Artemis Monthly Distribution Fund
Q3 2024 update

Overview

There was no shortage of noise in the third quarter…

• A snap election in France saw various forms of political populists making gains.
• There were two attempts to assassinate former President Trump.
• Some data suggested that the US economy was slowing; some data suggested that it wasn’t.
• Interest rates went down in the US and in the UK but went up in Japan.
• There was a short, sharp sell-off in early August (one that been entirely erased by the time the quarter ended).
• China announced a new package of fiscal and monetary stimulus measures.

After sifting through all this, we believe the salient points are that:

The US economy appears to be in good shape. Employment remains strong, and consumers have continued to spend. The wider global economy also looks reasonably healthy.

A ‘soft landing’ looks increasingly likely. The Fed’s bold decision to cut rates by 50 basis points in September (perhaps an ‘emergency’ cut without the emergency) combined with stimulus in China could provide a powerful boost to demand.

The outlook for both bonds and equities looks constructive. Interest rates are falling. And while they may not fall as far or as quickly as the market hopes, some of the capital sitting in money market funds may start to flow back into bonds and equities.

Performance

The Artemis Monthly Distribution Fund returned 2.4% (sterling, net of fees) over the quarter, a return roughly in line with the average return from the IA’s Mixed Investment 20-60% Shares sector.

The fund’s longer-term performance remains very strong and places it in the top decile of its peer group over one, three and five years as well as since launch in May 2012.

Past performance is not a guide to the future. Source: Lipper Limited/Artemis as at 30 September 2024 for class I distribution 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. Classes may have charges or a hedging approach different from those in the IA sector benchmark.

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 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 debts, which have begun to erode some of the US dollar’s attractions 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 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.

Bonds issued by Kier and Sotheby’s also performed well

Global auction house Sotheby’s announced a combined $1 billion equity injection from existing owner, Patrick Drahi, and Abu Dhabi-based sovereign wealth fund ADQ. Most of the funds 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 was one of our weakest performers

Analysts continued to lower their earnings forecasts for Samsung due to a combination of higher costs (thanks in part to a significant one-off employee bonus payment), 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 cheap relative to those of its peers and relative to their own history. In the short term, however, the stock lacks a catalyst for re-rating and, as such, we sold the holding.

Our autos exposure detracted

The autos sector has recently endured a slew of profit warnings amid concerns around increased supply of cheap vehicles from China. We retain the holdings in GM and Hyundai. General Motors’ shares trade on forward price-to-earnings multiple of just 5x and generate a 20% free cashflow yield. To us, this suggests the company could increase share buybacks or return cash directly to its shareholders. Moreover, 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 could benefit from initiatives by the South Korean regulator to close the ‘Korea discount’ and boost valuation multiples. These echo some of the reforms Japan has successfully implemented in recent years. We would also note signs that the initial public offering of Hyundai’s Indian business appears to be seeing strong investor demand.

Positioning

We continue to see compelling opportunities in the shorter-dated end of the high-yield bond market, particularly among higher quality issues. Much of this part of the market offers high-single-digit yields. We can generate an attractive level of income here while taking minimal duration (interest-rate) risk.

In equities, our allocation to traditional income paying stocks in the real estate, infrastructure and consumer staples sectors remains lower than average. We believe areas such as banks, insurers and defence companies still offer more attractive cashflows and better income credentials.

Outlook

The outlook for both bond and equity markets appears to be positive.

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 significantly exceeded forecasts (non-farm payrolls increased by 254,000 in September, the largest increase for six months) suggested this is likely to continue. A 50-basis-point rate cut from the Fed combined with China’s most concerted effort in several years to reignite the economy represents a significant level of stimulus.

Trillions of dollars currently sitting on the sidelines in money market funds are likely to flow back into equities and corporate bonds if interest rates continue to fall.

As a result, we feel positive about the portfolio’s prospects of generating attractive returns for our investors. Given the resilience of the economy, our equity holdings, particularly the likes of financials and industrials, should be able to continue to deliver attractive dividends to their 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. All in all, therefore, we think the outlook remains promising for income-focused investors.