Artemis Short-Duration Strategic Bond Fund
Q1 2026 update

Review of the quarter to 31 March 2026

The fund fell by 1.0% versus a fall of 0.7% in its target benchmark. The main driver for the negative returns seen over the quarter was the outbreak of war in Iran. Neither our fund, nor the wider bond market, were positioned for war and an energy crisis. 

Sharply higher oil prices triggered a dramatic U-turn in the market's interest-rate expectations and an aggressive sell-off in short-dated gilts. This aggressive flattening in the yield curve was the main contributor to the fund's underperformance over the quarter. Before war broke out, the market had been pricing in UK interest rates being cut to 3.25% by the end of this year. But amid the destruction of energy infrastructure across the Middle East and the blockade of the Strait of Hormuz, market pricing began to imply that the Bank of England would need to increase rates to 4.25% by the end of 2026. We think that represented a significant overreaction.

Past performance is not a guide to the future. 

Source: Lipper Limited, class I accumulation shares in GBP as at 31 March 2026. 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. 

*The target benchmark is the Markit iBoxx 1-5 year £ Collateralized & Corporates index; before 18 March 2024 it was the Bank of England base rate +2.5%.

In the credit portfolio, Arqiva underperformed. The fund's exposure was split between Arqiva's senior, investment-grade bonds and its subordinated, high-yield bonds. We had been selling down these positions since the start of the year in response to Macquarie's decision to sell its holding in the company’s equity at a low valuation in late 2025. We had managed to sell a significant proportion of our holding (around half our senior bonds and a third of the subordinated bonds) by the time Arqiva's largest shareholder communicated that it had written down the value of its shares to zero. We swiftly exited the remaining subordinated bonds.

Synthomer was the other main underperformer in our credit portfolio. This chemicals business has been struggling for some time and while the market had been anticipating a disposal that would have helped strengthen its balance sheet, the recent volatility made this less likely. We halved the position in February and sold the remainder in March.

Activity

Investment-grade corporate bonds

The fund sold its position in a funding agreement-backed note (FABN) from Athene in early January. Formerly known as GICs (guaranteed investment contracts), FABNs are issued and guaranteed by American insurance companies and are rated like senior bonds. Insurance companies buy assets, such as corporate bonds, with lower credit ratings and higher yields, parcel them into a portfolio and pay for these assets by borrowing money by issuing a FABN. They pocket the difference in yield between the lower-rated bonds they buy and the (typically) AA-rated bonds they issue. Providing defaults remain low, this delivers a ‘free’ profit. 

Insurance companies have an incentive to increase their allocations to higher-yielding assets to maximise profit from their FABNs. While this has encouraged them to look to private credit, concerns about the mark-to-market of private credit assets are growing. In January, BlackRock adjusted the net asset value of BlackRock TCP Capital Corp, its listed private debt vehicle, by 19%. Rumours abound that the ratings being applied to private credit by independent agencies can be two-to-three notches higher than Moody’s or S&P would award to publicly traded bonds. Athene is owned by Apollo Global Management. Some investors fear that private equity giants such as Apollo have been encouraging their in-house life assurance companies to buy private assets that their shareholders have originated. The fund also sold Wells Fargo, the major US bank with the greatest exposure to private assets.

February was dominated by fears that large areas of the technology sector could be disrupted by AI. Insurance companies also came under pressure. Insurers have been increasing their exposure to private credit, which has much heavier exposure to loans to technology companies (particularly software companies) than public credit markets. The good news is there is very little issuance from technology companies in the short-dated corporate bond market. For those that do fear AI disruption, it is a safe haven. 

Although our fund has no tech or software, it did have a small position in Pearson, which is considered tech-adjacent. We don’t think it will be replaced by AI. Some parts of its business will, but the value of external examination, validation and the certification of training and educational standards seems likely to endure. Nonetheless, we sold our position quickly before markets reacted.

The war in Iran dominated market moves in March, particularly for government bonds. The credit market was relatively docile: credit spreads at the index level barely shifted. We moved quickly to sell holdings in bonds that could prove vulnerable to the energy shock. We sold subordinated bonds from Heathrow and Gatwick Airport and bought defensive positions such as Cadent Gas, consumer healthcare business Haleon and a new issue from Danone. 

High-yield bonds

We participated in the new issue from Cheplapharm, a German-headquartered pharmaceutical company. In the past, the company has faced challenges around inventory management and manufacturing, but these issues now appear to be fading.

One of the fund's larger high-yield positions, Czechoslovak Group, was upgraded to investment grade during the quarter. This producer of ammunition is a significant contributor to the drive by European governments to re-arm and the positive outlook for this company was emphasised by the success of its €40bn IPO in the Netherlands. We switched our holding from its euro-denominated bonds to their US-dollar equivalents. Despite these bonds having the exact same maturity and identical credit risks, the euro bonds traded at a significantly lower credit spread, highlighting the inefficiencies active managers are able to exploit in the credit market.

