Artemis UK Future Leaders (AFL) – formerly Invesco Perpetual UK Smaller Companies Investment Trust – has published its results for the year ended 31 January 2025, marking a turbulent 12-month period during which it underperformed its benchmark and completed a major transition in management.

Performance disappoints amid wider sector struggles

The trust’s NAV total return came in at -2.4%, lagging the Deutsche Numis Smaller Companies + AIM (ex ICs) Index, which posted a 7.8% gain. Shareholders fared worse, with the share price total return down 8.0%, widening the discount to NAV to 16.6% from 11.1% a year earlier.

This follows a difficult period for UK smaller companies more broadly, though the board expressed dissatisfaction with the level of underperformance and initiated a change in manager during the year.

Board acts decisively with manager switch to Artemis

Following a strategic review in mid-2024, the board replaced Invesco with Artemis, citing a need for a team with a strong track record, communication capabilities, and alignment with shareholder interests. The transition completed on 10 March 2025, shortly after the financial year-end. Artemis portfolio managers Mark Niznik and William Tamworth now oversee the trust, bringing a long-term, valuation-disciplined approach to UK smaller companies.

Special dividend and reduced fee arrangements

In response to its persistent discount, the trust undertook a return of capital in October 2024, paying an elective special dividend of 484.85p per share, equating to £16.4m. This led to the cancellation of approximately 10% of shares in issue. The board also announced a reduction in the investment management fee, now charged at 0.65% on the first £50m of net assets and 0.55% above that. Artemis has agreed to waive management fees until December 2025. These changes are expected to reduce the ongoing charges ratio from 1.03% to 0.84%.

Dividend cut in line with policy

The trust maintained its 4% yield target, paying a total of 15.00p in regular dividends during the year (2024: 16.96p). The final dividend of 3.45p is subject to approval at the upcoming AGM on 5 June 2025 and will be paid on 12 June. Shareholders can elect to reinvest via the dividend reinvestment plan by 17 May.

Portfolio repositioning underway

The Artemis team is currently reshaping the portfolio in line with its strategy, which favours companies with strong cashflows, market-leading positions, and attractive valuations. A transition period is expected to last through the first half of 2025. No new stock-level detail has been disclosed yet, although the managers plan to update investors in due course.

Gearing will now be achieved via contracts for difference (CFDs), with a typical operating range of 0–10% and a hard cap at 15%. This replaces traditional bank debt, which the board says has become less attractive in the current environment.

Outlook: confidence key to recovery

The managers remain optimistic about the potential for UK smaller companies to rebound, pointing to solid consumer and corporate fundamentals. They note that small caps are deeply out of favour and valuations are historically low. A modest shift in sentiment could drive a substantial re-rating, especially as UK equities begin to look more attractive relative to their US counterparts.

Political stability, improved planning reforms, and pension liberalisation were flagged as potential tailwinds, though concerns around stagflation and global trade tensions remain in focus.

[QD comment MR: It’s been a bruising year for Artemis UK Future Leaders (formerly Invesco Perpetual UK Smaller Companies), with further underperformance relative to its benchmark and a deepening share price discount. While the NAV decline of 2.4% might not seem catastrophic in isolation, the 10.2 percentage point lag versus the Deutsche Numis Smaller Companies + AIM (ex ICs) Index is substantial and continues a pattern of ongoing underperformance. Against this backdrop, shareholders likely welcome decisive action by the board in shifting the management contract to Artemis.

It is clearly early days and it will take the new managers some time to realign the portfolio, but Mark Niznik and William Tamworth bring a proven track record and a disciplined, cashflow-focused investment approach. Their ability to attract net inflows into their existing fund – while the broader small-cap space suffered outflows – speaks to credibility with investors. The challenge now is for Artemis to deliver credible outperformance and rebuild investor confidence. If they can match their past results, particularly in this low-valuation environment, the trust may find itself well placed when sentiment towards UK smaller companies turns. A narrowing discount and renewed NAV growth could follow – but execution and communication will be key.]