Artemis Monthly Distribution Fund
Q4 2024 update

Overview

Equity markets posted healthy returns over the quarter as the concerns over the strength of the US economy that had developed over the summer faded. This, combined with the continued easing of interest rates and the anticipation of deregulation and tax cuts from the incoming Trump administration, propelled US and global market indices to all-time highs.

Cuts in interest rates typically provide a tailwind for the bond market. Unusually, however, bond yields have actually moved higher since the Fed began cutting rates amid concerns that inflation could re-accelerate. Bonds sold off materially over the quarter, with the US 10-year yield rising by around 100 basis points from mid-September to end 2024 at almost 4.6%.

Performance

The Artemis Monthly Distribution Fund returned 2.6% over the quarter, significantly outperforming the average return from the IA’s Mixed Investment 20-60% sector which was flat. The fund’s outperformance was largely driven by its equity allocation.

This rounded off a healthy year of performance. In 2024, the fund returned 15.7%, materially outperforming the peer average of 6.2%.

Contributors

Equities supplied the lion’s share of the fund’s returns in the fourth quarter. The top contributors were:

• Siemens Energy, which continued to deliver earnings upgrades amidst strong growth in demand AI infrastructure.
• Diversified Energy Co and Tenaris, which rallied as markets anticipated a shift towards a more oil & gas-friendly regulatory environment under President Trump.
• Banco BPM (BAMI), which became the subject of takeover bid from larger Italian peer UniCredit, which has also amassed a significant stake in German lender Commerzbank, another of the fund’s holdings.
• General Motors, which is expected to be a beneficiary of President Trump’s America-first agenda and the imposition of tariffs on non-US auto manufacturers.
• Despite the general weakness in bond markets, there were a number of idiosyncratic contributors within the fund’s bond portfolio. Holdings in Constellation Auto Financing, the market leader in dealer-to-dealer used car sales and Swedish residential landlord Heimstaden enhanced returns.

What didn’t work

Gold miner Newmont fell sharply as its earnings per share fell short of expectations due to higher costs and lower production. Although we have now exited the position, it has been a successful investment for us over the longer term as its share price played ‘catch up’ to a gold price that had risen sharply. It remains on our watch list.

Within the fund’s bond portfolio, our inflation-linked government bonds sold off in response to the significant rise in long-dated government bond yields. We remain invested here, as we value the ballast that these bonds provide from a portfolio-construction perspective. They should perform well when market conditions are less favourable for other parts of the portfolio, such as our short-dated high-yield bonds.

Activity and positioning

We sold out of gold miner Newmont and mining major BHP. Elsewhere, we added to US financials, buying Wells Fargo, Capital One and AIG. These companies look well placed to benefit from ‘higher for longer’ interest rates and from President Trump’s domestically focused agenda.

Our exposure to the ‘core income’ areas of the equity market (consumer staples, real estate and utilities) is close to its lowest level since the fund’s launch in 2012. These businesses tend to carry significant amounts of debt on their balance sheets, which has held back share-price returns as interest rates have risen. We continue to see more attractive investment ideas in other areas of the market.

Despite some turnover in the bonds we hold, the overall positioning of the fund’s fixed-income portfolio remains broadly unchanged. We continue to find short-dated, higher-quality high-yield bonds attractive. Many of these bonds offer high single-digit yields with little duration (interest-rate) risk. Furthermore, many high-yield bonds are called (redeemed) before they are due to mature, giving a capital uplift.

Outlook

Investor sentiment has rarely been so bullish and equity markets appear expensive by most valuation measures relative to their history. We would also suggest that there is a greater risk that inflation surprises to the upside than to the downside, given the enduring strength of the global economy.

We therefore continue to stay away from the most widely held (and expensive) areas of the equity market. Despite the growing concentration of equity markets, we have no shortage of investment ideas. We own a selection of modestly valued companies that can provide us with an attractive combination of income and capital growth.

Spreads in the high-yield bond market – the additional yield they offer relative to government bonds - are as tight as they have been for two decades. But we take comfort from the fact that interest cover remains high and net leverage remains low.

We launched the fund in 2012 and, for the majority of the first decade of its existence, interest rates were close to zero and bond yields were low, resulting in a challenging environment for a fund that looks to generate an attractive level of income. Following the reset in bond yields in 2022, however, sources of income are abundant. We are therefore optimistic as to the portfolio’s ability to generate attractive level of monthly income – and total returns – going forward.