Artemis Corporate Bond Fund
Q3 2024 update
Source for all information: Artemis as at 29 September 2024, unless otherwise stated.
Performance
The third quarter passed without too much drama and brought a gradual move lower in bond yields. With a return of 2.6%, the fund added another tranche of outperformance relative to its benchmark index and its peer group. Good credit selection in the financial and real estate sectors was once again key to that strong performance.
The fund is now more than a percentage point ahead of the benchmark index over the year to date and is almost six percentage points ahead of the index over three years.
| Performance (%) | 3 m | YTD | 1 yr | 3 yrs | Launch (*) |
|---|---|---|---|---|---|
| Fund | 2.6 | 3.3 | 12.6 | -3.5 | 10.0 |
| iBoxx £ Collateralized & Corporates Index | 2.4 | 2.1 | 11.0 | -9.3 | -4.2 |
| IA £ Corporate Bond NR | 2.5 | 3.1 | 11.1 | -5.7 | 0.1 |
Past performance is not a guide to future returns. Source: Lipper Limited, class I accumulation GBP to 30 September 2024. (*) Fund launched on 30 October 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.
Performance since launch
Past performance is not a guide to future returns. Source: Artemis, IHS Markit, class I accumulation shares in GBP from the launch date 30 October 2019 to 30 September 2024. 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.
A challenging quarter for water companies – and German car manufacturers
In part, the water sector’s poor performance over the quarter was due to cheap new issues from Welsh Water, Anglian Water and Yorkshire Water. The pattern we saw was a familiar one. The sector sold off as new deals were announced as pricing readjusted to reflect the wider spreads at which the issuance was being offered. The sector then stabilized and spreads recovered somewhat, with the newly issued bonds tending to outperform in the recovery.
Our policy over the last two years has been to run with relatively modest exposure to the water sector but to buy into (cheap) new issues, hold them briefly before selling them for a profit. This is a dance we have repeated numerous times and it has worked well. Eventually, it will be time to buy and hold water-company bonds – but we are not there yet. The water sector is an easy target for a government which is already unpopular with voters. So it may still be too soon to close this underweight.
It was also a challenging quarter for German car manufacturers, to which the fund had zero exposure. Given that all three major brands (BMW, VW and Mercedes) have now warned on profits, that was helpful. We should not overstate the weakness, however: spreads only widened by c15 basis points over the quarter.
Activity
New issuance was sparse through July and August but picked up in earnest in September. The fund bought into several of these new issues. At the end of the quarter, we still held newly issued bonds from:
- Anglian Water Services
- Comcast
- CPI Property Group
- East of Japan Railway
- Dwr Cymru Financing
- Great Portland Estates
- Haleon
- ING Group
- Land Securities
- MassMutual Global
- Nordea Bank; and
- Pearson.
Meanwhile, we made a number of switches between different bonds from the same issuer. These switches included Centrica, CPI Property Group, EDF, ING Group, Land Securities, Motability, Rothesay and across the UK water companies.
We sold our holding in Bayer in September. Its legal problems, which largely arose from its disastrous acquisition of Monsanto, have ebbed and flowed over the years. Of late, the judgements have been in Bayer’s favour and its bonds have performed well. But we are conscious that Robert F. Kennedy Jr (RFK), who has been at the forefront of pursing Bayer for damages, has joined Donald Trump’s team. While the result of the election is too close to call, a Trump victory would likely to be an incremental negative for Bayer.
We sold the fund’s remaining exposure to French banks. The political situation in France is clearly not helpful for the country’s perennial deficit problems and French government bonds have weakened in sympathy. Despite that, French corporate bonds have proven to be immune to the weakness in the sovereign market thus far. It seems prudent to move on in case that doesn’t last.
Outlook
Yields, technicals and fundamentals all appear supportive but valuations are not cheap…
Yields
In our view, the prospects for corporate bonds look good heading into the year end. Most obviously, their all-in yields look healthy. That matters – especially when interest rates are being cut.
Yields look attractive
Source: Bloomberg as at 30 September 2024.
Technicals
The technical setup in the investment-grade market appears to be strong. Despite a surge in new issuance in September, corporate bond spreads moved only slightly wider over the quarter. New issuance was easily absorbed and there appears to have been little selling in the secondary market to pay for it.
Typically, a post-summer seasonal ‘wobble’ in response to September’s new issuance will last to mid-October before a straight-line tightening in credit spreads through to the end of the year, when issuance tends to drop away. That spreads this year have already begun to recover we regard as a bullish signal. Market technicals appear to be strong.
Fundamentals
Fundamentally, meanwhile, things look supportive for risk assets. Central banks are mostly in rate-cutting mode (albeit not at a uniform pace) and markets typically respond well to that. We can debate the incremental effectiveness of China’s policy stimulus, but it would appear to be positive in the near term. There are pockets of concern, but they aren’t new. While auto companies have been issuing profit warnings, the weakness was easy to predict. And while their credit spreads have widened, these companies are far from being in trouble. Weak car sales are a classic sign of consumer fragility – but airports and holiday resorts are full. Perhaps people are using the time by the pool to decide whether to make the leap to electric vehicles.
Valuations
The one challenge to this otherwise bullish backdrop for corporate bonds are their relative valuations. Spreads are such that corporate bonds do not appear outright cheap. Equally, however, with spreads at around 120 basis points relative to gilts, they aren’t hitting the rev-limiter either. If spreads were narrow to 100 basis points over gilts, then valuations would be a higher hurdle to clear.
ICE BofA Sterling Corporate & Collateralized Index - Spread to Worst
Source: Bloomberg as at 30 September 2024.
Notes and references
Classes may have charges or a hedging approach different from those in the IA sector benchmark.
Benchmarks: iBoxx £ Collateralized & Corporates Index; A widely-used indicator of the performance of sterling-denominated corporate investment grade bonds, in which the fund invests. IA £ Corporate Bond NR; A group of asset managers’ funds that invest in similar asset types to the fund, collated by the Investment Association. These act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.
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 Corporate Bond Fund
- 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 risk The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
- 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.
- 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.
- 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.
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.