We participated in a new issue from SNF, refinancing our holding in its 2027 bonds with a new 2031 bond. This is an interesting example of the mispricing often seen in the short-dated end of the high-yield market, particularly around the pricing of early calls. Over the past three years, we have seen bonds trading at below par as they are priced to maturity, despite the fact that they are likely to be redeemed well ahead of maturity. We last topped up our holding in SNF's 2027 bonds in August 2025. The yield from that point through to the call announced during the quarter was equivalent to 8.3% or a spread of 430 basis points. When we bought those bonds, the US B-rated high-yield index had a spread of 327 basis points, despite SNF being a high-quality issuer. (Indeed, earlier this year it was upgraded from BB+ to investment grade.)

We are finding interesting opportunities among the bonds of UK housebuilders. We participated in a new issue from Keepmoat, a UK homebuilder focused on the North and Midlands, at the end of February. Around a third of its business is accounted for by partnerships with local authorities, providing it with earnings that are less sensitive to broader market volatility. We have liked this business for a while, having previously owned the bonds that it used this new issue to refinance. As the quarter progressed, these bonds were impacted by the combination of weaker gilt prices and worries about demand for housing, giving us the opportunity to invest at yields of between 7.25% and 8.0%. The company did well through the volatility and difficult market conditions seen in 2022 and we expect it to navigate the current environment with ease.

Government bonds

Bond yields moved lower in January and February but rose aggressively in March. A consistent theme was a flattening in the yield curve. In January and February, this was a 'bull flattening' (when long-term interest rates fall faster than short-term rates). But in March, we saw a 'bear flattening' (when short-term interest rates increase faster than long-term rates). This went against our core strategic view that yields would fall, led by the front end of the curve. So this was a difficult quarter for the fund's government-bond component.

The fund reduced its exposure to a steepening in the yield curve through January and February. By mid-March, we had closed out curve-steepening risk. We still believe concerns over government deficit spending and bond supply will cause curves to steepen. But from a risk-management standpoint, it was prudent to reduce yield-curve risk and reset, given the extreme levels of volatility. This freed up the portfolio to challenge yield levels outright. We bought short-dated UK government bonds into the weakness later in the quarter.

The fund's government-bond component is currently long in New Zealand and the UK, versus short Germany and Japan. It is long in US real yields (10- and 30-year), as longer-dated US breakevens didn’t really move through the conflict (in fact, through the deleveraging, 30-year breakevens in the US became marginally weaker).

Outlook: Why 2026 will not be a repeat of 2022

The situation in the Middle East has led to an energy shock, which will be painful for consumers and inflationary in the short term. But we should note the significant differences between now and 2022, when a supply shock existed due to the Covid lockdown. Heading into the Russian invasion of Ukraine, global inflation had been surprising to the upside for months. G10 average inflation is now at about 2%, whereas heading into the Russian invasion it was above 4% and rising.

Today, policy rates are significantly higher than they were in 2022 and inflation is no longer being treated as transitory. Near-term rate cuts seem unlikely. This is why we are confident that this price shock will be contained by central banks – and the market is telling us that, too. If we look at the UK specifically: heading into the Russian invasion, UK CPI was running at 5.5%, but MPC rates were 0.25% – a real effective policy rate of -5.25%. Currently the bank rate is 3.75% compared with UK CPI at 3%, so the real rate is six percentage points higher.

Do workers have the same bargaining power today as they had in 2022? A quick look at the jobs market would suggest not. The spike in energy prices after the Russian invasion came on the back of 18 months of inflation surprises, so companies that had been hoarding labour post-Covid were forced to concede to workers' demands for higher pay. By contrast, vacancies and unemployment levels today suggest that the bargaining power now lies with companies.

Where does this leave bond markets? We don’t believe current pricing of government bonds reflects fair value. The market is pricing in rate hikes from the Bank of England and European Central Bank (ECB) before year-end, but we expect rate cuts in the UK and believe the ECB will keep rates on hold. At the time of writing, 10-year US Treasuries are yielding 4.18% which doesn’t strike us as particularly cheap. Five-year UK government bonds yielding above 4.30% look far more attractive in our view. 

Turning to credit markets, the world could potentially experience energy supply problems for a protracted period. We don’t think markets are fully pricing this in. Furthermore, irrespective of what happens in Iran, concerns around private assets and AI disruption remain. We have little exposure to technology, tech-adjacent sectors or private credit and we are underweight banks, which account for 13% of our fund compared with 44% of the index. We do not anticipate a violent sell-off in these sectors but the fund is defensively positioned. Meanwhile, with two-year gilts yielding 4.40% at quarter end, we think selected short-dated bonds look very attractive.