Ed Legget is close to completing Artemis UK Select’s transition from the portfolio built by former manager Tim Steer to one that reflects his own views and process. 
Legget, who managed the top-performing Standard Life Investments UK Equity Unconstrained fund before joining Artemis at the start of 2016, was hired to take over the fund because of Steer’s planned retirement at the end of 2015. The fund was originally called Artemis UK Growth but was renamed Artemis UK Select to better reflect Legget’s investment style.
In his latest update to investors, the manager said: “In terms of the transition of the portfolio, we are 90 per cent there. There is just 2 per cent left in the fund in small-cap illiquid names. We have been selling and continue to do so… but they are moving slowly.”
“Around 8 per cent of the fund is in holdings where we are comfortable today but which we would look to exit at slightly higher levels if possible. These include names that we have generally been reducing, but which have fallen sharply. I think we may get a better opportunity to exit stocks like ITV and Ibstock after the referendum.”
The below table shows the largest stocks in the £541.6m fund but in the following article we’ll take a closer look at the stocks Legget has been buying and selling over the five months since taking over.
He has a highly benchmark-agnostic, value approach, which revolves around picking out-of-favour companies where he sees a potential for change, so many of his purchases are unloved at the moment and could take time to show their long-term potential.
Source: Artemis
Additions to Artemis UK Select
Some of the main purchases have been in the life insurance space, with a new holding started in Legal & General and additions made to existing positions in Aviva and Prudential.
The manager likes the sector as he says there is now greater clarity over the regulation of the sector, after the first set of reporting under the Solvency II directive provides comfort on dividends. He adds that current yields on these stocks look attractive in the current market and he expect dividends to grow, while the sector looks more attractively valued after becoming “friendless” in the run-up to the Brexit referendum.
Legget also added to Lloyds and Barclays during the sell-off in February that hit banks hard. He said: “Lloyds’ results and its dividend provided the first evidence that the regulator is comfortable that they have enough capital. On this basis, Lloyds’ yield looks too high. Barclays should follow in time as they exit non-core businesses.”
A new holding has been started in global packaging business DS Smith after its shares de-rated earlier in the year. The company fell in line with the wider US and European paper sectors, where sentiment has been damaged by the view that profits will come under pressure from weakening prices for kraftliner (white cardboard box paper).
Performance of sector vs sector over 2016
Source: FE Analytics
“DS Smith is actually a net buyer of kraftliner so should benefit from this trend. The share price weakness created an attractive opportunity to buy into the DS Smith’s story of winning market share in European packaging,” the manager said.
Another contrarian pick has been energy and resources businesses Tullow, Genel and Vedanta, which have been hit hard by the commodity price plunge of recent years, although some of these positions have been sold.
“We invested 200 basis points in total across these stocks in February on a change in view of the near term direction of the oil price. We subsequently took some profits in Tullow and sold Genel after the strong rally. All three are now pricing in oil above $65 in our view,” the manager said.
Sales from Artemis UK Select
Moving over to disposals now and Legget has been selling out of holdings where he has a different view to Steer or are too small to have a meaningful impact on performance. Some of these sales have been from the fund’s top 10 holdings when the manager took control.
One notable sale has been equipment rental company Ashtead Group, as the manager thought the position was too large given the cyclicality of its business. Its shares have been on a downward trend for around a year and Legget thinks they will continue to de-rate as returns seem to be at or near their cyclical peak.
Performance of stock over 1yr
Source: FE Analytics
He has also been selling Royal Dutch Shell/BG as he is “not keen” on the combined group’s exposure to liquefied natural gas (LNG).
Shell’s $53bn acquisition of BG made it the largest liquefied natural gas company in the world; while fans of the deal said it would allow Shell to become more competitive in the LNG market, others maintained that the company will be plagued by volatility in the energy market for years to come.
The position in Howdens Joinery has been reduced from more than 5 per cent to around 3 per cent, although it remains a top 10 weighting.
“This is a great business: high returns and the vertical integration of supply chain provide an enduring competitive advantage. We reduced slightly because we see it de-rating from here as earnings growth slows and the cyclical recovery in margins plays out,” Legget said.
Since Legget took over Artemis UK Select it has made a bottom-decile loss of 4.35 per cent, compared with a 0.02 per cent fall in its average IA UK All Companies peer and a 1.83 per cent gain in the FTSE All Share.
“Performance in the short term has been disappointing. And, having had full control of the fund since the start of the year, I take full responsibility. We have hit one profit warning (St. Ives) and two 5 per cent plus downgrades (Barclays and Ashtead),” he said.
“On the two occasions in the past where I have experienced similar short-term underperformance it was due to a big macro shock (EU, 2011) and or a significant number of profit warnings in the portfolio (Q4 2008). We remain confident in the holdings in the portfolio and believe we will regain the losses in time.”
Given the manager’s value-driven, long-term approach, it is perhaps unfair to look at returns on a five-month view.
Over his time running Standard Life Investments UK Equity Unconstrained (which spanned April 2008 to June 2015), the fund made a 212.25 per cent total return – outpacing the FTSE All Share and its average peer by a wide margin and ranking it second out of 208 funds in the sector.
Performance of fund vs sector and index under Legget
Source: FE Analytics
Artemis UK Select has a clean ongoing charges figure (OCF) of 0.82 per cent and is yielding 2.08 per cent.
