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Private investors

Artemis UK Select Fund

All data as at 28 February 2017 except where specified
  • Summary
  • About the fund
  • Performance (class R)
  • Performance (class I)
  • Composition
  • Key facts
  • Investment insights
  • Literature
  • How to invest


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 R)

As at noon, 30 March 2017
Bid price (acc units)495.12p
Offer price (acc units)523.46p
Historic yield (acc units)1.79%

Investment information
(class R)

Minimum lump sum investment£1,000
Ongoing charge (acc units)1.58%

The initial charge is currently waived. The ongoing charge includes the annual management charge of 1.5% 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

February saw a marked change in sector leadership in the UK market, as a fall in global bond yields, coupled with Kraft Heinz’s audacious bid for Unilever, encouraged investors to rotate back into sectors that had lagged amid the ‘Trump rally’. This sector rotation combined with the fund’s underweight position in Unilever saw it underperforming the market over the month. It returned 2.2% versus a 3.1% rise in the in the FTSE All-Share index.

Against this backdrop, we expect central banks to tighten monetary policy.

The catalyst for the fall in bond yields was not entirely clear. Profit-taking seems the most likely answer, although commentators also pointed to teething problems for the Trump administration as well as heightened political risk in Europe: opinion polls in the Netherlands and France indicated a shift towards anti-establishment parties. Our expectation is that the dip in bond yields will prove short-lived. Recent economic data on both sides of the Atlantic indicates that growth is accelerating and inflation is picking up. Against this backdrop, we expect central banks to tighten monetary policy.


Winners
The start of the results season provided the first evidence at a stock level that the improving economic trends seen in the second half of 2016 are starting to feed through to a pickup in activity levels for some companies. International Airlines Group and industrial heat treatment company Bodycote both reported improvements in their end markets and were strong contributors to performance. Although they operate in very different industries, both are asset-intensive businesses with high operational gearing - so their profits have the potential to continue to impress if current trends can be sustained.

Elsewhere, our holdings in UK housing-related stocks continued to perform well. Results from Redrow and Galliford Try confirmed that the market for new-build homes remains buoyant. The government’s recent white paper on housing has increased our confidence that easier planning and the continued availability of the Help-to-Buy mortgage scheme (which should remain in place until at least the next election) will help underpin returns.


Losers
The main negative contribution came from our holding in Fenner. A number of oil service companies reported disappointing results, prompting it to relinquish some of the strong gains it had made in January. We remain positive on the stock and believe that Fenner’s exposure to the onshore US shale industry leaves it ideally placed to capitalise on any recovery in capital expenditure by energy companies.

Elsewhere, Interserve fell sharply after it increased the provisioning it is making against losses on its energy-from-waste construction contracts. The company’s foray into this new market has proven an expensive one, with matters not helped by its sub-contractors going into administration. Although the range of outcomes on these contracts remains wide, we believe that, following the sharp fall, a further significant provisioning - and an associated equity raise - is already in the price.

Activity
Our main activity in February was to take profits in Anglo American and Vedanta and to re-invest the proceeds in a new holding: Glencore. The result of these trades was to reduce our exposure to bulk commodities such as iron ore and metallurgical coal. Prices of both commodities are now trading significantly above their marginal cost which will encourage an increase in supply. Offsetting this, the fund’s exposure to later-cycle base metals has increased. Prices for these are much closer to their marginal cost which should limit the extent of any supply response. In turn, this should mean that their prices remain more durable.

Elsewhere, we brought a small position in Lloyds Bank following its good results. The prospect of further fines for past misconduct appears to be receding, allowing it to distribute more of its profits as dividends. It has, meanwhile, outlined detailed return and capital generation targets for the medium term. If these can be met, it should allow the company to return over 8% of its market capitalisation a year to shareholders over the coming years. Meanwhile, the government seems likely to sell the remainder of its stake in the bank over the next couple of months, removing the overhang that their holding has represented to this point.

Outlook
Midway through the reporting season, we are encouraged that the improvement in economic surveys seen in recent months has started to result in stronger sales for many early cycle companies. This gives us increased confidence that momentum in economic growth is building on both sides of the Atlantic. We therefore regard the recent fall in long-dated bond yields as being temporary and so expect last year’s rotation into the financial sector and value stocks to resume. Both trends would benefit the fund.

