Artemis High Income Fund
Q1 2025 update

Overview

The year got off to a busy start, with volatility in government bond markets, question marks over the dominant AI narrative and the fallout from Donald Trump’s opening gambit in the tariff wars. Here in the UK, concerns around growth and inflation led to higher gilt yields, in turn reducing the chancellor’s fiscal headroom and raising fears that we would see further tax rises and spending cuts.

Later in the period, concerns around UK stagflation rapidly faded into the background as investor attention switched across the Atlantic and the Channel. Donald Trump’s initial foreign policy moves brought the need for rapid re-armament to the top of the to-do list for UK and European politicians. Then, just after the end of the quarter came ‘Liberation Day’, sending global markets into freefall, only for most of the tariffs introduced by the US president to be postponed and reduced a matter of days later.

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

The fund’s performance remains robust and it is top quartile over one, three and five years, demonstrating the benefit of allowing higher income to compound over the long term:

Past performance is not a guide to future returns. Source: Artemis/Lipper Limited, class I Inc GBP to 31 March 2025.  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 equities side, 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 what they pay on customer deposits). We took some profits from these positions, as well as other strong performers 3i and Deutsche Telekom, although we still like all four.

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

Detractors

Our shares in Melrose were the biggest detractors from performance. The aerospace company lowered near-term cashflow guidance, 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, 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 Tesco fell after competitor Asda initiated a price war. 

Activity

Among our biggest purchases during the quarter were:

• JP Morgan – we bought short-dated senior bonds (one year until maturity), which offered attractive carry with very 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. It is currently rated Ba3/BB, but we believe the growth in revenues and an inflection in earnings/cashflow mean further upgrades are likely to follow.
• GFL Environmental 2029s – we have owned shorter-dated bonds in GFL, the North American waste-management company, for the past year. We 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 a re-rating to investment grade, the company’s stated target.
• 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 meaningful deleveraging potential as new mines open. 

We sold down positions in gilts and TIPS during the quarter, but after the end of the period and the Liberation Day tariffs, we bought back in after both lagged.

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 increased to almost 9% in GBP-hedged terms in April. 
• Forvia – the autos sector was among those hardest hit by the tariffs, but Forvia makes parts that tend to be quite bulky and are therefore not sold over country lines, while factories are typically co-located near to car manufacturing plants. It is a strong company with resilient cashflows, low leverage and a strong track record of managing through auto-industry downturns.
• IGT – this global gaming-technology company has highly rated bonds (split between BB+ and investment grade) with clear catalysts for getting to full investment grade in the near term, which should result in a significant tightening in spreads. 

Outlook

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

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 markets 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. It is by allowing this income to generate and compound over the long term that we can create great outcomes for clients – and there is nothing within our portfolio that is making us think that the fundamental compounding (which has occurred in this strategy for the past 23 years) will come to an end.

We have very little CCC exposure, instead focusing on higher-quality high yield (alongside our holdings in investment grade, government bonds and solidly growing dividend-paying equities), which sets us up very well.

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, primarily through coupons 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.