Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me is Nick Shenton. He is Manager of the Artemis UK Income Fund. Hello.
Nick Shenton: Hi, Holly.
Black: So, welcome to the studio. Would you like to tell us just briefly what the fund does?
Shenton: Yeah, of course. So, the Artemis UK Income Fund has been running for almost 20 years. And the process is very much based around income. So, that's the dividends you get from owning shares in the companies. But the way we try to look at it is, that is a measure of how the company is performing, but what really drives the income is the cash flow.
Black: So, obviously, you're looking from the bottom-up, at the fundamentals of the company you invest in, but being a UK fund, it's probably been quite hard to ignore the macro and the politics in recent years. What's your sort of outlook for this year?
Shenton: So, we're straight into Brexit, are we? Okay. We tend to be, what we call, macro aware not macro driven. We think where we can have a sustainable edge is understanding the fundamentals of a company in the industry, as you say. But nonetheless, we invest primarily in the UK, we've got to be aware of what's happening out there. So, we think it's difficult to say what Brexit will look like when it eventually happens, and we don't have an edge on that. But one thing we do see with quite a good degree of conviction is that fears over Brexit have been keeping international investors out of the UK stock market. And that means valuations are, let's say, relatively undemanding versus the rest of the world. And either international investors will come back and buy shares in UK companies or private equity, which is awash with money will come along and arbitrage that.
Black: So, that means more mergers and acquisitions. What does that mean for investors?
Shenton: Well, we think that that's quite a good position for investors in the UK to be in. Let's also not forget, there's some really terrifically strong, good quality businesses operating in the UK Just because we got Brexit doesn't mean the whole economy is challenged.
Black: So, Brexit aside, I think one of the big themes for this year is sustainable or responsible investing. How is that affecting the way you invest?
Shenton: Two years ago, the concept of sustainability was a bit hard to put your finger on. As I say, as a team, we've really gone up a steep learning curve in the past six, nine months, because we can see how it's impacting companies' decisions, and how it's impacting the way their customers and suppliers view them. So, if you think of a business as an organisation of people, all those people want to work for a responsible business and we're also much more aware as a society about the negative externalities of, let's say, aviation, or the type of energy that's used to produce products for sale. So, it's starting to become much more tangible. And we would reflect on companies which are going to have to invest quite substantially to become cleaner and really question whether we want to be invested in those shares.
Black: Has it surprised you some of the companies that are sort of rising to that challenge?
Shenton: Again, optimistically, you would say that pretty much every company we are speaking to is aware of it, agrees that it's structural, and that they have to respond to the challenge. Where we're seeing the shift is the potential connotations for profits. So, that might be even in consumer goods companies, understanding the impact of soya on the environment. It might be for aviation businesses or airport owners. If there's going to be more taxation on air travel which we think is pretty likely. It might be for oil companies where they're going to have to reinvest more and clean energy to be on the right side of societal perceptions of their business. So, that's why we say we're intrigued, and we can see a reprise of the technology playbook, the disruption that came from technology in recent years, we see something similar now where companies are going to have to invest more to stay in the game. But of course, there will be opportunities for others.
Black: Well, thank you so much for your time.
Shenton: You're very welcome, Holly. Thanks for having me.
Black: And thanks for joining us.
