Artemis Short-Duration Strategic Bond Fund
Q2 2026 update

The Iran conflict dominated the market narrative during the second quarter. April was a tale of two halves: bonds initially started strongly, unwinding some of the March energy- and inflation-related weakness on hopes of peace in the Middle East. Optimism peaked around the middle of the month, just after Donald Trump and Iran’s foreign minister announced the Strait of Hormuz was open to all commercial traffic.

This optimism proved misguided for bonds, as the following week it became clear that the two sides were far from aligned on the actual re-opening terms. The fact that the US naval blockade would remain in place until negotiations were concluded constituted a breach of the ceasefire from an Iranian perspective. Consequently the Strait closed again the following day.

The impact on energy markets (which again marched higher) slowly became more entrenched, pushing out the futures curve. December 2026 Brent futures closed the month at $88 in a signal to markets that the pinch on energy prices would last much longer than many central banks first hoped. In effect, we had migrated closer to an ‘adverse’ scenario for central bank policy, with interest rate hikes becoming a realistic threat.

Oil prices fell significantly throughout May, supporting both equities and bond markets. Brent crude dropped almost 20% from $114 a barrel to $92. While a deal between Iran and the US was not achieved, investors continued to price in an eventual resolution to the conflict. Stocks were buoyed by stronger earnings and the backdrop of huge AI capex spending.

Throughout May, even when geopolitical news wasn’t supportive, it seemed as if credit spreads wanted to tighten and equities wanted to push higher. This was perhaps more indicative of money still left on the sidelines and FOMO, rather than investor conviction that global supply chains could withstand the conflict.

By June, the conflict was almost in the rear-view mirror, with the emergence of a ‘memorandum of understanding’ between the US and Iran. Oil prices collapsed further and quickly approached pre-conflict levels. Growth indicators were already bouncing and the global economy appeared to have weathered the energy crisis well.

Kevin Warsh arrived at the Federal Reserve and practically killed off forward guidance in his first press conference. Although the dot plot remained in place and the market took a hawkish signal from the chart, it was clear the Federal Open Market Committee under Warsh would bring significant changes in communication.

UK politics came to the fore as Keir Starmer reluctantly stood down as prime minister, clearing the way for Andy Burnham to take control. Markets largely ignored the news, instead focusing on central bank decisions and the retreating conflict in Iran.

The European Central Bank hiked rates by 25bps and by no means ruled out additional tightening. The Bank of Japan – well behind the curve with respect to policy normalisation – eventually hiked rates by another 25bps (perhaps under pressure from the new Takaichi administration), taking the policy rate to 1%.

Past performance is not a guide to the future. 

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

*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%.

Activity

Investment-grade corporate bonds

The fund participated in the following new issues during the quarter:

• Westfield shopping centre, rated AAA given the quality of the asset and low loan-to-value (LTV) ratio; this was the cheapest new issue we saw in April

• ENGIE’s new deal to finance its acquisition of UK Power Networks 

• Goldman Sachs, the cheapest bank deal

• Scotiabank and UniCredit

• Barclays, the only new issue we bought in May

• NTT in June, which is now our only telecom holding

• Close Brothers and Morgan Stanley, also in June

• Toronto-Dominion Bank, which we paid for by selling the Scotiabank bonds we bought in April, following strong performance

The fund also bought back into its prior holdings of Gatwick and Heathrow airports and Honda in May. We sold out of airports at the start of the Iran conflict and sold Honda on downgrade fears from A- to BBB+, which came to pass mid-March. Honda has underperformed since then and we believe it presents good value once more. 

On the other side of the ledger, we sold the following holdings:

• Mercedes-Benz, following strong performance

• The remainder of our funding-agreement backed notes (FABNs) 

• Danone, the standout new issue for 2026 so far; the fund bought at a spread of 85bps above government bond yields and sold in April at +62bps 

• International Distribution Services (which owns Royal Mail), on the news that Amazon was going to start delivering for other retailers; we took profits after strong performance

• Consumer healthcare company Haleon on valuation grounds, after a sharp recovery since we bought it in early March

• Flutter, to take profits 

• Whitbread, which had recovered all the ground it lost after its shareholder-friendly sale and leaseback deal to buy back shares

• Digital Realty; the fund switched into the better-rated London Metric Property at a yield pick-up

High-yield bonds

The fund participated in several new issues, including bonds issued by: 

• Sotheby’s, the auction house

• Together (formerly Jerrold Holdings), the UK alternative lender

• IHO Verwaltungs, the holding company of the Schaeffler family

• Capsugel, the market-leading manufacturer of drug capsules

• BASF Coatings, which was carved out from BASF (rebranded Surventis from 1 July)

• Verisure, which operates monitored security alarm systems in 18 countries throughout Europe and Latin America

Sotheby's (together with Christie's) dominates the fine art market and we see it as a unique and irreplaceable asset. Following an injection of equity from the Abu Dhabi sovereign wealth fund, its net leverage has fallen to 3.5x, which looks securely covered to us. As such, a five-year bond trading at an almost 9% yield in US dollars (9.5% in sterling) looks compelling.

