Artemis Monthly Distribution Fund
Q3 2024 update

The Artemis Monthly Distribution Fund’s objective is to generate a monthly income, combined with some capital growth over a five-year period. It seeks to give investors access to the income-generating potential of a blend of bonds and shares across:

• Dividend-paying company shares – These are shares in companies worldwide that return a portion of their profits to their shareholders through regular cash payments (‘dividends’).
• High-yield bonds – High-yield bonds are issued by companies that ratings agencies (such as S&P and Moody’s) deem to be at greater risk of defaulting on their debts. As their name suggests, they offer a higher ‘yield’ (rate of interest) to compensate for the higher level of risk.
• Investment-grade corporate bonds – These are issued by companies with higher credit ratings. These are businesses that ratings agencies consider to be at relatively low risk of defaulting on their debts.
• Government bonds – These are widely viewed as being among the safest bonds (governments in developed economies rarely default on their debts). The interest rate, or ‘yield’, available here is lower than it is on high-yield and investment-grade corporate bonds – but they can provide a useful counterweight to the fund’s holdings in more economically sensitive bonds and shares.

Performance

For full five-year discrete performance, please see the table below. Please remember that past performance is not a guide to the future.

With a return of 2.4%, the fund performed in line with the average return of 2.4% from its benchmark, the IA Mixed Investment 20-60% Shares sector¹. We examine some of the biggest contributors – and notable laggards – below.

Annualised performance, 12 months to 30 September (%)

Contributors

In equities, our defence holdings continued to make a material contribution to performance

Sadly, a number of conflicts appear to be becoming entrenched. The bitter conflict in the Middle East is intensifying rather than cooling. There is no sign that Russia’s war on Ukraine is about to end. Almost three decades of complacency following the Cold War mean most Western governments are underprepared for this new era of warfare: stockpiles of ammunition are almost non-existent and there is little capacity to ramp up production. This scarcity has transformed the pricing power of the world’s defence companies. In many cases, their order books are full for a number of years.

Our gold mining companies also continued to rally

The gold price has recorded a number of all-time highs this year, helped by buying by central banks and by ballooning US government debt, which has begun to erode some of the dollar’s attraction as a safe haven. Even after their strong performance over the year to date, the share prices of gold miners have yet to catch up with the boost to their earnings that a higher gold price is providing. 

In fixed income, falling interest rates helped the fund’s holdings in property-related sectors 

Our position in Swedish residential landlord Heimstaden was the pick of these thanks to a rebound in property prices and a rise in rents. We saw a recovery in Medical Properties Trust, a US-based real estate company, following the successful resolution of a bankruptcy by one of its larger tenants. Czech landlord CPI and US homebuilder New Home Company also did well. 

Bonds issued by Kier and Sotheby’s also performed well

Global auction house Sotheby’s announced a combined $1 billion equity injection from its existing owner and from Abu Dhabi’s sovereign wealth fund. Most of the capital will be used to repay debt, resulting in a sharp jump in its bond price. Elsewhere, our holding in bonds of infrastructure contractor Kier Group rallied on the likelihood of increased government spending and improved sentiment towards the UK following the general election. 

Detractors

Samsung’s shares performed poorly; we have sold the holding  

Analysts continued to lower their earnings forecasts for Samsung due to a combination of higher costs (thanks in part to a significant one-off bonus payment to its employees), weak demand for smartphones and significant supply from Chinese manufacturers of memory chips.

Over the longer term, Samsung should be well placed to benefit from growing demand for its high-bandwidth memory chips, which are important components in AI datacentres. Moreover, its shares look attractively valued relative to its peers and relative to their own history. In the short term, however, we cannot see a catalyst that might cause investors to reappraise its merits and, as such, we sold the holding.

Our holdings in the shares of carmakers performed poorly 

Carmakers in the West have been suffering due to concerns about the influx of cheap electric vehicles from China. Despite this short-term pressure, however, we retain the holdings in GM and Hyundai.

Because a significant proportion of the vehicles GM sells are bought on finance, it is also a potential beneficiary of cuts in interest rates. Hyundai’s shares could benefit from initiatives by the South Korean regulator to close the ‘Korea discount’. These echo some of the reforms Japan has successfully implemented in recent years. We would also note signs that the sale of Hyundai’s Indian business appears to be seeing strong investor demand.

Positioning

The fund’s allocation to the shares of traditional income-paying companies in the real estate, infrastructure and consumer staples sectors remains below its long-term average. Instead, we believe areas such as banks, insurers and defence companies offer better income credentials.

In the bond market, meanwhile, we continue to like the opportunity in short-dated high-yield bonds (those due to mature within the next five years). These tend to be much less volatile than the wider high-yield market and are often redeemed early by the companies that issue them, creating potential capital gains. It is this potential upside that we believe isn’t yet being fully recognised by the broader market.

Outlook

While there were some signs of normalising (slowing) economic growth in the US over the summer, there was nothing that suggested a deep recession was imminent. Employment and wage growth have remained strong, and a jobs report that exceeded forecasts suggested this is likely to continue. A rate cut from the Federal Reserve and China’s most concerted effort in several years to reignite the economy represent a significant level of stimulus.

As a result, we feel positive about the prospects of generating attractive returns for our investors. Bond yields are still attractive relative to their own history and to inflation. Should the economy weaken more than we expect, interest rates will be cut, boosting the capital value of our bonds. Meanwhile, trillions of dollars currently sitting on the sidelines in money market funds should start to flow back into equities and corporate bonds if interest rates continue to fall.