Artemis Income: December 2022 fund update

• The fund is managed by an experienced trio including one of the UK’s most experienced income investors Adrian Frost
• The managers invest in companies they think can pay a stable and sustainable income through the market cycle, regardless of the economic backdrop
• Our analysis shows the managers have added value through good stock selection
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into 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. Frost is an industry stalwart and has been managing this fund since 2002. He was joined by Shenton in 2012, and Marsh made up the trio in 2018. They have seven decades of investment experience between them and have developed a strong working partnership at Artemis. The coronavirus pandemic has been a good test of the partnership and has shown their investment styles to be aligned.

The team run two funds and a number of segregated mandates between them, all of which are managed in the same style, meaning the team is fully focused on their philosophy and process.

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. The team says there is a ‘competition for capital’ in the portfolio, and only their best ideas make it into the fund. They seek companies with reoccurring 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. They aim to have a portfolio of between 50 and 70 companies with diversified cash flows. They currently invest in 51 businesses in the fund. The managers also make use of their ability to invest up to 20% of the portfolio into businesses listed outside of the UK. There is currently just over 12% of the fund invested abroad.

In recent months the managers have added the shares of popular footwear designer and manufacturer Dr Martens to the portfolio. They are optimistic about the company’s future growth prospects and think by focusing on direct-to-consumer sales it can become more profitable. Vodafone exited the portfolio with the managers concerned about the businesses debt and the ability of telecoms companies to sustain their competitive advantage.

The managers believe the outlook, at least in the short term remains unclear. Given this, they remain focused on ensuring the portfolio is well diversified with resilient businesses able to weather the economic storm.

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 both 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.

ESG integration

Over the last few years, the UK equity income team has implemented Environmental, Social and Governance (ESG) considerations into their investment process in a more structured way, including in their fundamental analysis. Investing with ESG considerations in mind fits with their long-term philosophy of investing in companies with sustainable free cash flow.

Investment teams at Artemis are encouraged to think for themselves and invest according to their own style, so the quality of ESG integration across the firm varies. That said, recent meetings with the Artemis teams we back on the Wealth Shortlist suggest ESG is starting to become a more important factor. 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.

The firm also provides ‘responsible investing stamps’ next to each of its funds, which help investors see, at a glance, which forms of responsible investment are incorporated in each fund. 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 all votes. Stewardship activity is carried out in line with the firm’s comprehensive voting and engagement policies.

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.

Performance

The fund has outperformed the broader FTSE All-Share Index since Adrian Frost took over as manager in 2002. Our analysis suggests that the management trio have added the most value for investors over time through style and sector allocations, though stock selection has also contributed to outperformance. Past performance is not a guide to the future.

Over the last year the fund has outperformed the FTSE All-Share Index by 0.96%*, and the IA UK Equity Income peer group average by 4.15%. We normally expect the fund to lag a rising market but to hold up better when markets are falling. Our analysis suggests that the fund's investments in oil company BP and education specialist Pearson were among the bigger contributors to the fund’s performance over the year. The fund’s positions in real estate business Segro and media company ITV were among the main detractors from performance with the former’s share price falling as borrowing costs rose after the badly received ‘mini budget’.

At the time of writing, the fund yields 4.07%. 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.

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2022.

Find out more about the Artemis Income fund including charges

Artemis Income Key Investor Information