Artemis Strategic Bond Fund
Q4 2025 update

Review of the fourth quarter

Fixed income markets in Q4 were defined by a familiar pattern: credit continued to grind tighter on supportive fundamentals and relatively limited supply, while rates drove most of the volatility as politics and central bank shifts caused large divergences across G10 government bond markets.

The quarter began with a clear reminder that extreme consensus is often a contrarian signal. Gilts entered October accompanied by deeply negative sentiment and alarmist commentary, but subsequently rallied, becoming one of the best-performing G10 sovereign markets over the quarter. The fund managed to capture some of this opportunity at the start of the period by increasing UK duration exposure into late September and then scaling back as gilts rallied through October, while still maintaining some preference for UK rates into quarter end.

Key to UK rates strength during the quarter was also the passing of the Budget, though what mattered most was not the fiscal headlines, but the Debt Management Office’s supply response, including steps to reduce long-end issuance, cancelling remaining 30-year auctions for the fiscal year and signalling a potential expansion of Treasury bills. These measures reduced net-duration supply expectations and were supportive for gilts in the near term. However, the Budget also reinforced the longer-term tension: a more expansionary fiscal bias and political fragility may keep some fiscal risk premium embedded in the curve.

December extended the theme of cross-market divergence. US and UK rates outperformed, while Canada, Australia and Japan sold off – driven by stronger domestic data, sticky inflation dynamics and central bank messaging that pushed markets to consider the possibility of higher-for-longer or even renewed tightening. Japan was a particularly acute example, as its central bank hiked and the combination of fiscal stimulus and inflation risks weighed on Japanese government bonds.

Performance

The fund delivered returns of 1.8% during the fourth quarter versus 1.7% for the IA Strategic Bond sector. Returns for the 2025 calendar year amounted to 8.5%, ahead of the peer group average of 7.2%.

Past performance is not a guide to the future. Source: Lipper Limited, class I quarterly accumulation units in GBP to 31 December 2025. Sector is IA £ Strategic Bond NR. 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. This class may have charges or a hedging approach different from those in the IA sector benchmark.

Credit: Resilient spreads, disciplined rotation, selective new issue participation

Credit markets were steady across the quarter, with tightening bias and low volatility, particularly in December. In investment grade, spreads were supported by generally strong corporate balance sheets and periods of subdued issuance (notably in GBP). The fund remained selective but engaged in the primary market when pricing was attractive, participating in deals from issuers including financials and UK consumer/utility-linked names, while funding these positions largely from outperformers where forward upside had become more limited. Rotation themes were consistent: taking advantage of compression to shift from outperforming subordinated financials into underperforming senior financials, while capturing idiosyncratic opportunities such as the Resolution Life upgrade catalyst.

High yield remained constructive through the quarter, with spreads ending the year materially tighter, supported by resilient earnings and a market that continued to digest policy uncertainty without meaningful stress. Positioning focused on quality and visibility, with a preference for shorter-dated exposures and selective participation in new issue concessions. The fund added positions across sectors where it saw strong business models and valuation support, including consumer, industrial and commodity-linked credits, while taking profits where upside became capped and recycling risk into better opportunities at similar spread levels.

Outlook

Looking into 2026, the main drivers for government bonds remain policy rate expectations, supply/demand, inflationary risk and investor sentiment. We still expect US Treasuries to be broadly rangebound (10-year yields of 4 to 5%) as in the absence of a risk-off environment and/or a recession, we believe supply/demand dynamics will remain a headwind, not a tailwind. Governments are being forced by populist pressures to reject fiscal orthodoxy, while geopolitical shifts are driving a global rethink on defence spending and, frankly, a disregard for balance sheet repair. Even where fiscal rules exist, consolidation is pushed into future years and spending still supports growth in the near term.

On inflation, we continue to think it will prove sticky. Consumer and corporate balance sheets remain healthy enough to absorb higher prices, while a mix of pro-cyclical fiscal support and strong private sector foundations makes it difficult for central banks to cut policy rates by very much. That’s why we think the 'higher for longer' narrative is still alive and well. This is at odds with consensus, which still expects meaningful easing from the Federal Reserve and the Bank of England, and in some corners, hopes that the European Central Bank will eventually cut aggressively on imported disinflation. The risk in 2026 is that we move from the last two years – where the direction of travel for policy rates was definitively lower – to a world of much more two-way risk.

The key point, however, is that higher for longer can still be good for bond returns. Higher starting yields matter and on an historical basis (compared with the past 20 years), the current policy rate and starting all-in yields are high (the income cushion is meaningful). Even if yields drift higher, investors can still earn attractive returns through carry. Bonds also appear to have regained their defensive properties during market wobbles (think back to 2024), which wasn’t the case during the scary inflation regime of 2022 to 2023. While we believe inflation is stickier than consensus, we don’t believe we return to that post-Covid 'scary' regime. That’s why duration still makes sense as protection in downside scenarios for risk assets.

In practice, we are comfortable holding higher-quality names across investment grade and high yield, while recognising that spreads are tight. Valuations across developed market rates and what is already priced into policy rates mean we are happy to hold some duration protection in the portfolio as an offset to our constructive view on spreads. We are not over our skis from a risk perspective and we retain significant flexibility to add in any early-year wobbles across markets.