Artemis High Income Fund
Q1 2025 update

Fund objective

To provide a combination of a high level of income and capital growth, before fees, over a rolling five-year period. The manager defines a high level of income as equal to, or in excess of, the average yield of the funds in the fund’s Investment Association sector, the Strategic Bond sector.

About the fund

The Artemis High Income 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

The year got off to a busy start, with volatility in government bond markets, question marks over US dominance in artificial intelligence (AI) and the fallout from President Donald Trump’s threat to impose tariffs (taxes on imports) on the US’s trading partners. Here in the UK, concerns around economic growth and inflation (rising prices) led to higher gilt (UK government bond) yields (bond yields have an inverse relationship with prices), raising fears that we would see further tax rises and spending cuts.

Later in the period, concerns around the UK economy rapidly faded into the background as investor attention switched across the Atlantic and the Channel. Trump’s initial foreign policy moves brought the need for higher defence spending to the top of the to-do list for UK and European politicians. Then, just after the end of the quarter came the 'Liberation Day' announcement on 2 April when the president announced excessive tariffs on the US’s trading partners before postponing and reversing most of them.

Against this backdrop, the fund made 1.6%, compared with a gain of 1.5% from its IA Strategic Bond sector benchmark¹.

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 (%)

Past performance is not a guide to the future. Source: Lipper Limited/Artemis to 31 March 2025 for class I quarterly distribution units 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. This class may have charges or a hedging approach different from those in the IA sector benchmark.

Contributors

On the shares side of the portfolio, banks Barclays and NatWest continued to do well, benefiting from the contribution of higher interest rates to net interest margins (the difference between the interest they receive from loans and the interest they pay on customer deposits). We took some profits from these positions, as well as from two other strong performers, private equity firm 3i and telecoms company Deutsche Telekom, although we still like all four.

In fixed income, our Treasuries (US government bonds) and TIPS (Treasury Inflation-Protected Securities) made a positive contribution as bond yields fell.

Detractors

Our shares in aerospace company Melrose² were the biggest detractors from performance. It told investors to expect lower cashflows (the amount of money left over after all liabilities have been paid) in the near term, primarily due to a new contract for one of its jet engine programmes which is currently unprofitable. Yet based on longer-term expected free cashflow generation, we believe its shares look cheap compared with peers’.

Bookmaker Entain fell on concerns that US consumers would be hit by tariffs and spend less on sports betting and gaming. We are relatively relaxed – UK online sports betting and gaming has been around a lot longer and proved to be resilient throughout the Global Financial Crisis, Covid, the cost-of-living crisis and so on.

Shares in supermarket Tesco fell after competitor Asda initiated a price war.

Activity

Among our biggest purchases during the quarter were the following bonds:

• JP Morgan – we bought short-dated bonds (one year until maturity) in this financial company. They offer attractive yields with, in our opinion, relatively little downside risk.
• Shift4 Payments 2032s – this payments-technology company has grown quickly and is now a market leader in providing payment services for hospitality businesses around the world. We think it could get upgraded by a credit ratings agency, which would push the price of its bonds higher.
• GFL Environmental 2029s – we already owned shorter-dated bonds in GFL, the North American waste-management company. In Q1 we also bought these longer-dated bonds as we believe the recently announced sale of its environmental services division (alongside stated plans to pay down debt with the proceeds) should see the company upgraded by a credit ratings agency, which would push the price of its bonds higher.
• Capstone Copper – this is a Canadian-headquartered copper producer with mines in Chile, Mexico and the US. We bought its bonds at a new issue as it is a high-quality company with potential to pay off debt as new mines open.

We sold down positions in gilts (UK government bonds) and TIPS during the quarter, but after the end of the period and the ‘Liberation Day’ tariffs announced on 2 April, both fell in value so we bought back in.

In response to Trump’s 2 April announcement, we also topped up positions in:

• CBR – this German fashion wholesaler has no exposure to US tariffs (it sells into Germany and neighbouring countries), while it sailed through Covid with no issues. Yields on its bonds rose significantly in April.
• Forvia – the automobile sector was among those hardest hit by the tariffs, but Forvia makes vehicle parts that tend to be quite bulky and are therefore not sold over country lines, while factories are typically located near to car manufacturing plants. It is a strong company with resilient cashflows, low debt and a strong track record of managing through auto-industry downturns.
• IGT – we believe this global gaming-technology company has clear catalysts to be upgraded by a credit ratings agency, which would push the price of its bonds higher.

Outlook

As we are about to send this out, it looks like Trump is walking back on the Liberation Day tariffs.

So as with everything at the moment, the shelf life of what we have written below has probably already expired – but for what it’s worth…

As bond markets and stockmarkets experience volatility, it’s important to remember that for income-focused strategies like ours, income continues accruing and being paid every day even as markets go up, down or sideways. That is the beauty of such a strategy: we are not relying on market sentiment to drive returns; we have a different mechanism at our disposal.

We believe that by allowing this income to compound (deliver growth on top of growth) over the long term, we can create great outcomes for clients – and there is nothing within our portfolio that is making us think that the fundamental compounding will come to an end.

By focusing on higher-quality high-yield bonds (alongside our holdings in investment grade bonds, government bonds and solidly growing dividend-paying equities), we believe we are set up very well for this environment.

Since 2 April, we have managed to pick up a few attractively priced bargains, as discussed briefly above. But our most important act has been to stick to our knitting and refrain from getting too carried away by the volatility. Ultimately, we are buying good-quality companies that we believe, primarily through bond yields but also through dividends, will give our investors a strong core of income to either meet their personal needs or to reinvest in the market to allow further compounding. We continue to look for opportunities to do just that – whether markets go up, down or sideways.