Artemis Funds Lux Short Dated Global High Yield Bond
Q1 2025 update

Objective

The fund is actively managed. It aims to generate a return greater than the benchmark, after the deduction of costs and charges, over rolling three-year periods, through a combination of income and capital growth.

Performance

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. Unfortunately, there was no let up over the rest of the quarter.

Tariff worries began to bite harder in February, as the Trump administration threatened levies of 25% on Canada and Mexico and 10% on China. While the US lifted tariffs on its NAFTA colleagues with hours to spare, China wasn't so lucky. The uncertainty affected a range of sectors, not least European autos.

Although we thought second guessing these proposals was likely as futile as it was exhausting, we felt that, in combination with higher-than-expected inflation data, it was a good time to de-risk the fund. This entailed reallocating around 5 percentage points of our single-B bond exposure into BB-rated bonds. If anything, our conviction on front-end credit risk increased during the month, but we felt the sharply elevated volatility in rates markets, combined with increased policy volatility, meant nudging back our risk positioning was a prudent move. This would allow room for ‘future greed’ in the event of more widespread risk volatility.

By March, Germany’s incoming coalition announced plans to reform constitutional limits on government spending, allowing a transformational increase in defence spending. Similar announcements in France, the UK and other European nations underlined the dramatic switch in thinking forced upon Europe by the Trump administration. This had a predictable impact on European government bond markets, with bunds seeing the largest one-day sell-off since the reunification of Germany some 35 years ago. While the prospect of structurally higher spending weighed on European sovereign markets, the prospect of increased fiscal spending gave risk markets a boost.

Just after the end of the quarter came the 'Liberation Day' tariffs, followed in most cases by their subsequent postponement and rollback a matter of days later. See the 'Outlook' section below for more thoughts on this subject.

Against this backdrop, the Artemis Funds (Lux) – Short-Dated Global High Yield Bond Fund made 0.8% during the quarter, compared with gains of 1.1% from its Secured Overnight Financing Rate (SOFR) benchmark.

Past performance is not a guide to the future. Source: Lipper Limited for class I Acc USD to 31 March 2025. As this class is in a different currency to the fund’s base currency, a local-currency equivalent benchmark has been used. 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.

Positives

French games developer Ubisoft announced the creation of a new unit to develop its next tranche of blockbuster titles. While it will retain 75% ownership, the remaining share is to be taken by Chinese technology group Tencent, which will invest €1.16 billion as part of the transaction. This obviously bodes well for Ubisoft’s ability to refinance its bonds due to mature in 2027 and 2031, and the bonds responded in a predictably upbeat fashion.

Our holding in Constellation, the market leader in dealer-to-dealer used cars in the UK, moved higher as it announced it was going to call its bonds at a premium early in May 2025. Constellation has delivered strong returns after receiving a significant equity injection, illustrating the ability of high-yield bonds to exhibit different return profiles from their sector.

ASK Chemicals rallied on good results, comprehensively rebutting a short case which had been built in in recent months.

The bonds of cosmetics firm Coty received an upgrade from Moody's.

Negatives

Growth-sensitive retail names such as Victoria’s Secret and Isabel Marant were significant detractors from performance.

After rallying close to 10 points in the previous quarter, our holding in US construction equipment-leasing firm Alta Group was a couple of points lower.

Australian iron ore and lithium miner Mineral Resources experienced some softness. Unease about lower lithium prices and high capex spending was compounded when bad weather in north-west Western Australia damaged one of its supply roads. We like the strategic options available to the company should the market become too concerned about leverage and/or liquidity. We never buy companies reliant upon a commodity price and as such we are comfortable with our holding and increased our position in response.

Fund 10-year discrete performance (%)

Past performance is not a guide to the future. Source: Lipper Limited for class I Acc USD to 31 March 2025. As this class is in a different currency to the fund’s base currency, a local-currency equivalent benchmark has been used. 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: Secured Overnight Financing Rate (SOFR); 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.

Purchases

New issuance markets sprung into life in January and we chose to take advantage by reinvesting in global low-voltage battery manufacturer Clarios, while we rotated most of our exposure in Swedish residential landlord Heimstaden into its new senior bond. We added Gulf of Mexico oil & gas producer W&T Offshore and later also added a new bond from core pick Carnival Cruises.

In secondary markets we added to our short-dated position in oil services specialist Welltec, as we think the 2026 bond is likely to be called in October. We also added to existing positions that have fallen but where we retain conviction, such as in US recruitment software provider ZipRecruiter.

Other additions to the fund included Shift4 Payments (a specialist provider of payment technology to the US hospitality sector), agricultural specialist chemical maker LSB and US online domestic services portal Angi.

We reinvested profits from a few of our US retail names into a higher-beta exposure in footwear retailer Foot Locker, which we see as benefiting from Nike’s expected recovery from a period of underperformance.

Sales

As part of our move out of single-B bonds, we sliced higher-beta positions in warranty provider Domestic & General, French retailer Thom and speciality chemical producers ASK and Synthomer. We also sold out of French optical chain Alain Afflelou to reallocate some of our French exposure into water purification specialist SNF.

We exited Italian speciality chemicals firm Italmatch after strong performance had left it trading at its call price and we saw better sector exposure in LSB. Similarly, one reason we exited our position in UK IFA consolidator True Potential was its call-constrained valuation following good performance.

A stretched valuation also led us to sell Spanish homebuilder Neinor Homes. We left our position in UK retailer Iceland as we are cautious about a price war in the already hyper-competitive UK grocery space.

Outlook

For many months now we have been assessing every holding in the fund to ensure we do not have any disproportionate exposure to the first-round effects of tariffs and we remain confident that our holdings should be able to adapt, adjust and carry on.

Many (including us) expected the 2 April tariff announcement to be an opening gambit to be walked down in the following weeks and in many ways that appears to be happening already. Another hope is that the immense pressure placed on the US consumer will enact some form of feedback loop into the populist Trump administration, leading to a total reversal. However, the fund is not dependent on this outcome. Our take is that the tariffs will act as a giant sales tax placed on the US consumer which will affect the global economy as it dampens demand, a second-order effect it will be harder to avoid. However, our lack of CCC-rated bonds will be helpful as that is the market segment that will see the stress from a growth dip.

The other big second-order impact will be on government bond markets as the opposing forces on bond yields could grow stronger in either direction, setting up a fundamentally more volatile backdrop and one even less suited to taking a highly directional approach. The tariffs will likely be inflationary (yields up) but also hurt growth (yields down), affecting government bond curves and resembling a curve-steepening event. Our strategy consciously avoids curve risk, focusing as it does on the front end.

The operating environment is set to become more challenging in the short term, with yields and spreads remaining volatile and likely a bit weaker, but our approach aims to take advantage of such moves where possible. We have already started buying some outstandingly priced bonds that we have been after for months at yields far above our most optimistic targets.

Overall, we think remaining humble around the inherent unpredictability of the situation is warranted. At the same time, we are optimists who have for years been encouraged by the seemingly limitless ability of management teams, consumers and companies to adapt, survive and thrive under difficult circumstances.