Artemis Income: January 2021 fund update

Emma Wall | Thu 28 January 2021

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• We hold the team that manage this fund in high regard
• The team has stuck to its tried and tested process in a tricky year
• Our analysis shows the manager has added value through stock selection
• 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 developed a strong working partnership at Artemis. This year has been a good test of the partnership, and 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 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 used the market volatility last year to examine their holdings and committed to upgrading the quality of the portfolio. They undertook deep analysis work on all their stocks, and re-examined the investment case for each holding against the shift in consumer behaviours as a result of the coronavirus pandemic.

The managers say they feel good about the fund’s positioning. While they had never stress tested the companies in the fund for going through a period of making zero revenues, they now have a real-life example to draw upon. They have not made changes for changes sake, or to chase yield.

They consider some of the companies in the fund to have had a “good” crisis. These are categorised as “digital survivors”, or capital-light platform businesses, including the London Stock Exchange (LSE), analytics firm RELX, and software solutions business Wolters Kluwer. Supermarket Tesco has also expanded market share through the year. The managers sold some shares and took profits from RELX, LSE and Tesco through 2020.

The managers have a long-term outlook and the average holding period is six years. They have been more active than normal in the last year though, and bought new investments in C&C, Pearson, Next and Burberry.

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 18 months 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.

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%. This makes it one of the cheapest UK equity income funds in the sector. 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.

Since the Brexit vote in 2016 the fund has performed more in-line with the FTSE All-Share index, as value stocks – which most UK equity income funds have a tilt towards – have been out of favour. However, the managers sheltered clients’ capital better than the index through the volatility of 2020, in line with expectations that the fund will lag a rising market, but not fall as far in a downturn. UK equities remain challenged through 2021 as the headwinds of the pandemic remain. All investments fall as well as rise in value, so you could make a loss.

The dividend outlook remains uncertain, and the fund managers expect they have taken a cut of around 25-30% as a result of the pandemic. The fund was on a running yield of 3.7% in the last quarter of 2020, versus the market yield of 3.2%. The managers expect that the fund will pay out around 4% within 12 to 18 months as companies return to paying dividends. They believe that few companies will be permanently impaired by the pandemic, but that there are large headwinds for certain sectors such as banks and insurers. 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 31/12/2020.

Find out more about the Artemis Income fund including charges

Artemis Income Key Investor Information