Artemis Funds (Lux) — Short Dated Global High Yield Bond
Q2 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.

Review of the quarter to 30 June 2025 

April was an eventful month to say the least, bearing witness to the complete gamut of investor emotions. The shock of the ‘Liberation Day’ announcements was met with pure revulsion and the pricing of some very cataclysmic outcomes.

Spreads (one- to five-year BB- to B-rated global high yield) started the month at 286bps above government yields before widening out to 388bps in the teeth of the crisis, then rallying part of the way back to 330bps at the month’s end. By way of context, April’s 111bps trading range in index spreads compares with a 119bps range over the entirety of 2024.

We took advantage of the market dislocation to lock in extremely attractive yields. Having trimmed risk in February as the market got a little too comfortable, moving 5% of the fund from B to BB rated bonds, we reversed that move in April.

Like most market participants, we were glad to see risk assets recover in May and June. Yet while the US administration’s pauses, reversals and climb-downs were welcomed, there remains a high degree of uncertainty. We are cautious as to the damage done to inventory and corporate supply chains, not to mention consumer confidence and we are keenly monitoring macro data as well as company statements.

At the start of this year, the fund yielded 6.4% in US dollar terms, compared with a yield of 7.1% as at 30 June. While our strategy is anything but static – and we have added, cut and added risk again this year – it has returned 4.0% (net of fees) over the past six months. It has achieved this during a period when its yield increased by 74bps, which would normally be a headwind to returns. This performance illustrates what active management during volatile periods can achieve.

Looking at the second quarter specifically, we used the tariff-induced sell-off to add to some of our most-affected names, which resulted in the fund underperforming in April but laid the foundations for strong relative and absolute performance in May and June. The fund returned 3.2% during this three-month period, compared with 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 30 June 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

We took advantage of April’s tumult to add to several positions. Of these, fashion label Isabel Marant was one of the first to rally after surprising the market with strong numbers and positive momentum.

Many of our hardest-hit names in April became our strongest performers the following month. W&T Offshore, Mineral Resources, Ineos Styrolution, Synthomer, ASK Chemicals and Pfleiderer all posted significant gains in May, after we added to most of them at – or near – market lows.

Our best performer in May was US footwear retailer Foot Locker, which we introduced to the fund in March. We built the final third of our position in the darkest days of April at a yield of 11.8%. Although the initial tariffs on Vietnamese and Chinese imports looked alarming, we took the view that they would ultimately be watered down, given the infeasibility of switching production to the US. In mid-May, Dick’s Sporting Goods announced plans to buy Foot Locker, causing the bonds to rally by some 17 points.

Our best returns for June came from US healthcare consumables distributor Owens & Minor (OMI). Its proposed acquisition of Rotech was quashed following objections from the Federal Trade Commission. The market had not liked the 100% debt-funded nature of the acquisition and OMI’s bonds had suffered earlier this year as a result. We topped up our position in OMI’s 2029 bonds at low levels in March and April on the basis that the sell-off was overdone and were subsequently rewarded when the bonds rallied following the cancellation of the acquisition.

Negatives

Our positioning in B-rated securities acted as a headwind in April as BB-rated bonds outperformed in the risk-off environment. Some of our cyclical names underperformed in April although many of these rebounded in subsequent months.

Our largest detractor in April was the aforementioned US oil & gas producer W&T Offshore. Lower oil prices were a headwind for the whole energy sector but W&T’s underperformance even of its sector was unjustified, we felt, given its low lifting costs (post-drilling extraction costs) of around $20 per barrel, less than 2x of leverage and strong liquidity. The drivers are hard to pin down: it is a recent (January 2025) issue, which can see a degree of ‘last in, first out’ behaviour by investors looking to de-risk. We added to our position at extremely attractive levels and were rewarded with strong performance in May.

Nufarm, the Australian crop protection and seed technology multinational, came under pressure in May. It reported flattish numbers for the six months to 31 March 2025, driven by some softness in North America after a late start to the sowing season. There was some disappointment in the muted performance from its seed tech division, which is considered the ‘growth engine’ of the company. We added to our position because Nufarm’s management team is looking at options to scale its seed tech segment, such as outside investment or a sale, both of which would be strongly credit positive.

Calendar year performance (%)

Past performance is not a guide to the future. Source: Lipper Limited for class I Acc USD to 30 June 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

Amid April’s market volatility, we added materially to our holding in BB-rated French specialty chemicals producer SNF, making it the fund’s largest holding. We were able to buy some of SNF’s 2027 bond at a yield of 8.7% to call.

SNF manufactures polyacrylamide (PAM), a flocculant that makes fine particles within a liquid clump together. It has a dominant market share – some 56% of global supply. PAM is used to purify municipal water for around one billion people, but it is also widely used in the energy industry to improve the oil recovery rate. The interaction of these two businesses is what makes SNF so compelling.

Propylene, the main production input for PAM, has a volatile price based largely on that of natural gas. When this is high, SNF’s water-purification business has modest margins due to high input costs and demand being constant. However, such periods coincide with increased demand for PAM in the energy segment, because adding it to drilling fluids becomes economic above a certain oil price.

Conversely, when gas prices fall, SNF’s water business becomes extremely profitable due to the same constant demand but with sharply lower input costs. Meanwhile, SNF’s energy business will see a fall in volume as drillers use less PAM.

Essentially, the business cycle determines whether SNF generates most of its profits via margin or revenue growth. The company also has low leverage of just 1.2x and is led by the most stable management team in the European high-yield universe, we believe.

Elsewhere, the fund participated in several new issues as we continued to benefit from the high level of relatively short-dated issuance. In June, we bought a new five-year issue from Arqiva, the owner/operator of UK communications infrastructure, which benefits from long-term inflation-linked contracts with broadcasters and telecom operators. We also participated in a new issue from Clarivate, which provides data services and sets for use in academia, life sciences and intellectual property management. We like its high barriers to entry and the mission-critical nature of its offering.

We also added a position in 2028 bonds issued by UK and US transport operator Mobico, which was downgraded to high yield last year, because we see the sell-off as overdone. Mobico has suffered from difficulties in its US school transport business, but it has now disposed of this division and is using the proceeds to deleverage.

Sales

We sold out of footwear pioneer Crocs in April because we felt it had held up too well during the volatility and it is facing increasing competition from other brands. We also sold one of our holdings in mobile power solutions provider Aggreko, as the bond will probably be called in October and we were able to sell above par and recycle capital into a cheaper market.

In June, we made a few sales where valuations had become too stretched to ignore. These included US domestic services website Angi, desktop game maker Asmodee and North American waste disposal operator GFL Environmental, which is now priced at investment grade levels with an actual upgrade still a little way off.

We also sold a couple of our more cyclical positions where pricing compressed to levels that didn't reflect the uncertainty: these included German Tier 1 auto supplier IHO (Schaeffler) and US agricultural and mining chemical producer LSB Industries.

Outlook

We are embracing what we think will be a more volatile backdrop by focusing on resilience rather than beta in our stock selection. Resilient companies with strong cashflows, manageable leverage and pricing power will be best positioned to cope and ultimately prosper. We also know there will inevitably be times when the market freaks out; we will be ready to use fundamental conviction to lean against such times.

Taking a lot of duration risk looks unwise to us, as does reaching for the furthest echelons of the credit risk spectrum. We prefer to take short-term exposure, get repaid and reinvest, which gives us a lot of flexibility – and that can be very valuable in times of high uncertainty. There are many pockets of value; we think some areas of cyclical risk are very oversold – and harvesting income without taking a material duration exposure remains the place to be.