Artemis High Income Fund
Q3 2025 update

Review of the quarter to 30 September 2025

Performance

Artemis High Income made 2.3% over the quarter, compared with 1.6% from its IA Strategic Bond sector. It is a top-quartile performer in its sector over one, three and five years.  

Past performance is not a guide to the future. Source: Artemis/Lipper Limited, class I Inc GBP to 30 September 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

Earlier in the year, I pointed out that the volatility caused by ‘Liberation Day’ had thrown up some pricing anomalies in high-yield bonds that made no sense whatsoever, including in the likes of Gulf of Mexico oil & gas producer W&T Offshore and French fashion house Isabel Marant. 

When the oil price fell to just below $60 a barrel in May, bonds in W&T Offshore fell along with it. This seemed to ignore the fact that the company has lifting (post-drilling extraction) costs of about $25 a barrel as well as relatively low leverage (less than 2x) and no immediate liquidity needs. Even after equity in the company had fully recovered, the bonds continued to languish and offered near-18% yields (to a 12-month early call). 

If this sounds extreme, consider the case of Isabel Marant: at one point its bonds were yielding 51.4% (again, to a 12-month early call) even though it had net secured leverage of just 4.2x compared with an average enterprise value of 11.9x for listed industry peers.

Such anomalies don’t last forever and so it should come as no surprise that W&T Offshore and Isabel Marant were two of our best performing bond positions during the quarter, each delivering double-digit returns.  

While we have trimmed our holding in the former, our position in the latter remains unchanged – Isabel Marant's bonds are currently trading in the mid-60s with an 8% coupon, which we view as being well covered by the underlying assets.  

Elsewhere, our holding in Norwegian oil & gas producer DNO also performed well following news that its holding in Kurdistan can now export oil to the Turkish coast. For the avoidance of doubt, we bought these bonds because of recently acquired Norwegian assets that offer low lifting costs in long-life fields with a predictable regulatory regime. The Kurdistan assets were always an aside to the investment case – but it’s good to see them helping, nonetheless.  

On the equities side, the banks continued to contribute to performance, with the structural hedge (where banks use the five-year swap market to hedge interest rate risk) underpinning net interest margin (the difference between the interest the banks charge on loans and what they pay on customer deposits) visibility out to 2028 and beyond. 

Detractors

Bonds in US recruitment technology platform ZipRecruiter fell in July on disappointing employment data. We felt these concerns were overstated for two reasons. First, the company has a flexible cost base – its main expenditure is on marketing costs, which can be adjusted lower in a downturn. Second, the company’s only debt is the $550m bond, against which it had $468m of cash on its balance sheet. After the fall, we felt the bonds offered good value on yields of 12%; they recovered some of their losses in August. 

European transportation contractor Mobico underperformed following the (previously announced) resignation of its auditor and unsubstantiated rumours it would hire restructuring advisors (these were subsequently corrected by the news source). At current valuations we are being well compensated for the uncertainty and expect the company to benefit from negotiations with the German government later this year. 

US healthcare supplies distributor Owens & Minor and portable cabin provider Modulaire both fell despite little news flow. We have recently noticed that while demand for credit remains strong – in crude terms, there are more buyers than sellers – the market is bifurcating, with ‘uncontroversial’ bonds bid up to ever tighter levels while more complicated ones are ignored. 

Turning to equities, bookmaker Entain fell after former prime minister Gordon Brown called for taxes on the sector in the UK to be more than doubled. Such a move is in our view unrealistic as it would likely cause a sharp fall in government revenues from this source as betting moves offshore. Meanwhile, momentum in the underlying business remains strong.  

Activity

July was reasonably busy for new high-yield issuance and we participated in deals for Flutter, a sports betting and online gaming company; Carnival, the global market leader in cruises; and Kioxia, a producer of solid-state memory which was spun out of Toshiba in 2017.  

In August, we bought a new five-year 7% dollar issue from specialist cruise operator Lindblad Expeditions. Lindblad is the leader in cruises to remote destinations such as Antarctica and the Galapagos Islands, with each journey transporting an average of 65 passengers paying about $1,400 a day for once-in-a-lifetime experiences. In recent years, the company has acquired a range of high-quality land-based tour operators to expand its business among its highly affluent customer base. This form of expansion is capital-light and doesn’t risk overcapacity from excess boat building. 

We also added a new line in Levi Strauss, the iconic US denim producer. A few years ago, we noticed positive momentum in its operations and a meaningful improvement from previous inventory issues. These are not the cheapest bonds in the world, but in the words of the company itself, “quality never goes out of style”, and we think now is a good time to pay for it.  

The benefits of taking a multi-regional approach to high yield were evident from the mispricing of DeepOcean’s euro-denominated new issues. We believe most Europe-based investors are much less familiar with the oil & gas sector and therefore overlooked the non-cyclical nature of its focus on maintenance/repair.

In terms of sales, we exited US waste management company GFL, Shift4 Payments, European pharmaceutical Stada and French recycling company Paprec following strong performance which limited further upside.  

Finally, we sold the stub of our position in US discount furnishings retailer At Home at distressed prices following the announcement of its imminent Chapter 11 restructuring.

Outlook

During September, numerous stories emerged of underwriting failures in the private credit market. We have long suspected this to be the case: a wave of cash has rushed into private credit in recent years and it is unlikely all of it has been allocated carefully.  

However, this is distinct from the picture in high yield. Unlike private credit, the high-yield market has not experienced a growth surge in recent years (its size is effectively unchanged over the past decade). Average credit quality is much higher than it was 15 years ago, while the percentage of the market that is secured has never been higher. This increase in quality has shone through in recent years – while there has been a significant number of defaults in leveraged loans, they have been more limited in the high-yield market (and the majority have come through somewhat discretionary ‘liability management exercises’ rather than a conventional failure to pay). 

As such, we are not overly worried about the credit quality of the broad high-yield market. What does concern us are high valuations and anything that might cause the currently robust technical pressures that are supporting them to unwind. As a result, we have been focusing on shorter-dated credit for more than a year now and over recent months – following the strong post-April recovery – we have been trimming some of our positions to ensure we have dry powder to take advantage of any volatility.  

For the avoidance of doubt, we still very much believe that investors who focus on higher yielding bonds will make very attractive returns over the next few years (especially when considered alongside the volatility of alternative asset classes).  

However, by ensuring we have the flexibility to dip into positions during periods of volatility, not only do we benefit from higher-income securities throughout the cycle, we can also benefit from tactical swings of bullishness and bearishness.