Artemis Income - the technological impact on the investment universe

Heather Ferguson | Mon 25 September 2017

The links in this article will take you to Hargreaves Lansdown’s main website for more information. Please be aware that if you wish to join any of the benefits in your company Plan you must return to this website to apply.

• The managers continue to favour good-quality companies with an edge over their competitors
• Performance has improved following a difficult 2016
• Investments in Segro and RELX continue to harness technology to enhance their competitive advantage

Our view

Equity income investing is a tried and tested strategy for growing wealth over the long term and the Artemis Income Fund is one of our favoured funds in this sector. Adrian Frost is a seasoned investor with a long and proven track record. Together with his co-manager Nick Shenton, who joined the fund in 2012, he has delivered exceptional returns for investors although this should not be seen as a guide to future returns. Our analysis suggests significant value has been added though the managers’ positioning of the fund towards areas which have performed well, alongside some good stock selection. We continue to feel this fund could provide the backbone to an income-focussed portfolio and the fund retains its place on the Wealth 150+ of our favourite funds across the major sectors.

The fund currently yields an attractive 3.89%, although this is not an indication of future income. Please note the fund’s charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Performance

Minimal exposure to mining companies boosted the fund’s performance relative to the FTSE All Share Index during 2014/15 as the sector struggled. The sector struggled against low commodity prices and slowing growth in China. This trend reversed in 2016 and the fund’s low exposure to the recovering mining sector held back returns relative to the benchmark. So far this year, the fund has outperformed the FTSE All Share Index, aided by the weaker performance of miners and a strongly performing financials sector, to which the fund is biased.

Long-term performance remains exceptional and the fund has risen 265.8%* since Adrian Frost began his tenure in January 2002. The FTSE All Share Index and IA UK Equity Income sector have returned 179.3% and 172.9% respectively over the same time period. Please remember past performance is not a guide to future returns.

Past performance is not a guide to future returns. Source: Lipper IM *to 31/08/17

Portfolio review

A successful investment approach can often be as much about avoiding poor companies as it is about selecting ones that go on to perform well. A key element of the managers’ approach, for example, has been to identify companies whose profits are likely to prove fragile in the face of technological change. If asked which brand sold more batteries than any other, for example, Duracell might be the first company to come to mind. However, Amazon’s own-label batteries outsell all other recognisable brands put together. Therefore, although the managers feel Duracell is a great company, the challenges posed by Amazon prevent them viewing the business as an investment opportunity.

The managers have also identified a number of businesses they believe can continue to harness technology to enhance their competitive advantage. RELX, a global provider of business information and analytics, for example, has steadily invested in technology to improve their customers’ productivity and decision-making accuracy, at a fraction of their total costs. This has allowed RELX to grow its revenue at a consistent pace, which the managers believe is sustainable over the long term.

Segro, which owns, develops, and manages warehouses and light industrial properties, is another investment in the fund positioned to benefit from technological change - specifically growth in online shopping. The company’s management have used their understanding of the more developed UK market to move into less mature European markets. The managers believe the company is in a much better competitive position than many of its peers that have predominately focused on physical retail properties.

The managers also seek companies that possess competitive advantages outside of technological advancement. They invest in Card Factory, for example, for its high barriers to entry – it is difficult for another business to attempt to replicate its business model. Unlike other UK card retailers, which are supplied by inefficient and costly Asian manufactures, they design and print their cards in-house. This allows them to undercut other card retailers considerably, which results in a much higher footfall in their stores. The managers estimate it would cost in excess of £100 million for a competitor to replicate their model, so are confident the business will retain this competitive advantage for some time.

Please read the key features/key investor information document in addition to the information above.