Artemis Corporate Bond Fund
Q1 2025 update

Fund objective

The fund aims to generate a return greater than the iBoxx GBP Collateralized & Corporates Index, after fees, over rolling three-year periods. It seeks to do this through a combination of income and capital growth.

Performance

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

Gilts (UK government bonds) were the main discussion point in January. This market was weak in the first half of the month before mounting a strong recovery and ending up pretty much back where it started. This weakness was part of a global trend, with Treasuries (US government bonds) also falling.

Our view is that gilt yields are likely to end the year lower as interest rates are simply too high for the mediocre growth environment (bond yields have an inverse relationship with prices). We believe the Bank of England will have to focus more on low growth rather than the slow pace of falling inflation and so will cut interest rates to boost the economy (government bond yields have a close relationship with interest rates).

February saw credit spreads (the difference in yield between corporate bonds and Treasuries of the same maturity) tighten, before creeping out towards the end of the month, but there were no wild moves. Gilts finished the month relatively unchanged.

Credit spreads then moved sharply wider in March. Some of this was due to fears over the economic impact of tariffs (a tax on imports) initiated by the US. However, corporate bond markets and global stock markets have risen a lot over the past few years, so perhaps some sort of reversal was overdue.

The fund made 0.7% over the quarter, compared with 0.7% from its iBoxx £ Collateralized & Corporates index¹ benchmark and 0.9% from its second benchmark, the IA Sterling Corporate Bond sector².

Calendar year performance (%)

Past performance is not a guide to the future. Source: Lipper to 31 March 2025 for class I accumulation GBP. All figures show total returns with dividends and/or income reinvested, net of all charges. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. Benchmark: iBoxx £ Collateralized & Corporates. IA sector: IA Sterling Corporate Bond.

Contributors/detractors

Rising credit spreads were largely responsible for our modest underperformance in March. The silver lining is that despite credit spreads being weaker in 2025, the fund hasn’t underperformed its benchmarks in the quarter to date.

There was no dominant driver of the weakness, it was somewhat random. Some high-quality bonds we hold performed badly, while some higher-risk or lower-quality names hardly moved. Sometimes it can be hard to rationalise the moves in the bond market. The best reason we can think of is that there has been a significant amount of selling of passive corporate bond funds³ (those that aim to track the performance of the corporate bond market). So, the big index components such as GlaxoSmithKline, where we had no exposure, were heavily sold given their high weighting in the index. Our job is to actively manage the fund and exploit these opportunities, irrespective of what is driving them.

While 10-year gilt yields barely changed during the quarter, March was a weak month for the asset class. We have yet to commit to market direction. We aren’t trying to take advantage of short-term government bond volatility and will wait until we feel the market is making a longer-term move in a certain direction. We started the year with a very small bias to long-duration (bonds with a greater sensitivity to moves in interest rates) but cut that very quickly. We now have a neutral duration position.

Activity

Compared with the end of last year, the credit (corporate bond) market had a busier month in January, but it remained modest. The deals that came were well subscribed. The fund bought new issues from building society Nationwide, supermarket J Sainsbury and car-leasing service Motability. We switched out of existing holdings to buy bonds in the latter. While owning Motability has been a modestly poor decision, we switched between some of its bonds in search of better value, which has helped.

In February we bought new issues from annuity provider Athene, housing association Places for People, engineering equipment manufacturer Caterpillar, pharmaceutical Johnson & Johnson, and tobacconist Imperial Brands, selling utility Anglian Water and others to help pay for them. Imperial Brands has since been sold, while we also reduced our property exposure by selling Grainger and Blackstone Property Partners. Property bonds were looking shaky 18 months ago, but have since recovered strongly. We still like the sector, but with higher valuations and government bond yields remaining healthy in comparison, reducing exposure appeared sensible. This proved to be a good decision given events since February.

March proved to be a busy time for activity. After months of low turnover, a fall in the corporate bond market presented us with an opportunity to make switches based on value, including in bonds from the same company, such as J Sainsbury, Caterpillar, Motability, CPI Property and pensions insurance specialist Rothesay. We also carried out numerous switches in the same industry, selling Lloyds to buy Barclays in banks, selling Wessex Water to buy Anglian Water in utilities, selling Places for People to buy Notting Hill Genesis in housing associations and selling Logicor to buy Digital Realty in property. In addition, we took profits from outperformers and recycled the proceeds into underperformers. The bond market was indiscriminate during the weakness in March, with many higher-quality bonds selling off more aggressively than lower-quality ones.

Rationally, you would expect the market to punish the more economically sensitive and lower-quality names while rushing to quality in names such as GlaxoSmithKline and Walmart. This has happened in some cases, but it has been an unusual sell-off. Time will tell if we have made the right decision.

Outlook

Tariff uncertainty makes accurate forecasting more difficult – though our view is that it may increase the chance of more interest rate cuts this year (central banks can cut interest rates to boost the economy).

Higher tariffs act as an obstacle to global growth while also raising inflation (the rate at which prices increase). We believe central banks will focus on the former and the impact on domestic demand, leading to lower interest rates, all else being equal.

Ultimately, we believe that the US president will back-pedal on aggressive tariffs should it become clear that US economic growth is falling rapidly. If he doesn’t and tariffs are not, as has been claimed, a negotiating tactic, then a global growth slowdown is inevitable.