Artemis Monthly Distribution Fund
Q1 2025 update

Fund objective

To generate monthly income, combined with some capital growth over a five-year period.

About the fund

The Artemis Monthly Distribution Fund gives investors access to the income-generating potential of a blend of bonds and shares. It is actively managed. 

• 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.

Calendar year performance (%)

After driving the performance of global stockmarkets in late 2024 and early 2025, the US has more recently encountered some potential challenges. In January, the introduction of DeepSeek – a Chinese competitor to ChatGPT that was allegedly developed at a lower cost¹ – questioned the long-held view that American companies reign supreme in technology and AI (artificial intelligence).

Latterly, talk of tariffs (a tax on imports) on some of the US's largest trading partners resulted in sentiment deteriorating. This initially led to government bond yields falling (bond yields and prices have an inverse relationship) as investors sought out assets regarded as ‘safer’. However, yields began to climb again after the end of the quarter and the uncertainty created by the 'Liberation Day' announcement on 2 April (when the US president announced excessive tariffs on every country, before postponing and reversing most of them), while the gold price also rose.

The main US index, the S&P 500, had a poor quarter. Its largest technology companies, which have been so dominant in global stockmarkets for more than a decade, fell sharply.

High-yield spreads (the difference in yield between high-yield bonds and Treasuries [US government bonds] of the same maturity) moved higher from near record levels of tightness. Despite this move, we believe the high-yield bond market looks relatively robust.

Meanwhile, Europe saw a significant quarterly outperformance of the US. Aerospace & defence was strong, boosted by Germany’s decision to unlock enormous amounts of spending in this area².

Against this backdrop, the fund made 3.4%, compared with gains of 0.2% from its benchmark, the IA Mixed Investment 20-60% Shares sector³.

Contributors

Shares were responsible for most of the fund’s positive returns during the quarter.

Expectations rose that government spending on aerospace & defence will increase significantly. As a result, the order books of the defence companies that we hold (Rheinmetall⁴, BAE Systems⁵ and Mitsubishi Heavy Industries⁶) grew substantially, as did profits and dividends.

Banks also did well, particularly in Europe (Commerzbank and CaixaBank). They continue to benefit from the impact of high interest rates on net interest margins (the difference between the interest they receive on loans and the interest they pay on customer deposits).

A lack of exposure to US technology companies contributed to performance from a relative point of view as this sector fell.

In fixed income, Treasuries (US government bonds) and TIPS (Treasury Inflation-Protected Securities) made a positive contribution as bond yields fell, although they rose sharply (especially on TIPS) after the end of the reporting period.

Detractors

General Motors shares sold off with the rest of the automobile sector as a result of tariff concerns (it has a large manufacturing presence in both Mexico and Canada).

We will continue to monitor policy developments with interest, but still believe General Motors to be relatively well placed to increase shareholder returns.

Another significant detractor was electronics manufacturer Hon Hai, which sold off on concerns around AI demand and tariffs (the company plays a significant role in Apple’s supply chain). The company is one of many positions that we are debating at present, but in our view it is on a relatively low valuation with a healthy dividend yield and a strong balance sheet.

Activity and positioning

In shares, we have been adding to ‘core income’ (mature companies with high and stable dividend yields, but low prospects for dividend growth) and reducing exposure to economically sensitive companies. We do however retain a material exposure to financials, which we believe are potentially capable of delivering double-digit annual cash returns and are relatively prepared for a recession.

When it comes to bonds, we have sold some Treasuries and added to TIPS, given the latter underperformed at the end of the period, which we do not believe to be logical. Elsewhere, there have been some selective opportunities to pick up some bargains in higher-quality high-yield bonds with a short time until maturity (these constitute about 25% of the portfolio).

Outlook

Since Liberation Day, many stockmarkets have lurched lower as investors have attempted to reconcile the effects of sweeping US tariffs on the majority of its trading partners. Despite postponements and reductions to most tariffs since then, uncertainty still looms large. We would offer the following opinions at this stage:

• The probability of recession has increased significantly: Corporate uncertainty is much higher, with the returns that companies can expect from new investments highly questionable, given a more unpredictable environment. As a result, companies are less willing to commit, while consumer confidence is also likely to fall (having already done so in the US). The big question we are weighing as a team is whether this leads to a recession, as that would damage corporate profits and share prices.
• We are likely at or past peak tariffs: Uncertainty is always challenging for share prices and this is amplified when valuations are high. Despite weak stockmarkets, it was likely the disorder in the bond market – with Treasury (US government bond) yields climbing despite the S&P 500 selling off – that forced US President Donald Trump to announce the 90-day suspension to reciprocal tariffs. Bond yields are inversely correlated with prices.
• This is more evidence of regime change: Trump has aggressively rolled back the norms that have underpinned global trade over the past 30+ years. Tariffs look problematic for global platforms in particular, with the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) good examples of these sorts of businesses. Take Apple, which designs products in California and assembles them in Taiwan with Chinese components before selling them all around the world with little friction. In our view, the viability of this sort of model looks more challenged going forward. ‘National champions’ may be better equipped to weather this sort of environment; that is to say businesses that produce and sell their products domestically and are therefore relatively well insulated from tariffs. None of this will be good for stockmarkets, with supply chains becoming more inefficient.

Despite this volatility and uncertainty, we think the outlook for a portfolio like ours remains compelling. Largely, we are positioned for the regime change that continues to play out, in the form of a deglobalising (the reversal of globalisation – the process by which the world has become more interconnected through trade and cultural exchange), more unpredictable world with higher inflation and interest rates.

In uncertain times like this, the certainty of income and its ability to compound and grow over time is incredibly powerful.