Artemis Strategic Bond Fund
Q1 2026 update

Review of the quarter to 31 March 2026

Geopolitical concerns bookended a volatile quarter for government bonds. January saw Venezuela and Greenland take centre stage; however, bond markets largely looked through any concerns the removal of Venezuela’s president Nicolás Maduro might have on energy supply. This was not the case later in the quarter as investors grappled with the outbreak of war in Iran. Government bond markets sold off aggressively, sending yields sharply higher.

Turning to corporate bonds: in February, the market reacted to a surge in new issuance from the AI hyperscalers and attempted to discount the potential threat that Anthropic's powerful new AI models might pose. The net result was a weakening in some parts of the credit market, particularly in the bonds of technology and tech-adjacent companies. Our fund holds little in the way of software and we think it is too soon to participate in hyperscaler funding.

Performance

The fund returned -1.5% during the first quarter of 2026, underperforming its peer-group average (-0.9%). March was a difficult month for us given the significant sell-off in global government bonds, where our longer duration position versus peers was the primary driver of underperformance. Our preference for shorter-dated parts of the fixed income universe, where March’s repricing was most aggressive, also detracted. 

Despite this short-term weakness, the fund’s longer-term performance remains robust. It has outperformed the IA Strategic Bond sector over one, three, five and 10 years, as well as since its inception.

Past performance is not a guide to the future. Source: Lipper Limited, class I quarterly accumulation units in GBP to 31 March 2026. 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.

Activity: Government bonds

In January, we participated in a syndicated auction of 10-year Australian government bonds. This is AAA-rated debt issued by a government untroubled by concerns over fiscal sustainability. With a yield of 4.87% at issue, we believe these bonds offer an attractive balance between risk and reward, as well as useful diversification.

We added duration to the portfolio into the end of January amid growing concerns over the potential for AI to disrupt the software sector, which could have a knock-on impact on private credit. 

As government bonds rallied in February, we reduced our exposure to steepening in the yield curve as the trade-off between risk and reward became less asymmetric. We increased duration slightly during March, as many parts of the global bond market took what we regarded as an overly hawkish stance on interest-rate pricing. We don’t expect an easy end to the conflict in Iran but we believe these trades make sense from a valuation perspective. 

The fund also made several switches amid the volatility seen in March. We added exposure to US Treasury Inflation-Protected Securities (TIPS), as US inflation markets didn’t respond to the rise in energy prices in the same way as other regions (in part because the US does not depend on energy imports). With 10- and 30-year TIPS pricing signalling that the Federal Reserve might fall short of meeting its 2% inflation target, we saw relative value in adding some inflation protection to the fund.

We added short-dated (two- and five-year) UK government bonds. If UK interest rates were to rise to the levels the market was pricing in by mid-March, recession would seem unavoidable.

The fund also added exposure to New Zealand, which is suffering from weak demand and significant slack in its labour market. With the cash rate in New Zealand at 2.25%, we added exposure to forward two-year rates at 4.45% – the greatest premium on offer across the G10 economies.

We sold 30-year German bunds. As the yield curve flattened aggressively, long-dated German government bonds outperformed significantly. We feel that Germany's fiscal set-up will require higher yields at the long end of the curve.

With Australian rates outperforming US rates through March, we reduced the fund's position in 10-year Australian bonds.

Investment-grade credit

We sold US insurer Athene’s funding agreement-backed notes (FABNs). These highly rated (A1/A+) notes are issued to fund the purchase of lower-rated, higher-yielding credit products, including private credit. While the notes themselves are rated like senior bonds and their structure suits illiquid assets, we decided to exit given their exposure to private credit. 

We rotated the proceeds into BUPA, the health insurer. We also topped up the fund's exposure to UK shopping centre Meadowhall, McDonald’s and Associated British Ports. We trimmed our holdings in Quadgas and in Centrica's hybrid bonds.

While credit markets were resilient in February, the bonds of software companies came under a degree of pressure as investors began to worry about the impact AI could have on their sales. We trimmed our exposure to education provider Pearson, whose long-term future looks sound but which appeared fully priced. 

