Artemis High Income Fund
Q2 2026 update

It was a positive quarter for every market this fund invests in. Corporate bonds and equities responded positively to the de-escalation of the conflict between Iran and the US, while government bonds began to look past the inflationary impulse from the war. Economic data has been better than many feared when the war first broke out, with growth and consumer spending receiving support from the wealth effect (a side effect of rising stock markets), high levels of government spending and, particularly in the US, the AI capex super-cycle. 

Overall, the fund returned 3.9% during the quarter versus an average return of 2.6% from its peer group, the IA Strategic Bond sector. 

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

The shares of our UK-focused banks Barclays, Lloyds and NatWest recovered sharply as fears the Iran war could lead to stagflation eased. Their results, meanwhile, demonstrated the resilience of their loan books, their improving net interest income and the scope they have to continue returning capital to their shareholders. 

High-yield bonds issued by ZipRecruiter, an online recruitment portal, rallied as it announced a buy-back of around half of a $550m bond maturing in 2030. Although this position has caused us a few headaches over the past year, we always felt that, while the number of job searches has been relatively subdued, Zip’s highly discretionary cost structure allowed it to protect its cashflows. It can continue to generate cash while it waits for an uptick in recruitment activity. 

Our holding in bonds of specialty chemicals company Ineos Quattro rose early in the quarter amid a recovery in cyclical risk. Its preliminary results highlighted aggressive restocking by its customers. The accompanying outlook statement indicated that a lack of imports into the European market due to the closure of the Strait of Hormuz could push margins higher.

Bonds issued by home healthcare provider Accendra, formerly Owens & Minor, rallied as it took steps to shore up its balance sheet by extending the maturity profile of its debts at attractive terms.

Detractors

There were thankfully few negatives over the quarter, but we did see some underperformance from our holding in bonds issued by SIG, which distributes building products. The recovery of the UK construction industry remains sluggish and expectations that interest rates could move higher did little to help sentiment.

Among the fund’s equities, Melrose Industries fell as instability in a chemical storage vessel prompted the closure of a plant in California that makes canopies for F-35 fighter jets. Housebuilder Vistry suffered from a weaker property market, a change in management and, more recently, from concerns around the strength of its balance sheet. We retain the holding in the belief its new management team is pulling the right levers to reduce debt. In the fullness of time, demand for affordable housing should improve as government funding finally reaches councils and housing associations.

Activity

We took part in a new issue by leading auction house Sotheby’s. We like the strength of its market position (it operates as part of a duopoly with Christie’s) and we recognise the power of its trusted brand, which is vital in a market where establishing provenance is part of the service. Sales in the art market have rebounded strongly, increasing by 20% on last year.

We bought bonds from Paratus Energy, which provides pipe-laying services to offshore oil & gas producers. Even if the Strait of Hormuz were to fully reopen tomorrow, the significant disruption that has already occurred to the infrastructure in that area and the need to rebuild both operational and strategic commodity reserves should see the oil market well supported for a number of years.

German footwear producer Birkenstock has a strong position in the niche market it created: making casual, orthopaedic open-toed sandals. Strong brand equity and customer loyalty is reinforced by its vertical integration and German manufacturing base. It has been producing its core models for over 40 years, reducing its exposure to the fickleness of fashion. Despite the brand’s maturity, its sales increased by 16% in the six months to March 2026. Its new euro-denominated issue at a GBP-hedged yield of 5.8% appealed to us.

We added a new holding in the bonds of Oceaneering, which designs, manufactures and operates underwater remotely controlled vehicles and robots for use in the energy and infrastructure industries. It also has a burgeoning defence-related business. Its technology is vital to keeping undersea infrastructure operational.

Despite having a positive view on the oil & gas sector, we sold our holding in Ithaca’s bonds. The high-yield market often has quite different dynamics going on at an individual issuer level to the story for the wider sector. We have liked and owned Ithaca for a long time. In recent years, it has obtained a listing, massively de-levered its balance sheet and derisked its operating model through some outstanding M&A and operational execution. Unfortunately, this is now fully reflected in its valuation.

We sold US pet chain Petsmart to fund an addition to our favoured pick in the sector, Petco. We also exited our holding in hair and beauty supplier, Sally Holdings. Primarily, this sale was made on valuation grounds. Its bonds have performed well and have little upside left. We used the proceeds to fund the addition to Birkenstock, maintaining the fund’s exposure to the consumer sector.

Outlook

As we see it, inflation is still the primary threat to markets, but the recent fall in oil prices to pre-conflict levels has eased the pressure on the world’s central bankers. This, in turn, has led to a recovery in government bonds which should lower borrowing costs and further support consumer confidence through the rest of 2026. Notwithstanding the brighter outlook for long-duration (interest-rate sensitive) assets such as government bonds, we won’t add excess interest-rate exposure to the fund. We see the risk/reward of such an approach as unattractive. Instead, we can find income-producing bonds and equities that benefit from many of the same dynamics, but without the direct exposure to rate moves. Fiscal incontinence doesn’t look like it’s going anywhere anytime soon, so we remain cautious.

Finally, we would note that there has been a deluge of investment-grade bond issuance by the AI hyperscalers in recent months. These companies – Meta, Alphabet, Amazon, et al – are fine businesses with strong balance sheets (for now) but we feel the sheer volume of supply may cause some indigestion. The returns this wave of investment will produce are highly uncertain. We prefer to focus on bonds issued by companies with more predictable business models.