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Artemis UK Select Fund

All data as at 31 January 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, 24 February 2017
Bid price (acc units)505.89p
Bid price (dist units)491.68p
Offer price (acc units)514.59p
Offer price (dist units)500.13p
Historic yield (acc units)2.52%
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

After a strong end to 2016, the UK market paused for breath in January. With data suggesting that growth in the global economy would accelerate in 2017, stockmarkets worldwide delivered strong returns in the final quarter of 2016. We now await the results season to see whether companies share investors’ optimism.

We remain of the view that we have a diversified portfolio of companies that are well placed to deliver strong earnings and dividend growth in the year ahead.

At a sector level, mining shares continued to rally, helped by further gains in the prices of iron ore and copper. Conversely, the oil sector lagged as a sharp rise in the number of rigs operating in the US confirmed that output from shale drillers would increase rapidly while the oil price remains above $50 per barrel. Healthcare also underperformed as the Republicans moved to repeal Obamacare and as president Trump tweeted his complaints about excessive drug pricing.

Focusing on the fund, some positive stock-specific news, combined with our underweight position in oil and gas, resulted in it outperforming its benchmark over the month. It returned 1.4% versus a 0.3% fall in the FTSE All-Share index.

Winners
The biggest contributor to performance was our holding in Fenner, which rallied following a positive update on trading. This is the third upgrade to profit forecasts in nine months and confirmed that their mining and oil and gas markets have turned upward after three years in which sales had fallen precipitously.

Elsewhere, our holdings in Anglo American and Vedanta continued to move higher as commodity prices rose. Housebuilder Crest Nicholson reported a strong set of full-year results: it has sold more homes and prices have risen. It continues to generate strong cashflows, supporting a 40% increase in its full-year dividend. Trading on a forecast dividend yield of over 6.5%, we still believe that there is a lot of value both in Crest Nicholson and the broader sector.

Losers
The main negative contributor to performance was media company St. Ives, whose legacy print business continues to disappoint. This time, the culprit was its in-store merchandise business, which is suffering as food retailers switch away from promotional offers towards ‘everyday low prices’. In our view, the resulting shortfall in profits and cashflows from this division makes the company’s current dividend policy incompatible with its strategy of investing in their high-growth marketing business. This undermines the thesis we had for holding this stock and we decided to sell it.

Elsewhere, Supergroup weighed on performance as its shares drifted lower along with the broader UK retail sector despite its strong Christmas trading statement. We remain very positive about the company’s prospects. We believe its shares, which trade on a forward p/e of just over 15x earnings in exchange for a growing, profitable, cash-generative business, are materially undervalued.

Activity
January was another quiet month. Following BT’s profit warning, we sold what remained of our small position. We had begun reducing the holding last year when it failed to reach an agreement with the regulator on the future of Openreach, its broadband subsidiary. The update highlighted that profits and cashflows from their corporate and global services divisions would be lower than expected, leaving cashflows more reliant on the fortunes of Openreach. Elsewhere, we added modestly to our holdings in Arrow Global (a purchaser and manager of debt) and Tyman (building products). Both stocks had drifted lower despite a lack of any real news. We funded these purchases by taking further profits in Vedanta.

Outlook
Our outlook is largely unchanged. On both sides of the Atlantic economic indicators such as employment rates and survey data continue to point in a positive direction. Given expectations of fiscal stimulus in the US, we would expect the rise in long-dated bond yields to continue. This should support a continued re-rating of financials as well as the ongoing shift into ‘value’ stocks. Both trends would benefit the portfolio’s current positioning. Looking at the outlook for the UK more narrowly, uncertainty over Brexit clouds the medium-term picture. For now, however, strong growth in consumer credit, rising nominal wages and continued low unemployment are likely to mean the upward revisions to growth forecasts continue. We therefore maintain a significant exposure to domestic stocks and believe 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 strong earnings and dividend growth in the year ahead. On just 11x forecast 2017 earnings, the aggregate valuation of the portfolio remains attractive. We believe that as our holdings deliver on these earnings, the valuation gap to the rest of the market should start to close and so enable the fund to continue to recover the relative losses it endured in the first half of 2016.

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 January 2017

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

Percentage growth (class I)

20162015201420132012
12 months to 31 December1.8%12.2%0.5%37.5%11.9%
20172016201520142013
12 months to 31 January11.1%2.0%4.8%28.1%15.9%
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 2016. “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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