Artemis Funds (Lux) — Global High Yield Bond
Q3 2024 update
Source for all information: Artemis as at 29 September 2024, unless otherwise stated.
Objective
The fund is actively managed. It aims to increase the value of shareholders’ investments through a combination of income and capital growth.
Performance
The fund returned 4.4% during the three months to the end of September, behind the 5.0% from its ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged index benchmark.
As we have mentioned in the past, we tend to lag large rallies given our lack of ETF-exposed bonds (this conversely helps us whenever markets suffer downside volatility). We also suffered from our underweight in CCCs and our focus on the front end, lower-duration part of the high-yield market.
The story of the year so far has been one of making sure that downside credit protection is intact while allowing coupons to deliver the ‘base’ of total returns, topped up with a number of small upside moves in select credits. In other words, this year has neither seen a volatility event large enough to create value, nor a dislocated market full of mispriced bonds. However, we are pleased with our performance. We have avoided large credits with significant issues and found a few (generally lower beta) ideas that have given some additional outperformance.
Year to date, we have made 10.2% against an index return of 8.7%. This has been despite getting a lot of our top-down positioning wrong – we have been short CCCs (which have returned 16.0% compared with 7.9% from BB-Bs); short the long-end (which has marginally outperformed); and had zero in emerging market high yield which has also done well. In short, the wind has been blowing in our face all year. To have outperformed in this environment shows how much value can be added through credit selection.
| Performance (%) | 3 m | 6 m | 1 yr | 3 yrs | Launch (*) |
|---|---|---|---|---|---|
| Fund | 4.4 | 6.4 | 16.7 | 9.0 | 27.6 |
| Benchmark | 5.0 | 6.5 | 15.9 | 8.4 | 21.9 |
IA sector | 4.3 | 5.5 | 14.2 | 7.3 | 19.4 |
Past performance is not a guide for the future. Source: Lipper Limited to 30 September 2024 for class I Acc USD. (*) Fund launched on 13 November 2019. 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: ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged Index.
Positives
Holdings in property and related sectors dominated our list of top performers during the quarter, aided by falling interest rates. Our position in Swedish residential landlord Heimstaden was the pick of these on the back of a rebound in local property prices and increasing rents. We saw a recovery in Medical Properties Trust, a REIT, 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.
Elsewhere, our holding in infrastructure contractor Kier Group rallied on the likelihood of increased government spending and improved sentiment towards the UK following the general election.
Global auction house Sotheby’s was another strong performer after it announced a combined $1 billion equity injection from existing owner, Patrick Drahi, and Abu Dhabi-based sovereign wealth fund ADQ. When it was announced that most of the funds were to be used to repay debt, the bonds jumped by about 17 points.
Negatives
One of June’s top performers, French fashion retailer Isabel Marant, ended up as our worst performer during the quarter due to weakness in the luxury sector. While frustrating, we feel the position earns its keep: its recent fall was driven by external factors and it has a yield in the mid-teens, so we feel we are being well compensated.
Our position in US equipment distributor and rental firm Alta Group also held us back due to a disappointing outlook for the remainder of the year. Car sealing-systems maker Standard Profil was another laggard. Our conviction in its bonds declined along with their performance, and we sold out.
Activity
We took part in a new issue for French optometrist chain Alain Afflelou, which we see as being attractively priced given its low cyclicality, strong market position and resilient franchising model.
Frozen food retailer Iceland continues to surprise with the quality of its earnings, as falling energy costs help to boost margins. Additionally, we feel close competitor Asda has lost management focus and as such there is an opportunity for Iceland to increase its market share. Although historically we have been sceptical of the business, we have finally bought in. As Keynes almost said: “When the facts change, we change our mind.”
We also topped up positions in Carnival Cruises and US homebuilder Dream Finders Homes.
We exited our position in Victoria Carpets, following rumours it was considering a potentially disruptive fundraising. While our bonds were relatively insulated from any negative implications of the fundraising, this action fundamentally disrupted our view of the company’s value.
Another position we sold was US golf cart manufacturer Club Car, which has been struggling to compete against cheaper Chinese imports. In our view, the valuation didn’t reflect this growing threat and what would happen if the market began to take it more seriously, as it has done in autos.
