A wide 15% discount to net asset value (NAV) at the recently-renamed Artemis UK Future Leaders (AFL) presents a compelling entry point for investors keen to capture the long-term outperformance of small caps and back the top-quality investment team at Artemis who took over the portfolio on 10 March 2025.
New managers Mark Niznik and William Tamworth have a proven track record of investing in UK smaller companies and, importantly, both have backed the trust with their own money.
They are excited by the opportunities they are seeing in the undervalued UK stock market, especially at the inefficient micro-cap end of the spectrum, and have the ability to use the trust’s gearing to turbo-charge returns.
Shares believes when confidence in UK companies begins to recover, this should drive a strong re-rating of small cap share prices and narrow the NAV discount delivering a powerful performance double-whammy.
PROVEN PROCESS
Niznik and Tamworth have taken over the running of the previously poorly-performing Invesco Perpetual UK Smaller Companies trust, whose returns had fallen behind the benchmark.
The pair currently manage the Artemis UK Smaller Companies Fund (B2PLJL5), ranked top-quartile in the IA UK Smaller Companies sector over one, three and five years.
Both are passionate believers in the ‘small-cap premium’, the historic long-term outperformance of small caps over large caps of between 3% and 4% per year, and believe the closed-ended structure is the ideal way to access companies further down the cap spectrum.
NICHE LEADERS
Artemis UK Future Leaders seeks to invest in UK smaller companies which occupy market-leading positions or which the managers believe can establish leading positions in the future.
As Niznik explains, ‘Market leaders in their little niches tend to have better pricing power than the number two, three and four, which gives them the ability to cover off any cost of goods inflation they face, which is really important to protect the underlying profit of the business. Niche market leaders in our experience tend to have better pricing power than most.’
The word ‘future’ in the new name is a reminder market positions are not static, and the managers like to invest in companies which can strengthen existing leadership positions or establish new ones.
In terms of their stockpicking process, Niznik and Tamworth use a disciplined approach to analysing the value of companies and the strength of their cash flows and profitability.
A key tenet of their approach is a strong valuation discipline, which helps them avoid over-hyped companies and deliver better long-term returns.
‘Our portfolio is on about an 11 times price-to-earnings ratio (PE) for double-digit earnings growth and is on an 8% free cash flow yield,and the average company has no debt at all, so we are quite debt-averse,’ says Niznik.
FOLLOW THE LEADERS
Shares believes Artemis UK Future Leaders would suit investors with a long-term horizon, since the smaller companies sector can remain out of favour for prolonged periods.
However, when it comes, performance can be ‘substantial and rapid’, so this requires investor patience to maximise the full value of the small-cap premium.
The heavy lifting in terms of repositioning the portfolio is largely done now, with top 10 positions as at 23 April 2025 including government outsourcing leader Serco (SRP), social housing maintenance leader Mears (MER) and the price comparison market leader MONY Group (MONY), not to mention niche market leaders ranging from Moonpig (MOON) and Hollywood Bowl (BOWL) to Gamma Communications (GAMA) and Hilton Food (HFG).
Corporate buyers and companies themselves are seeing 50% undervaluation in many of the holdings across the two Artemis small cap portfolios.
‘We are seeing lots of takeovers at the moment, but lots of opportunities to reinvest in similarly attractive undervalued companies which have the traits we are looking for,’ insists Tamworth, while Niznik observes an ‘unprecedented’ level of small-cap share buybacks underway, which is a result of attractive valuations, strong balance sheets and management teams’ confident outlooks.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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