Artemis Alpha remains bullish on UK economy despite FTSE lag

The Artemis Alpha Trust [LON:ATS] is tipped by the Association of Investment Companies (AIC), the trade body of the Investment Trusts sector as a future “dividend hero” having increased its dividend for 19 straight years. Artemis Alpha needs one more year to break into the AIC’s coveted list of “dividend heroes”, which features 14 funds and has some veritable old names including Caledonia Investments LON:CLDN which has been at the crease since 1928, and The City of London Investment Trust [LON:CTY], which can trace its origins back to 1891.

This isn’t a bad record, given the GBP110m’s fund was only launched in 1998, and is rubbing shoulders with veritable City institutions established when Britain had an empire that still covered a quarter of the globe.

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The fund, and its manager, Kartik Kumar, have long been flag-wavers for the underlying strength of the UK economy, and the investment trust aims to provide long-term capital and income growth by investing in predominantly listed companies and to achieve a NAV total return greater than the total return of the FTSE All-Share Index. The fund is benchmarked against FTSE All-Share Index (Total Return).

Unhappy hunting grounds

The FTSE hasn’t been happy hunting grounds for fund managers over the recent past, and performance has been weak in comparison the other markets – particularly the US – a factor not set to change given the insipid economic news over the state of the domestic economy. Many analysts are questioning the sustainability of the FTSE, as companies leave on plunging valuations and more choose to list in other jurisdictions following the withdrawal of the UK from the EU.

However, Kumar, who has been with Artemis since 2012, joining straight from university, and managing the investment trust since 2018 with co-manager John Dodd, is bullish on the longer-term prospects of UK equities, especially as inflation falls and the economy comes out of recession.

That said, over the past few years Kumar and Dodd have been affected by bad UK economic news, with rising inflation, rising interest rates, rising energy prices, falling productivity and growth, exacerbated by that Liz Truss budget. UK stocks haven’t done well, the fund has done worse.

On a discrete basis, 2023 was a good year for the fund, returning +17.2% against +7.9% for the FTSE All-Share (TR), however 2023 was only making up for a poor 2022, where the fund retuned -22.6% against +0.3 for the FTSE. In 2021 the fund was behind the FTSE again, returning +0.2% against a FTSE return of +18.3%, but in 2020 the fund outperformed once again, returning +10.1% against a negative return of -9.8% for the FTSE. The investment trust beat the FTSE by 9.3 percentage points in 2019 to return +28.5%.

On a cumulative (NAV) basis Artemis Alpha has returned 626.6% from launch to 6th March 2024, over a decade 38.7%, 26 percentage points behind the FTSE All-Share (TR). However, performance caught up somewhat over five-years with the fund being in a dead heat with the FTSE at 26.9%. Three-years saw Artemis lag the All-Share by 26.1 percentage points, returning -2.4%, but the fund nosed ahead of the FTSE over one-year at 10.1% against 0.5%.

The Capital Cycle

Kumar says that the fund is constructed on a ‘stock-picking’ bottom-up basis, but “you should look at it [the portfolio] with a top-down lens to better understand the construction of it”. The fund invests on a “capital cycle” understanding, where returns on the industry vary quite a lot (about 40% of total portfolio) and cites Retail, Housebuilding, Oil & Gas and Airlines as key sectors.

However, over the past three or four years the market has been unusual and difficult, which has led to a distortion of the capital cycle where huge volatility in interest rates and demand patterns has affected, for example, both the demand and the supply sides of the Airline sector, but over the longer-term, the demographic pressures argued Kumar, will inevitably lead to a rise in demand.

Another key theme is “longer-durational compounding franchises” such as financial trading platforms, like Hargreaves Lansdown LON:HL. and technology and media stocks (around 35% of the portfolio). The rest of the portfolio is “idiosyncratic holdings” where industries that are reacting to a structural change in the macroeconomic environment are considered.

Kumar is also more focussed on finding opportunities in the UK domestic economy, where the managers see the future opportunities and the fund has a value bias.

The Artemis Alpha Trust is a closed-ended fund, meaning it has a limited number of shares in issue. Investors can buy or sell the trust’s shares on the stock market but may have to wait for a buyer or seller to become available. If the trust performs well, the value of the shares can rise beyond the value of the underlying investments held in the trust. This provides the potential to further increase returns in a way that is not available to investors in open-ended funds. However, the share price of a trust may also fall below the value of the underlying holdings, meaning losses may be higher. The fund is currently trading at a discount to assets of 14.3%.

The fund declared a dividend of 2.54p paid out in January 2024. The previous dividend, paid out in September was 3.87p.

The company’s shares have returned 0.6% over one-year and 2.2% year-to-date to close of play on 11th March, with shares ranging between 260p and 344p over a 52-week period. The company has a market cap of GBP111.8m

Artemis Alpha Trust (31st January 2024)

Eventually the UK economy will pull itself out of its current slump. Artemis Alpha could be the right vehicle to take advantage of the opportunities that will emerge as the economy turns to recovery.

• Find the latest research for Artemis Alpha Trust on the AIC website