Alongside these we also took profits in Itelyum (Italian oil recycling), Miter Brands (US window maker), Neopharmed (Italian pharma) and RAC (UK car breakdown).
Outlook
We are entering a new phase for liquidity in the market. The Federal Reserve, European Central Bank and Bank of England have all started their cutting cycles, while China has announced a significant boost in stimulus. There is an awful lot of liquidity starting to slosh around the system. Alongside this, enormous sums in money-market funds are going to be transferred into other assets as rates are cut and returns start to drop.
The following elements mean that this injection of liquidity into markets could significantly benefit high yield:
- For yield-focused investors (and most investors in money-market funds generally fit this bill), high yield is one of the few global markets in which you can lock in yields of more than 7%.
- Unlike most other markets, high yield has not been the subject of capital inflows over the past five years (the market has had cumulative outflows of about $60 billion since the start of 2018).
- The owner base has moved away from more flighty investors towards more structural, buy-and-hold owners such as insurance and pension funds (Bank of America estimates that the latter two segments now own 39% of the US high-yield market).
- The overall high-yield market has grown by just 2.3% over the past decade, due to bonds being upgraded and issuers instead using cheaper sources of funding. This compares with 61% for global investment grade bonds, 39% in global government bonds and 104% in global equities.
It is not unreasonable to suspect that at least a small part of this excess liquidity being pumped into the system will make its way into high yield. Given the technical backdrop (a smaller scale of market with a larger share of permanent owners), this is likely to have a greater impact on this asset class than on others.
Think of it like this – high yield is currently at the end of a relatively small pipe (due to a smaller market size and a larger share of flows being dominated by structural owners). At present there is a small trickle coming through, supporting valuations where they are today. As liquidity starts to slosh around the global financial system, some will likely find its way into the high yield pipe. Because of the size of the pipe, the pressure will be higher – which will likely keep spreads compressed and support performance.
Discrete performance, 12 months to 30 September (%)
| 2024 | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Fund | 16.7 | 9.3 | -14.5 | 15.2 | - | - | - | - | - | - |
| Benchmark | 15.9 | 11.4 | -16.0 | 10.1 | - | - | - | - | - | - |
Past performance is not a guide to the future. Source: Lipper Limited/Artemis to 30 September 2024 for class I Acc USD. 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: ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged Index
Notes and references
Benchmark: ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged Index; the benchmark is a point of reference against which the performance of the fund may be measured. Management of the fund is not restricted by this benchmark. The deviation from the benchmark may be significant and the portfolio of the fund may at times bear little or no resemblance to its benchmark.
FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.
CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.
Risks specific to Artemis Funds (Lux) – Global High Yield Opportunities
- Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency hedging risk The fund hedges with the aim of protecting against unwanted changes in foreign exchange rates. The fund is still subject to market risks, may not be completely protected from all currency fluctuations and may not be fully hedged at all times. The transaction costs of hedging may also negatively impact the fund’s returns.
- Bond liquidity risk The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities.
- Higher-yielding bonds risk The fund may invest in higher-yielding bonds, which may increase the risk to capital. Investing in these types of assets (which are also known as sub-investment grade bonds) can produce a higher yield but also brings an increased risk of default, which would affect the capital value of the fund.
- Credit risk Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund.
- Derivatives risk The fund may invest in derivatives with the aim of profiting from falling (‘shorting’) as well as rising prices. Should the asset’s value vary in an unexpected way, the fund value could reduce.
- Leverage risk The fund may operate with a significant amount of leverage. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested. A leveraged portfolio may result in large fluctuations in its value and therefore entails a high degree of risk including the risk that losses may be substantial.
- Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Emerging markets risk Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
- Income risk The payment of income and its level is not guaranteed.
- Counterparty risk Investments such as derivatives are made using financial contracts with third parties. Those third parties may fail to meet their obligations to the fund due to events beyond the fund's control. The fund's value could fall because of loss of monies owed by the counterparty and/or the cost of replacement financial contracts.
- ESG risk The fund may select, sell or exclude investments based on ESG criteria; this may lead to the fund underperforming the broader market or other funds that do not apply ESG criteria. If sold based on ESG criteria rather than solely on financial considerations, the price obtained might be lower than that which could have been obtained had the sale not been required.
Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.
