sales for many early-cycle companies. This gives us increased confidence that economic momentum is building on both sides of the Atlantic. Given this, we see the recent fall in long-dated bond yields as temporary and, as a result, expect the rotation towards the financial sector and value stocks more generally to prevail. Both trends would benefit the fund’s current positioning.

The UK government has now triggered Article 50, starting the country’s process of withdrawing from the European Union. It seems reasonable to expect a sharp pick-up in the number of headlines about Brexit over the coming months as both sides outline their initial negotiating positions. We still believe that UK economic growth will prove resilient this year, driven by increasing consumer credit, rising nominal wages and low unemployment. We therefore maintain a significant exposure to domestic stocks in the portfolio and believe that the current uncertainty provides an opportunity to invest in UK companies with strong franchises on low valuations. We remain of the view that we have a diversified portfolio of companies that are well placed to deliver good growth in earnings and dividends in the year ahead. At the same time, trading on just over 11x forecast earnings for 2017, the aggregate valuation of the portfolio remains attractive and the aggregate dividend yield of its holdings (just over 3%) is well covered.

14 February 2017

Faith in the consumer …

Ed Legget, manager of the Artemis UK Select Fund, talks about the outlook for UK consumer spending and its effect on the stockmarket. He explains why he sees value in housebuilders and selected financials.

Value of £1,000 invested at launch to 31 March 2017

Value of £1,000 invested at launch to 31 March 2017

Data from 3 April 1998. Source: Lipper Limited, data from 3 April 1998 to 1 September 2010 reflects class R accumulation units, and from 1 September 2010 to 31 March 2017 reflects class I accumulation units, bid to bid in sterling. All figures show total returns with dividends reinvested.

Net asset allocation

Net asset allocation

Source: Artemis as at 31 March 2017.

Percentage growth (class I)

20172016201520142013
12 months to 31 March15.1%-2.1%2.8%25.3%20.4%
20172016201520142013
12 months to 31 March15.1%-2.1%2.8%25.3%20.4%
Please remember that past performance is not a guide to the future. Source: Lipper Limited, accumulation units, bid to bid in sterling. All figures show total returns with dividends reinvested.

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Faith in the consumer …





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Risk warnings

THIS INFORMATION IS FOR PROFESSIONAL ADVISERS ONLY and should not be relied upon by retail investors.
The fund may have a concentrated portfolio of investments.
The fund may use derivatives to protect the value of the fund, to reduce costs and with the aim of profiting from falling prices.
The fund may invest in the shares of small and medium sized companies.
FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE data is permitted without FTSE’s express written consent.
Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.
Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.

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