While the UK news continues to be dominated by running commentary on Brexit talks, the impact on the market has been limited and attractive opportunities can still be found, according to Artemis’ Derek Stuart (pictured). 
In the Artemis UK Special Situations fund's quarterly update covering Q3, Stuart said the word 'Brexit' was becoming “rather irritating” seeming to dominate “every news broadcast, analyst report and dinner party conversation”.
The FE Alpha Manager said: “The good news is that the noise is not really impacting the UK stock market yet. Investors are still rewarding good companies and those delivering on results.
“But the noise is affecting currencies – and this does move the stock market.”
Since last year’s referendum, sterling has fallen by around 10 per cent against the US dollar and by 13.51 per cent against the euro.
Performance of sterling vs euro since EU referendum
Source: FE Analytics
However, Stuart noted that sterling had strengthened during the summer, despite continued uncertainty over the future relationship with the EU, benefitting domestically-focused stocks and the fund.
“While we had not consciously moved into more UK-focused companies, this is where we are finding value,” he said.
As such, the manager has stood by top holding Tesco, which represents a 5.1 per cent position for the fund, despite a slow recovery for the embattled supermarket giant.
“This quarter the shares have started to pick up and recent results have added to our conviction that this story has further to go,” said Stuart.
It has also retained its position in another top holding, specialty chemicals and sustainable technology firm Johnson Matthey, which has seen an uplift.
Stuart said investors had taken a “hard line” on companies like Johnson Matthey “whose existing business model could be significantly challenged by new technology”.
“We bought the holding in the aftermath of Volkswagen’s emissions scandal,” he explained. “Although its initial performance was reasonable, the shares subsequently drifted as enthusiasm for electric vehicles gained momentum.”
Stuart said: “There is no denying that sales of electric vehicles will grow dramatically over the coming years – but it is unlikely that the internal combustion engine will disappear overnight.
“Challenges around price, battery technology and charging infrastructure all need to be addressed before pure electric vehicles are adopted by the mass market.
“It is more likely that hybrid vehicles become the intermediate choice – and these use Johnson Matthey products.
“So, for now, demand should remain intact for this area of its business. In the meantime, the company is investing in new battery technologies.”
Performance of stock over 1yr
Source: FE Analytics
Indeed, while performance over one year has been flat, rising by just 0.87 per cent, it rose sharply in September, as the above chart shows.
The rise came after the company announced plans to invest £200m into expanding its battery material technology business in an attempt to make inroads into the burgeoning electric vehicle industry.
Stuart explained: “In September, it updated the market on this investment and on some of the attractive characteristics of its chosen technology.
“The shares were trading on a low valuation at the time of the update and responded well to it.”
Elsewhere, however, the manager said it had experienced some setbacks with a profits warning at portfolio holding and language software specialist SDL.
“The new managers have made significant changes to the business and we have started to see revenues grow,” he said.
“Costs, however, have been higher than expected and this has led to downgrades to profits. We view these as short-term problems and feel that good progress has been made."
There were also disappointments from support services group Interserve and retailer Dixons Carphone, which face different challenges. Stuart said it had also taken profits and reduced positions in London Stock Exchange Group and IT company FDM.
Stuart said the global economy appeared relatively stable and the UK economy was growing, albeit at a slower pace. Meanwhile, Stuart said, the depreciation of sterling had led to higher inflation and raised the prospect of higher interest rates later this year.
However, Stuart said the Bank of England is unlikely to raise rates too quickly while Brexit negotiations remain ongoing.
“As we have often commented, the good news is that the UK stock market is an international one,” he said.
“So, while what happens in the UK is important, it can also benefit from the better growth elsewhere.”
Stuart added: “In general, while we see little upside in the overall market, we are finding pockets of value. This is reflected in the significant discount of the fund’s valuation to the market.
“Investors are taking a hard line on any companies that disappoint. This provides opportunity.
“Overall, we have a decent list of new ideas and hope that the fund’s valuation drives continued improved returns going forward.”
Year-to-date, the Artemis UK Special Situations fund has returned 5.56 per cent, compared with a rise in the FTSE All Share benchmark of 10 per cent and a 11.74 per cent gain for the average IA UK All Companies sector fund.
Performance of fund vs sector & benchmark in 2017
Source: FE Analytics
“In essence we believe that both the investment philosophy and investment process for this fund are sound, sensible and straightforward,” analysts at Square Mile Research noted.
“However, from time to time the managers are likely to find themselves out of step with trends in the market and the fund may suffer an extended period of underperformance.
“Nevertheless, the focus on undervalued situations in sustainable businesses has helped limit the volatility of the fund’s performance and the fund’s risk profile compares well to the market despite the above average exposure to small and mid caps.”
The fund has an ongoing charges figure (OCF) of 0.81 per cent.