We sold our holding in Dick’s Sporting Goods and rotated the proceeds into Flutter, the gaming company. We also sold our holding in Arqiva’s junior bonds. This company provides UK broadcast infrastructure and continues to operate under contracts running through to 2030. But there are potential risks on the horizon. Should the future of terrestrial broadcasting come under threat as viewers move online, the equity coverage of the junior tranche could be in question. 

We added bonds from UK investment and development company Great Portland Estates, which owns a high-quality property portfolio. 

In March, we stepped away from holdings that could suffer should concerns about private assets intensify. We sold insurer Rothesay and reduced our exposure to Legal & General. L&G has a low solvency ratio, relatively high exposure to private assets relative to its European peers, and its bonds had performed well. We reinvested some of the proceeds into Zurich, which has less exposure to private assets. 

The fund exited Wells Fargo's Tier 2 bonds. It has the largest exposure to private credit of all the major US banks. We also sold Tier 2 bonds from Goldman Sachs. Again, its exposure to private assets looks high relative to its peers. While Morgan Stanley is less exposed, its bonds held up well in March and it seemed prudent to sell. We also exited Deutsche Bank, arguably the European bank with the largest exposure to private credit. We did, however, add to Close Brothers.

We sold bonds we consider to be vulnerable to the energy shock, including Ford and subordinated bonds issued by Gatwick Airport. Against this, we bought Shell and TotalEnergies. 

High-yield bonds

We subscribed to a new issue from German pharmaceutical company Cheplapharm. The bonds came to market at attractive levels, relative to its existing bonds and its peers. We expect operational improvement and deleveraging to result in spread tightening.

We added to our positions in Czech defence group CSG, US housebuilder Dream Finders Homes, European postage locker company InPost and US building-products maker James Hardie. We took advantage of the market volatility seen in March to add to holdings such as RBC Bearings that had underperformed but which we believed to be resilient. 

We added to Californian housebuilder Five Point Holdings after it reported robust earnings and offered supportive guidance. In the same sector, we added to a new issue from UK partnership homebuilder Keepmoat. In volatile markets, the higher level of liquidity that new issues enjoy can be less of a help than a hindrance. We added to our holding as the price moved lower. We had been disappointed not to receive a larger allocation so were pleased to be able to build our position at even more attractive yield levels. 

Other additions in March were to lower-risk names that had sold off in the volatility. These included luggage maker Samsonite, UK gym chain David Lloyd, UK food producer Premier Foods and mortgage provider Together Finance. 

Finally, we added to our holding in Swedish residential landlord, Heimstaden. Its bonds sold off in March despite the operating company reinstating dividend payments, which will be a direct benefit to the bonds we own. 

On the sale side, we exited software provider CVENT and manufacturer Synthomer. We trimmed our position in US residential land holding company Millrose Properties.

Outlook

The global economy was on a strong footing before the conflict in Iran erupted. Despite the negative impact that higher energy prices will have on consumer demand, we do not believe it will tip the world into outright recession. The war's impact on energy and food supply chains will, however, take time to work its way through the system. Sustained price increases are therefore inevitable for the next three-to-six months. This could have a knock-on impact on the cost of services and on wages. In this environment, buying inflation protection, particularly in markets like the US where inflation pricing hasn’t really moved, makes sense.

In credit markets, we are reassured that corporate earnings are still growing and balance sheets remain resilient. Management teams are rightly being cautious, which is encouraging them to take bondholder-friendly actions, such as reducing capital expenditure. In both the investment-grade and high-yield credit markets, we have added to holdings where we see the impacts from high energy costs and retrenchment by consumers as being muted. We are focusing on owning resilient companies where we can afford to be patient.

The conflict in the Middle East has interrupted the UK's rate-cutting cycle and could compel other central banks not just to refrain from cutting interest rates but to potentially consider pushing them higher. This means that yields on short-dated government bonds are no longer being held down. Yet at the same time, growing budget deficits and the attendant increase in the supply of government bonds will continue to pose structural challenges to longer-dated bonds. So despite the pain inflicted on holders of shorter-dated bonds in March, we still believe this is where investors should focus their fixed income exposure.