Artemis Strategic Assets Fund
Q1 2026 update

Review of the quarter to 31 March 2026

Global equity markets moved higher in the first part of the quarter but relinquished those gains amid a sudden escalation in geopolitical tensions. As a result, market indices in the US and Europe ended the quarter lower. Bond markets also came under pressure as energy prices rose, prompting fears of higher inflation.

Performance

The Artemis Strategic Assets Fund contains two ‘buckets’: a Directional (Trends) Strategy, which aims to take advantage of market trends; and a Non-Directional Strategy, whose goal is to generate returns that are uncorrelated to market movements by taking long and short positions whose exposures offset one another. In both strategies, the fund invests in financial derivatives that give it exposure to a diversified range of asset classes, including equities, bonds and currencies.

The fund generated a positive return during the quarter, holding onto a portion of the strong returns it generated in January through the risk-off conditions seen in March. The Directional (Trends) Strategy was marginally positive, driven by its equities and currency positions. Its government bond positions detracted. Returns from the Non-Directional Strategy were stronger, with useful contributions from its currency and government-bond positions. In total, the fund returned 7.8% versus 1.4% from its CPI +3% benchmark and an average decline of 1.7% in its peer group, the IA Flexible Investment sector. 

Past performance is not a guide to the future. Source: Lipper Limited to 31 March 2026 for class I Acc GBP. 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.

Activity

Directional (Trends) Strategy

• Equities – We reduced the aggregate exposure to equities from 32% to 8%. Within that, higher energy prices influenced our significant overweight in US energy stocks. The strategy also has significant exposure to the Chinese market, where share prices were supported by targeted government stimulus.
  
• Government bonds – The duration of the directional government bond positions rose from a low of -5.5 years at the start of the quarter, peaked at +4.7 years in early March, then fell back to -2.1 years. The largest short positions were in Australia and Japan, reflecting the strength of the data on the Australian economy and the result of the Japanese election, both of which made rate hikes look possible. Later in the quarter, we initiated short positions across a wider range of government bond markets when the Iran war postponed the rate cuts the market had expected.
  
• Currencies – The strategy is short in the US dollar against the Chinese renminbi. Reflecting the renminbi's managed appreciation, this position delivered positive returns with low volatility. The strategy is also short in the US dollar against the Mexican peso. A short position in the euro against the Norwegian krone reflects the weakness of the eurozone relative to Norway's energy-exporting economy.

Non-Directional Strategy

• Equities – Our relative preference for US and emerging-market equities reflected their valuations. Relative short positions in Swiss and European equities were justified by their weak earnings-growth forecasts and expensive valuations.
  
• Government bonds – We retained a preference for being relatively short in Australia's government-bond market. Expectations for economic growth in Australia are relatively strong. Conversely, a relative long position in Swiss government bonds reflected the country's muted inflation and comparatively slow growth.
  
• Currencies – We maintained a preference for being long in the Australian dollar and Norwegian krone for most of the quarter due to the relative strength of those economies, supportive carry and positive momentum. Our relative short position in the Canadian dollar reflected outflows and negative sentiment. The euro also appeared relatively unattractive, particularly in the early part of the quarter.

Outlook

Geopolitics and energy: From risk to reality

Sentiment deteriorated meaningfully at the end of February when the US took direct military action against Iran. Oil prices rose dramatically over the quarter, reflecting supply concerns and the risk of disruption to a key transit route through the Strait of Hormuz. By reinforcing inflationary pressures globally, this transformed a rise in energy prices from a tail risk into a key market driver. Although a ceasefire may bring temporary relief, it will take at least six months to restore energy production to prior levels and the impact on inflation and growth cannot be quickly reversed.

US monetary policy: Expectations repriced

The energy shock complicated the outlook for interest rates in the US. As rising oil and gasoline prices fed into higher near-term inflation expectations, earlier predictions that rates would be cut this year were called into question. Measures of inflation compensation have moved higher and policymakers are likely to remain cautious in signalling any near-term easing. The resilience of the US economy, combined with these new inflationary pressures, increases the risk that rates will remain restrictive for longer than anticipated. This shift has already contributed to tighter financial conditions, higher bond yields and increased stress in some areas of financial markets, including private credit and in equities sensitive to interest rates.

Europe: Policy trade-offs intensify

With higher energy prices feeding directly into inflation and squeezing real incomes, Europe’s economic recovery is under threat. Bond yields have moved higher as markets reassess the outlook for monetary policy, with expectations shifting away from rate cuts and, in some cases, towards further tightening. This presents a challenging backdrop for the European Central Bank (ECB), which must balance weak underlying demand against rising headline inflation. The risk is that monetary policy remains tighter for longer, weighing on already fragile growth.

United Kingdom: Renewed threat of stagflation

The Bank of England faces a similar, but potentially more acute, policy dilemma to the ECB. Rising energy prices are expected to feed through into higher household bills, even with regulatory mechanisms such as the energy price cap softening their impact. At the same time, financial conditions have tightened, with gilt yields rising in line with global bond markets. This combination of weak growth and renewed inflationary pressure raises the risk of stagflation, limiting the ability for the Bank of England to cut rates in the near term.

China and emerging markets: Divergence and vulnerability

Higher energy prices act as a headwind for energy-importing emerging economies but benefit energy exporters. This should widen the divergence in returns across emerging markets. In addition, tighter global financial conditions and a potential stabilisation (or even strengthening) of the US dollar could weigh on capital flows into emerging markets. Focusing on China, the outlook for its economy remains one of stabilisation rather than acceleration, but weaker global demand and higher input costs could limit the effectiveness of the support being provided by policymakers. Overall, the balance of risks for emerging markets has shifted in a negative direction since late February.