We sold Together’s 2030 maturity bonds and bought a new holding in its 2032-maturity ones in April. Together has a strong culture of risk control and its niche positioning insulates it from the more commoditised (and lower margin) parts of the lending market.

IHO Verwaltungs owns a majority stake in Schaeffler AG (an auto and industrials supplier, which is performing well due to increased defence spending). It also owns 46% of Continental AG (the tyre manufacturer) and 46% of Aumovio SE (which manufactures automotive electrical components). The LTV of these stakes through the IHO Verwaltung group is just 27%. However, the bonds trade at a significant discount to other names of similar credit quality. At issuance, it yielded 7.5% (hedged into sterling terms).

Capsugel’s capsules make up a tiny proportion of the overall cost of drug production. Not only that, but regulatory licences are often predicated on a specific manufacturer-type of capsule. This gives Capsugel a huge economic moat – exactly what we are looking for within high yield to insulate a business through different market cycles.

BASF Coatings is a market leader in automotive paint and has a lot of exposure to China, which is one of the reasons we are bullish on its prospects.

Finally, Verisure has a stable business model (security is a low/no discretion expenditure) and a strong market position (number one in 14 of 18 countries). It is a key beneficiary from AI technology, which increases the efficiency and effectiveness of monitoring. 

We put on a market-neutral derivatives trade within the high-yield space in May. We went long risk through a position in CDX HY (the US high-yield credit default swap [CDS] index) and hedged it with a short risk position in the US high-yield cash bond index (duration-hedged, expressed through a credit future). Cash high-yield spreads currently trade at tight levels relative to CDS spreads – in the 85th percentile over the past five years. In summary, we are going long the ‘cheap’ high-yield carry asset and short the relatively more ‘expensive’ asset. In general, when the relationship has been around current levels, future returns for this strategy are reasonably positive and – crucially – not tied to the market improving.

The fund sold the following holdings during the quarter:

• MasterBrand, the US household cabinetry company, following weak Q1 numbers that changed our expectations about the recovery path of the sector

• Ithaca Energy (a UK North Sea oil and gas producer) on news that BP was considering selling its UK North Sea portfolio; we think Ithaca would be an obvious candidate to bid, which would involve a considerable amount of debt issuance 

• Levi Strauss (the denim apparel manufacturer) and PPC (the largest Greek power utility), both of which were trading too tightly to justify their presence in the portfolio

Government bonds

The fund ended June with a duration of 2.45 years. Policy rates are on hold globally and governments are not bringing budgets back into balance – if anything, they are getting worse. Central banks are unlikely to give enough support via policy rate moves to keep 10-year yields from drifting higher, in our view. Therefore, the fund has been selling 10-year bonds, while maintaining/increasing an overweight in zero-to-five-year bonds.

Themes within the government bond portfolio are as follows: 

• Long front-end rates (two- and five-year) versus 10- and 30-year: curves are still too flat

• Long US inflation: We don’t think Warsh is as hawkish as the market seems to believe and we don’t expect him to hike aggressively before year-end; with that in mind, US breakevens look cheap

• Long UK front end: Bank of England governor Andrew Bailey is dovish and UK growth is weaker; the country has the best chance of rate cuts over the next 12 months

• Long Australia, the US and the UK versus short New Zealand, Canada and Japan

Outlook

Global inflation is likely to remain high for the rest of this year, considering how long the Strait of Hormuz has been closed and the shock to energy markets (not withstanding recent oil price falls). We expect many central banks (although not the Bank of England) to consider hiking rates, if only as a precautionary measure. Despite increased chance of an adjustment higher in policy rates, the case for short-duration fixed income over longer-duration bonds remains sound. Curves are still very flat by historical standards while fiscal deficits and a deluge of government bond supply continue to act as headwinds to the performance of longer-duration bonds. Investors only sacrifice a small amount of yield in shorter-dated fixed income over longer-maturity assets, while over the longer term experiencing only around 30% of the volatility.

The Iran crisis and oil prices are not the only themes dominating financial markets at present. The tech/AI investment super-cycle is arguably a bigger story. The AI hyperscalers perceive their race for supremacy as an existential threat, so we see no signs of it slowing down. This will continue to support global growth and lean on supply chains. There are additional reasons to be nervous about asset valuations, including retail participation in momentum trades, herding behaviour and concerns about private market debt. Nonetheless, global growth appears to be on a reasonably sound footing and is unlikely to be derailed by adjustments higher in policy rates. The fund remains positioned for a continued grind lower in credit spreads, though we are not reaching for yield/credit beta, and have considerable room to react should markets become nervous.