As the government prepares to trigger Article 50, it seems reasonable to expect an increase in the number of Brexit-related headlines over the coming months as both sides outline their initial negotiating positions. In the short term, this may put further pressure on sterling. Meanwhile, we believe strong growth in consumer credit, higher nominal wages and low unemployment should mean that economic growth will prove resilient this year. We therefore maintain a significant exposure to domestic stocks in the portfolio and believe that the current uncertainty gives us an opportunity to invest in strong UK companies at low valuations. We remain of the view that our diversified portfolio of companies is well placed to deliver strong 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 28 February 2017

Value of £1,000 invested at launch to 28 February 2017

Data from 3 April 1998. Source: Lipper Limited, accumulation units, bid to bid in sterling to 28 February 2017. All figures show total returns with dividends reinvested.

Net asset allocation

Net asset allocation

Source: Artemis as at 28 February 2017.

Percentage growth (class R)

20162015201420132012
12 months to 31 December1.0%11.3%-0.3%36.4%11.1%
20172016201520142013
12 months to 28 February14.1%-3.7%0.7%29.5%14.5%
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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About the fund

The Artemis UK Select Fund is actively managed to produce long-term growth. The managers use specialist software to screen the UK market for stocks with the right characteristics. They then analyse each company on the resulting shortlist to pick out the best investment opportunities. The result is a focused portfolio of UK equities that has little in common with market benchmarks.

  • ‘Multi-size’ strategy: the fund invests in companies across a spectrum of sizes, holding only those stocks whose value the managers believe will rise significantly over the long term. The fund will never hold a stock simply because it represents a significant proportion of the index.
  • Flexibility to ‘go short’: to enhance returns, the fund has the flexibility to hold ‘short’ positions in selected companies, where the managers believe a company’s share price will fall and aim to make profits as a result.
  • Focus on fundamentals: is a company healthy and will it grow? The managers look below the surface of a company’s financial statements in deciding where to invest – and if the answers to these questions are negative, when to take a ‘short’ position (where they aim to make money from a falling share price).

Reasons to consider

The fund may be suitable for investors looking for:

  • a core UK equities holding
  • the potential for capital growth
  • experienced fund managers with a good performance record

Risk considerations

Before making an investment, investors should consider the level of risk they’re comfortable taking with their money.

  • This fund invests in a relatively small number of mostly UK companies, primarily substantial stable businesses. The managers carefully scrutinise companies’ balance sheets and cashflow statements before investing.
  • The fund also tries to identify shares that will fall in value. To do this, the manager will use derivatives (financial instruments whose value is linked to the expected price movements of an underlying asset). Investing in derivatives carries risks; in the case of a ‘short’ position, for example, if the price of the underlying asset doesn't fall in value as the manager expected, but instead rises, the fund will lose money.
  • Investors should be aware, though, that the usual risks of investing in stocks and shares apply – companies and stockmarkets can go through periods of turbulence and the value of your investment can fall.
  • Some of the fund’s investments may also be in smaller companies, which can be more vulnerable to financial or operational failure. The manager may also use more complex financial instruments which can add to the level of risk to investors’ money.
  • This fund’s ‘SRRI’ risk rating, a measure of how volatile the fund’s performance has been over time, is currently 5, in a range of 1 (lower risk) to 7 (higher risk).

More detailed information on fund risks is included in the ‘risk warnings’ section below.

Risk warnings

To ensure you understand whether this fund is suitable for you, please read the Key Investor Information Document, which is available, along with the fund’s Prospectus, from artemis.co.uk.

The value of any investment, and any income from it, can rise and fall with movements in stockmarkets, currencies and interest rates. These can move irrationally and can be affected unpredictably by diverse factors, including political and economic events. This could mean that you won’t get back the amount you originally invested.

The fund’s past performance should not be considered a guide to future returns.


The fund may have a concentrated portfolio of investments. This can be more risky than spreading investments over a larger number of companies.
The fund may use derivatives (financial instruments whose value is linked to the expected price movements of an underlying asset) to protect the value of the fund, reduce costs and/or generate additional income. Investing in derivatives also carries risks, however. In the case of a ‘short’ position, for example, if the price of the underlying asset rises in value, the fund will lose money.

The fund may invest in the shares of small and medium-sized companies. Shares in smaller companies carry more risk than larger, more established companies because they are often more volatile and, under some circumstances, harder to sell. In addition, information for reliably determining the value of smaller companies – and the risks that owning them entails – can be harder to come by.

The historic yield reflects distribution payments declared by the fund over the previous year as a percentage of its mid-market unit price. It does not include any preliminary charge. Investors may be subject to tax on the distribution payments that they receive.
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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