Artemis Funds (Lux) – Global High Yield Bond
Q3 2025 update

Objective

The fund is actively managed. It aims to increase the value of shareholders’ investments through a combination of income and capital growth.

Review of the quarter to 30 September 2025

Risk markets performed well over the quarter, although they didn’t go up in a straight line. In the US, non-farm payroll numbers for July were weak and featured material downward revisions to prior months’ readings. Risk markets initially took this poorly – in an almost quaint ‘bad news is bad’ manner – before skipping to the end of the chapter and rallying on the realisation that the weakish data only increased the chances of the Federal Reserve cutting rates in September. Later on, a ‘nothing to see here’ CPI report allayed fears of major tariff-induced inflation, Jerome Powell seemed to take a dovish stance at Jackson Hole, and equity markets reached new all-time highs.

While short-dated government bond yields rallied as expected, yield curves steepened markedly as investors’ worries about future inflation and fiscal policy continued to mount. Donald Trump’s threat to remove the Fed’s independence made longer-dated government bonds appear even less attractive.

US high yield has outperformed its European equivalent so far this year, with the gap widening since April. This has been painful for our relative performance, given our larger weight in Europe (the fund returned 2.4% during the quarter, compared with 2.6% from its ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged index benchmark).

However, periods of US outperformance are the exception rather than the rule in high yield. We suspect the strength in US Treasuries has been driving this trend and should it unwind – as we suspect it will – the outperformance will do likewise just as quickly.

Past performance is not a guide for the future. Source: Lipper Limited to 30 September 2025 for class I Acc USD. 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.

Detractors

US recruitment technology platform ZipRecruiter fell in July on disappointing employment data. We felt these concerns were overstated for two reasons. First, the company has a flexible cost base – its main expenditure is on marketing costs, which can be adjusted lower in a downturn. Second, the company’s only debt is the $550m bond, against which it had $468m of cash on its balance sheet. After the fall, we felt the bonds offered good value on yields of 12%; they recovered some of their losses in August.

Our bonds in European transportation contractor Mobico underperformed following the (previously announced) resignation of its auditor and unsubstantiated rumours it would hire restructuring advisors (these were subsequently corrected by the news source). At current valuations we are being well compensated for the uncertainty and expect the company to benefit from negotiations with the German government later this year.

US healthcare supplies distributor Owens & Minor and portable cabin provider Modulaire both fell despite little news flow. We have recently noticed that while demand for credit remains strong – in crude terms, there are more buyers than sellers – the market is bifurcating, with ‘uncontroversial’ bonds bid up to ever tighter levels while more complicated ones are ignored.

Contributors

Earlier in the year, I pointed out that the volatility caused by Liberation Day had thrown up some pricing anomalies that made no sense whatsoever, including in the likes of Gulf of Mexico oil & gas producer W&T Offshore and French fashion house Isabel Marant.

When the oil price fell to just below $60 a barrel in May, bonds in W&T Offshore fell along with it. This seemed to ignore the fact that the company has lifting (post-drilling extraction) costs of about $25 a barrel as well as relatively low leverage (less than 2x) and no immediate liquidity needs. Even after equity in the company had fully recovered, the bonds continued to languish and offered near-18% yields (to a 12-month early call).

If this sounds extreme, consider the case of Isabel Marant: at one point its bonds were yielding 51.4% (again, to a 12-month early call) even though it had net secured leverage of just 4.2x compared with an average enterprise value of 11.9x for listed industry peers.

Such anomalies don’t last forever and so it should come as no surprise that W&T Offshore and Isabel Marant were two of our best performing positions during the quarter, each delivering double-digit returns.

While we have trimmed our holding in the former, our position in the latter remains unchanged – Isabel Marant's bonds are currently trading in the mid-60s with an 8% coupon, which we view as being well covered by the underlying assets.

Elsewhere, our holding in Norwegian oil & gas producer DNO also performed well following news that its holding in Kurdistan can now export oil to the Turkish coast. For the avoidance of doubt, we bought these bonds because of recently acquired Norwegian assets that offer low lifting costs in long-life fields with a predictable regulatory regime. The Kurdistan assets were always an aside to the investment case – but it’s good to see them helping, nonetheless.

Fund 10-year discrete performance

Past performance is not a guide for the future. Source: Lipper Limited to 30 September 2025 for class I Acc USD. 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.

Purchases

July was reasonably busy for new issuance and we participated in deals for Flutter, a sports betting and online gaming company; Carnival, the global market leader in cruises; and Kioxia, a producer of solid-state memory which was spun out of Toshiba in 2017.

We also added a new line in Levi Strauss, the iconic US denim producer. A few years ago, we noticed positive momentum in its operations and a meaningful improvement from previous inventory issues. These are not the cheapest bonds in the world, but in the words of the company itself, “quality never goes out of style”, and we think now is a good time to pay for it.

Along with Christie's, Sotheby’s has an effective duopoly in the fine art market. A flash update on Q3 numbers confirmed a strong recovery and we suspect it is likely to refinance its 2027 bonds in the coming months (meaning that this 2029 bond will become the first maturity). Because of our nimble approach, we were able to buy Sotheby’s bonds on the morning of the flash release before the market reacted. The 90.75 level at which we bought in suggests an 8.9% yield to maturity – or (more likely) a yield to a 2027 call of 12.2%.

The benefits of taking a multi-regional approach to high yield were evident from the mispricing of DeepOcean’s euro-denominated new issues. We believe most Europe-based investors are much less familiar with the oil & gas sector and therefore overlooked the non-cyclical nature of its focus on maintenance/repair.

Sales

In terms of sales, we exited US waste management company GFL, Shift4 Payments, European pharmaceutical Stada, and Speedway Motors, the US owner of NASCAR circuits, following strong performance which limited further upside.

We disposed of our holding in UK public sector contractor Kier Group due to a lack of upside, as well as concerns about businesses adjacent to the UK public sector coming under scrutiny ahead of the Budget.

For similar reasons, we reduced our position in UK and European building products distributor SIG. In the US, we trimmed our exposure to homebuilders LGI, New Home Company and Dream Finders Homes with a view that higher long-end rates could harm the sector. In the case of the latter, we were also motivated by the limited upside in the name ahead of likely new issuance.

Finally, we sold the stub of our position in US discount furnishings retailer At Home at distressed prices following the announcement of its imminent Chapter 11 restructuring. This has been one of our poorest performers since the fund’s inception.

Outlook

During September, numerous stories emerged of underwriting failures in the private credit market. We have long suspected this to be the case: a wave of cash has rushed into private credit in recent years and it is unlikely all of it has been allocated carefully.

However, this is distinct from the picture in high yield. Unlike private credit, the high-yield market has not experienced a growth surge in recent years (its size is effectively unchanged over the past decade). Average credit quality is much higher than it was 15 years ago, while the percentage of the market that is secured has never been higher. This increase in quality has shone through in recent years – while there has been a significant number of defaults in private credit and leveraged loans, they have been more limited in the high-yield market (and the majority have come through somewhat discretionary ‘liability management exercises’ rather than a conventional failure to pay).

As such, we are not overly worried about the credit quality of the broad high-yield market. What does concern us are high valuations and anything that might cause the currently robust technical pressures that are supporting them to unwind. As a result, we have been focusing on shorter-dated credit for more than a year now and over recent months – following the strong post-April recovery – we have been trimming some of our positions to ensure we have dry powder to take advantage of any volatility.