Artemis UK Smaller Companies: December 2024 fund update

• Mark Niznik has vast experience of investing in smaller companies and we think he has skill and support to deliver good long-term returns to patient investors.

• The fund’s higher quality approach and focus on valuation means that we expect it not to fall as much as some other funds during down markets.

• The managers work as part of a broader UK equities team at Artemis that we rate highly.

• This fund was recently added to our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

How it fits in a portfolio

The Artemis UK Smaller Companies fund aims to grow an investment over the long term by investing in the smaller parts of the UK stock market. The valuation focused approach means the fund invests differently to many of its peers in the IA UK Smaller Companies sector.

Smaller companies typically have more growth potential than larger ones, though they can be more volatile and higher risk. Companies of this size are often overlooked by analysts, meaning there are plenty of opportunities for investors prepared to scratch below the surface.

The fund could add diversification to the UK portion of an adventurous global portfolio or could complement a UK focused portfolio orientated towards larger, more established businesses.

The fund has recently been added to our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

Manager

The fund is co-managed by Mark Niznik and Will Tamworth.

Niznik began his career at Legal & General in 1985, followed by a stint as a private client fund manager at Greig Middleton & Co. In 1992, he joined Perpetual, working on a range of UK smaller companies products. He then moved to Standard Life Investments in 2002 to work as a small and mid-cap fund manager, running a UK Opportunities strategy from its launch. In 2007, he joined Artemis and became co-manager of the UK Smaller Companies fund alongside seasoned investor and Artemis co-founder John Dodd. In January 2011, Dodd stepped back and Niznik became sole manager of the UK Smaller Companies fund.

Tamworth began his career at Citigroup as an equity research analyst in the UK small and mid-cap team. He moved to Liberum in 2009, where he continued to work in small- and mid-cap equity research, specialising in support services. He then joined Artemis in 2015 and in March 2016 became co-manager of the UK Smaller Companies fund.

We have a positive view of both managers, however given Niznik’s vast experience of investing in smaller companies, at present, our conviction in this fund is based on his continued involvement.

Process

The managers believe smaller companies possess lots of growth potential. They aim to use their experience to uncover hidden gems, and then benefit from investing in them as they compound in this under researched part of the market.

Niznik and Tamworth look for businesses that are leaders in their markets and have a good degree of visibility of their future earnings. These businesses should have strong balance sheets to support their growth and be driven by capable and experienced management teams. They should also be cash generative, and trade at attractive valuations, offering investors the prospect of good returns in the future. Not every stock will fulfil each of these criteria, so the managers are pragmatic in forming an overall view on how well a company fits the bill.

The managers won’t invest in companies that are pre-revenue because of their focus on cash generation. They are also sceptical about the prospect of investing in small businesses with very ambitious growth projections attached to their future performance expectations. The outcome of this process is a value style bias.

This process leads them to a portfolio of 60-90 stocks, with individual company position sizes generally not exceeding 3% of the fund. In terms of sector allocations, consumer discretionary and industrials are currently the largest exposures, representing 28.0% and 25.6% of the fund respectively. Online card platform, Moonpig and financial services business Alpha Group are among the fund’s largest individual positions.

The managers have made some changes to the fund in recent months. They added a position in record management company, Restore, following the return of its previous CEO who they rate highly. They also invested in Victorian Plumbing, an online bathroom and plumbing products business. They feel the company is attractively valued considering its significant online market share and has a good runway of growth ahead of it.

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, with the managers working as part of a UK equities desk that we rate highly. Fund managers at Artemis are required to invest their own money into their funds, so they benefit when their investors do.

Niznik is a partner at Artemis, which is a private company, so receives a share of the profits and is subject to a long term incentive plan. We think this structure is a good thing for investors, as both manager and firm are focused on the long-term and can run funds without distractions from short-term shareholder demands.

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 managers of this fund suggest ESG is an important factor, though the 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.

Cost

The fund has an annual ongoing fund charge of 0.86% but through HL, clients can secure an ongoing saving of 0.09%, reducing the net ongoing charge to 0.77%. This reduction is paid as a loyalty bonus, which could be taxable if held outside of an ISA or SIPP wrapper. The HL platform fee of up to 0.45% a year also applies, except in the HL Junior ISA, where no account charge applies.

Performance

Since Mark Niznik became lead manager of the fund in January 2011, the fund has delivered returns of 258.89%*, compared with 182.87% for the IA UK Smaller Companies peer group average. Past performance isn't a guide to the future.

The fund has a value focused investment strategy. Its higher quality approach and focus on valuation means that we expect it not to fall as much as some other funds during down markets, providing some shelter from the worst of market falls. However, this does mean we think the fund could lag its growth focused UK smaller companies peer group in a strongly rising market.

Over the last 12 months, the fund has delivered returns of 17.92%, performing better than the 14.68% return from the IA UK Smaller Companies sector average.

Our analysis suggests that software services business, Beeks Financial Cloud Group, and bathroom and kitchen design and supply company, Norcros have been among the main contributors to the fund’s performance. On the other hand, pawnbroker H&T Group and consultancy, Next 15 Group have been among the main detractors from performance.

Overall, we think Niznik has the experience, skill and support to deliver good long-term returns to patient investors, although there are no guarantees. Investments fall as well as rise in value, so investors could get back less than they invest.

Investing in smaller companies is higher risk and investors should invest for the long term and be prepared for volatility along the way.