Artemis Institutional UK Special Situations Fund Half-Yearly Report (unaudited) for the six months ended 30 June 2021 General information Objective and investment policy Company profile Objective The investment objective of the Fund is to provide long- and term capital growth by exploiting special situations. The Artemis is a leading UK-based fund manager, offering a range investment Fund invests principally in UK equities and in companies of funds which invest in the UK, Europe, the US and around policy which are headquartered or have a significant part of their activities in the UK which are quoted on a regulated the world. market outside the UK. The securities of companies listed, quoted and/or traded in the UK but domiciled elsewhere As a dedicated, active investment house, we specialise in and the securities of companies traded on PLUS may be investment management for both retail and institutional included in the portfolio. Income within the portfolio is accumulated and reinvested. The Fund aims to provide investors across Europe. investors with a total return in excess of that of the FTSE ALL-Share Index. Independent and owner-managed, Artemis opened The Manager actively manages the portfolio in order to for business in 1997. Its aim was, and still is, exemplary achieve this objective. Exposure to large, medium and small companies varies over time, reflecting the Manager’s investment performance and client service. All Artemis’ views on where the greatest performance potential exists. staff share these two precepts – and the same flair and The Fund may also invest the property in transferable enthusiasm for fund management. securities, money market instruments, derivatives and forward transactions (for the purposes of efficient portfolio management), deposits and units in collective The firm now manages some £27.9 billion* across a range investment schemes. of funds, two investment trusts and both pooled and Benchmarks FTSE All-Share Index TR segregated institutional portfolios. A widely-used indicator of the performance of the UK stock market, in which the fund invests. It acts as a Our managers invest in their own and their colleagues’ funds. ‘target benchmark’ that the fund aims to outperform. This has been a basic tenet of the Artemis approach since Management of the fund is not restricted by this benchmark. the firm started. It means that interests of our fund managers are directly aligned with those of our investors. * Source: Artemis as at 31 July 2021. Fund status Artemis Institutional UK Special Situations Fund was constituted by a Trust Deed dated 23 December 2004 and is an authorised unit trust scheme, belonging to the non- UCITS retail category, as defined in the Collective Investment Schemes Sourcebook (‘COLL’) of the Financial Conduct Authority (‘FCA’). Buying and selling Units may be bought and sold by contacting the manager by telephone, at the address on page 4 or via the website artemisfunds.com. Valuation of the fund takes place each business day at 12 noon on a forward pricing basis. Investors are reminded that past performance is not a guarantee of performance in the future and that the price of units and the revenue from them can fall as well as rise. 3 Prospectus Report of the manager Copies of the most recent Prospectus are available free of We hereby approve the Half-Yearly Report of the Artemis charge from the manager at the address below. Institutional UK Special Situations Fund for the six months ended 30 June 2021 on behalf of Artemis Fund Managers Limited in accordance with the requirements of COLL as Manager and Alternative Investment Fund Manager issued and amended by the FCA. (‘AIFM’) Artemis Fund Managers Limited * Cassini House M J Murray L E Cairney 57 St James’s Street Director Director London SW1A 1LD Artemis Fund Managers Limited London Dealing information: 25 August 2021 Artemis Fund Managers Limited PO Box 9688 Chelmsford CM99 2AE Telephone: 0800 092 2051 Website: artemisfunds.com Investment adviser Artemis Investment Management LLP * Cassini House 57 St James’s Street London SW1A 1LD Trustee and Depositary J.P. Morgan Europe Limited † 25 Bank Street Canary Wharf London E14 5JP Registrar SS&C Financial Services International Limited * SS&C House St Nicholas Lane Basildon Essex SS15 5FS Auditor Ernst & Young LLP Atria One 144 Morrison Street Edinburgh EH3 8EX * Authorised and regulated by the FCA, 12 Endeavour Square, London E20 1JN. † Authorised by the Prudential Regulation Authority (‘PRA’), 20 Moorgate, London EC2R 6DA and regulated by the PRA and the FCA. 4 Investment review ̥ Amid economic and Covid uncertainty, our companies And here the news across the portfolio has been uniformly continued to deliver. positive. Having reduced (or removed) guidance on future ̥ The fund returned 15.3%* versus 11.1%* for the FTSE All- earnings during the early