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

Objective

The fund is actively managed. It aims to generate a return greater than the benchmark, after the deduction of costs and charges, over rolling three-year periods, 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. Given our preference for Europe, this has acted as a headwind for performance. Yet the fund's gains of 2.0% over the quarter were still ahead of the 1.1% return from its Secured Overnight Financing Rate benchmark. 

It is worth remembering that periods of US outperformance are the exception rather than the rule in high yield. We suspect the strength in US Treasuries has been behind 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.

Positives

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 had 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 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. 

Bonds in French automotive supplier Forvia also did well after it reported better-than-expected results.

Negatives

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, 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.

Fund 10-year discrete performance

Past performance is not a guide to the future. Source: Lipper Limited for class I Acc USD to 30 September 2025. As this class is in a different currency to the fund’s base currency, a local-currency equivalent benchmark has been used. 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

We participated in a maiden issue from Japanese solid-state memory manufacturer Kioxia, which was spun out of Japanese technology giant Toshiba in 2017. We also bought a new issue from European lottery operator, Allwyn. 

In August, we participated in a new five-year 7% dollar issue from specialist cruise operator Lindblad Expeditions. Lindblad is the leader in cruises to remote destinations such as Antarctica and the Galapagos Islands, with each journey transporting an average of 65 passengers paying about $1,400 a day for once-in-a-lifetime experiences. In recent years, the company has acquired a range of high-quality land-based tour operators to expand its business among its highly affluent customer base. This form of expansion is capital-light and doesn’t risk overcapacity from excess boat building. 

One final point is the $675m bond tranche is larger than average in the global high-yield index, but as the company has only the one bond outstanding, it represents an insignificant part of the market and will have floated (sorry) under the radar of most high-yield funds. 

Other new positions included Roller Bearing Company of America (RBC), Sotheby's and DeepOcean. 

RBC makes high-end bearings and cams for use in industrial, aerospace and defence applications. It is one of the highest-quality industrial businesses we monitor, with free cashflow generation of around one-third of its net debt and an equity cushion of some 28x above its modest 1.5x net leverage. We believe it is an excellent example of a company that has benefited from not hiring management consultants to tell it its balance sheet is ‘inefficient’. 

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

We disposed of the balance 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 in the months ahead. 

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 took profits from European oil & gas producer Bluenord ASA, European pharmaceutical Stada, agricultural and industrial wheel producer Titan International, US home service website Angi, European recycler Paprec, paper packaging specialist GPK, French care provider Clariane and US consumer appliance retailer and financer Upbound

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. The front end remains our favourite place to invest, given the combination of attractive yields and lower exposure to market volatility. Our strategy continues to generate high levels of income and a growing number of our bonds are being repaid early through refinancings as the market has opened up. While spreads are reasonably tight and we could of course see some volatility, the combination of a high level of current income and low duration means that the fund should be well insulated if spreads widen; we have seen this happen over the past three years that we have been living in a ‘normalised’ yield environment.

Returns for the fund over the past three years have been incredibly smooth. What makes this more impressive is that there have been five examples of spreads widening by more than 50bps over the period and two examples of spreads widening by more than 100bps (including a 180bps widening in April). The stability of returns illustrates the powerful combination of high income and low duration, even during periods of volatility.