Artemis Income: January 2022 fund update

• The fund is managed by an experienced trio including industry veteran Adrian Frost
• Our analysis shows the managers have added value through good stock selection
• The managers focus on companies able to pay a stable and sustainable income to investors
• This fund is 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 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. Between them they have seven decades of investment experience 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 retail funds and three 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 and 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 that 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 50 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 10% of the fund invested abroad.

The managers have made a number of changes to the portfolio in recent months. Builders merchant Travis Perkins and electrical retailer Currys have both received investment. The managers expect Travis Perkins to benefit from the multi-year decarbonisation trend as buildings and homes comply with stricter environmental standards. And with Currys, the managers are attracted by the cashflow on offer as well as the relatively low debt after management’s simplification of the business.

Culture

Artemis encourages managers to run their funds in their preferred style, encouraging different approaches rather than a house view. The managers are partners in the business, a structure which we like as it encourages the fund managers to think long term. 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.

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. They are refining this process as they get a better understanding on how ESG risks affect cash flows, and how they can be a tailwind for valuations or fundamentals.

For example, if there is an ESG impact on a company’s cash flow the managers will sell the investment. Investing with ESG considerations in mind fits with their long-term philosophy of investing in companies with sustainable free cash flow.

There have recently been key personnel changes within the Artemis fixed team. While these do not directly influence the Artemis Income fund, we are monitoring the impact of these changes on the Artemis culture.

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 HL platform fee 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 management 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 lagged the FTSE All-Share Index by 2.15%*. We 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 the consumer discretionary and financials sectors have been among the bigger detractors from performance. At a stock level, London Stock Exchange Group and industrial business Smiths Group were the fund’s worst performing holdings. On the reverse, investment company 3i Group and RELX were among the best performing holdings over the year.

UK equities remain challenged as the headwinds of the pandemic remain with us. The growth of dividends expected to be paid by companies in the UK is expected to slow in 2022 to just 2% after a strong bounce back in 2021. Companies are likely to face a number of headwinds including dealing with inflation so the managers think there could be some profit disappointments over the next year. However, they think that this might mean businesses that have been undervalued and produce physical things could fall back into favour with investors which should benefit the UK market. All investments fall as well as rise in value, so you could make a loss.

The fund has a historic yield of 3.65%. Remember that yields are variable and are not 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 31/12/2021.

Find out more about the Artemis Income fund including charges

Artemis Income Key Investor Information