days of the pandemic, most Share index. companies have spent the past 12 months or so rebuilding ̥ The ‘easy’ part of the year is probably behind us. these forecasts. Indeed the speed with which earnings have recovered, often supported by reduced costs and by new ways Performance – As economies and profits recover from the of delivery, have surprised many. But it has not all been plain pandemic… sailing (or, in our case, a smooth flight)... In writing the outlook in the fund’s annual report six months ago, we slightly hedged our bets (a typical fund-manager tactic…). Review – Waiting for our airlines to take off… While we noted the progress being made in rolling out vaccines While speaking to a friend over a drink at Christmas (from and in the economic recovery, we also introduced a note of the requisite two metres) I was asked which shares had caution. In a sense, we were right on both counts. The pandemic performed best for us in 2020. “Airlines”, I replied. My friend has continued and, just as we are about to return (at least in the looked at me in surprise and asked how this could be given eyes of the politicians) to ‘normality’, the Delta variant caused no-one was flying. As we know, share prices tend to discount an upsurge in cases. Inevitably, it is now being suggested that the future and financial markets operate one step ahead we might be exiting lockdown too quickly. This clearly depends of the real world. But were last year’s gains misplaced? on who you ask. With now two-thirds of the UK population Although only time will tell, we still think the basic ‘double-jabbed’ one would like to think the most vulnerable are investment premise is logical. An industry that was once now somewhat protected. And this appears to be supported by plagued by multiple low-cost entrants, state-supported flag the lower level of hospitalisations and deaths. We are, however, carriers and which has a highly operationally geared business dealing with the unknown, and as we write this report the model (airlines have high fixed costs) may not seem to be the prevalence of the virus among the young is increasing quickly. stuff of investment dreams. But with the demise of marginal The other note of caution we expressed was how much of the airlines such as Monarch and Flybe, and with the collapse of return to normality had already been priced by the stockmarket holiday company Thomas Cook, we had started to witness – and what a swift return to normality might mean for both a more rational environment in which the better players had inflation and interest rates. All of these issues have been front an opportunity to win market share. We took the view that and centre of investors’ minds over the first half of the year. the pressures exerted by the pandemic would ultimately Given the success of the stimulus provided by governments clear out the rest of the airline industry’s weaker players and and central banks, there were concerns that interest rates restrict some underfunded larger players from expanding. So would have to rise sooner than previously thought – so yields we bought Jet2 and Ryanair, both of whom we believed would on government bonds rose markedly (yield is the return on be able to exploit this situation and take significant market a bond relative to its price so rise when bonds lose some share. Yet while both holdings performed well last year, they of their appeal). We old folks, of course, still have to rub our have been the largest drags on our performance this year. eyes when we look at bond yields; these remain at incredibly Does this change our view? low levels by historic standards. But that yields briefly edged As investors, we believe in the quote often attributed to Keynes higher demonstrated the degree of concern over an economic “When my information changes, I alter my conclusions”. To this overheating. point, however, our conclusion hasn’t changed. Both airlines So given all the concerns outlined above it may be a bit of a remain well-financed (partly with our help). They therefore surprise that our benchmark index, the FTSE All-Share, actually have the ability to respond as demand recovers and to invest rose by 11.1%. The fund, meanwhile, did a little better, producing in more fuel-efficient aircraft. The competition, in contrast, a return of 15.3%. has amassed more debt and is retrenching. But the largest ‘unknown’ continues to be the virus and what it means for travel These healthy returns highlight the drawbacks of spending restrictions this year and, indeed, for travel over the longer term. too much time focused on the macroeconomic environment: We had hoped that we would have more clarity on this given commentators can instil all manner of fear by making the level of vaccinations, but the Delta variant has muddied the predictions that, more often than not, turn out to be completely waters.