Artemis Income: October 2024 fund update

• We have a high level of conviction in all three experienced co-managers - Frost, Shenton and Marsh.

• The fund features as one of our five funds to watch for 2024.

• The fund aims to outperform the FTSE All-Share over the long term, while providing a growing income and a dividend yield above what’s offered by the index.

• The fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

How it fits in a portfolio

The managers of Artemis Income mainly invest in large UK companies, with some holdings in medium-sized and overseas companies when they find great opportunities. They look for companies they believe will deliver a sustainable income, though there are no guarantees. We view this as a more conventional UK equity income fund that could work well alongside other asset classes in an income focused portfolio.

Manager

Artemis Income is managed by the experienced trio of Adrian Frost, Nick Shenton and Andy Marsh.

Adrian Frost is an industry stalwart and one of the best known UK equity fund managers around. He began his career in 1983 at Deutsche Asset Management and rose up the ranks to become Head of UK Equities. In 2002, he joined Artemis to run this income fund and has been managing it ever since.

Nick Shenton started his career at F&C Asset Management in 2003 working on UK and pan European equities. In 2007, he moved to Polar Capital to take up a role as a fund manager on a UK long/short equity hedge fund. He joined Artemis in 2012 to work alongside Frost as manager of the Income fund.

Andy Marsh began his career in accountancy at Ernst & Young before working in analyst roles at ING Charterhouse and Merrill Lynch. He moved to Investec Investment Bank in 2005 to take up a role as Head of Equity Sales. In 2006, he moved to Polar Capital to work as a fund manager before joining Frost and Shenton at Artemis in 2018.

The managers have over eight decades of investment experience between them and have developed a strong working partnership at Artemis. They’ve been investing through good times and bad and we think they’re one of the best teams in the business. We have a high level of conviction in Frost, Shenton and Marsh.

Process

The managers aim to outperform the FTSE All-Share over the long term, while providing a growing income and a dividend yield above what’s offered by the index. This means the management trio look for businesses they believe can pay a stable and sustainable level of income, through the market cycle, regardless of the economic backdrop. Key to this is a company’s ability to generate free cash flow, which is a key area of focus for the team. The managers say there is a ‘competition for capital’ in the portfolio, and only their best ideas make it into the fund. They seek companies with recurring revenues which they believe will still have consumers, profits, and therefore dividends, in the future, regardless of disruption – although nothing is guaranteed.

The managers spend a lot of time assessing company management and think their ability to allocate capital efficiently is vital to making a success of the business. There’s also analysis of the structure of different industries, how value is created within them and which companies have the best competitive position to take advantage.

They aim to have a portfolio of between 45 and 55 companies with diversified cash flows, and therefore a diversified income stream. Most of the fund is invested in larger companies, with around 86.3% of its assets currently invested here.

In terms of sector exposures, financials account for the largest weighting at 32.1%, followed by consumer discretionary and consumer staples stocks at 25.5% and 11.0% respectively. The managers make use of their ability to invest up to 20% of the portfolio into businesses listed outside of the UK, with around 6.7% of the fund currently invested abroad.

In recent months, the managers have made some changes to the fund’s investments. This included adding to their existing positions in retailer Tesco, with the managers feeling the business is well positioned competitively and is offering attracting returns through a combination of dividends and share buybacks. They also added to the fund’s investment in energy business SSE, feeling the business has a long, underappreciated runway of growth from the energy transition ahead of it. On the other hand, they sold the fund’s position in metals and mining company, Boilden, over concerns around its cash generative potential over the medium term.

ESG Integration

Investment teams across Artemis are encouraged to think for themselves and invest according to their own style, so approaches to ESG integration across the firm vary. Recent meetings with the Artemis teams we back on the Wealth Shortlist suggest ESG is an important factor. However, this fund is not managed to a responsible mandate.

Artemis has a firm-wide policy to support the aims of international conventions on cluster munitions and antipersonnel mines and therefore the firm will not knowingly invest in companies which produce these weapons.

Artemis votes on all their holdings, unless restricted from doing so, and fund managers engage with firms to develop their understanding, raise issues with management and monitor subsequent developments. The firm provides engagement case studies, and other information about its engagement and voting efforts, in an annual Stewardship report. Artemis also provides a monthly voting summary which includes rationales for votes against management and abstentions. Stewardship activity is carried out in line with the firm’s comprehensive voting and engagement policies.

Culture

Artemis provides an attractive environment for fund managers, allowing them the freedom to run money how they see fit without imposing a house view on them. It’s also a collegiate atmosphere, with managers supporting and challenging each other. The managers of the fund are partners in the business. We think this structure is a good thing for investors, as the managers and the firm are focused on the long term and can run funds without distractions from short-term shareholder demands. They are rewarded from the profits of the business, based on their long-term fund performance and payment of the profit share can be deferred over several years.

Cost

The fund has an annual ongoing charge of 0.80%. Investors using the HL platform will benefit from a discount of 0.21%, to pay 0.59%. The saving is achieved through a loyalty bonus which may be taxable if the fund is held outside of an ISA or SIPP. The HL platform charge of up to 0.45% a year also applies, except in the HL Junior ISA, where no account charge applies.

Performance

The fund has significantly outperformed the broader FTSE All-Share Index since Adrian Frost took over as manager in 2002. Over the last 10 years, the fund has also done well and performed strongly for its investors. Over this period, its delivered returns of 95.63%, ahead of the FTSE All Share return of 83.62%. Past performance isn't a guide to future returns.

Over the last 12 months, the fund has delivered returns of 18.42%, some way ahead of the 13.40% return generated by the FTSE All Share index over the same period.Our analysis suggests that the fund’s investment in private equity business 3i, whose strong performance has been driven by discount retailer Action, has been one of the key contributors to performance. Supermarket, Tesco and NatWest bank have also been good performers for the fund. On the other hand, weaker performers in the fund have included footwear business Dr Martens and luxury fashion group Burberry which has faltered following errors in execution of its strategy.

The managers are optimistic about the fund’s prospects and the opportunity set available to them. They feel there are plenty of cash generative, profitable companies listed in the UK which are well equipped to weather uncertain economic environments, creating competition for capital. In addition, they see the growing dividends which in many cases are supplemented by share buybacks, driving a powerful trend of transferring value to patient, long term shareholders of businesses.

At the time of writing, the fund yields 3.34%. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income. The fund takes charges from capital, which can increase the yield but reduce the potential for capital growth.