Artemis Global Income Fund: review of the year to 31 July 2023

Fund objective 

To grow both income and capital over a five-year period.

Main changes to the fund

We added to the fund’s holdings in banks. A long period of low interest rates squeezed their profits, but that process is now going into reverse as interest rates move higher. As their margins expand and their profits grow, banks will be able to return capital to their shareholders, either by buying back their own shares (which should, in theory, push their share prices higher) or through dividend payments.

The proportion of the fund invested in Japan is now at its highest ever level. Many Japanese companies are financially strong and their shares are often less expensive (relative to their earnings) than those of companies in other developed markets. Japan has finally broken out of its long deflationary slump, a destructive process in which falling prices deterred spending and investment. At the same time, however, it does not face the uncomfortably high rates of inflation seen in many other parts of the world.

We added to the fund’s holdings in emerging markets. Inflation in these economies is nothing new, so the recent spike in prices has not, generally speaking, been as much of a shock to them as has been to developed markets. Demographic trends also tend to be more positive in emerging markets (they often have younger populations) and economic growth is often stronger than it is in the West.

We sold some of our holdings in energy companies. This sector performed well in 2022 and our holdings here contributed meaningfully to the fund’s strong performance last year. This year, however, China’s surprisingly weak economic growth has weighed on demand for oil. Russia, meanwhile, has proven surprisingly adept at evading sanctions by finding export markets for its oil and gas. This combination of weaker-than-expected demand (from China) and higher-than-expected supply (from Russia) pushed energy prices lower and weighed on share prices of our holdings across the energy sector.

Explaining the fund’s performance

The fund returned 4.2% over the year. In so doing, it underperformed the MSCI AC World Index, which returned 6.8%¹.

The main reason for the fund’s underperformance was its lack of exposure to large US technology companies such as Nvidia, Microsoft and Apple. Share prices of these companies rose extremely sharply in the first seven months of 2023. In part, this was due to investor exuberance around the transformative potential of artificial intelligence (AI). It would also appear that some of the liquidity that the US central bank supplied to the US banking system in reaction to the problems at regional banks (such as Silicon Valley Bank) found its way into the shares of large technology companies. The meagre (or non-existent) dividends that these companies offer mean we choose to invest our clients’ capital elsewhere.

The wider context/looking ahead

The chances of a ‘soft landing’ in the US economy have increased in recent months. Under this scenario, higher interest rates will succeed in lowering inflation without provoking a recession. This has helped to foster positive sentiment towards US equities: the US market rose for five consecutive months to the end of July 2023, its longest streak of monthly gains in more than two years².

We remain of the opinion that valuations in some parts of the US market look stretched. We are particularly wary of the technology sector. We are also conscious that borrowing costs in the US, as measured by bond yields, have crept higher. Japan is also preparing to let bond yields rise.

In time, we expect higher bond yields to weigh on share prices – particularly in the most expensive areas of the market³. Our focus is on companies whose shares are less expensive relative to their earnings. Our holdings also generate what we regard as an attractive dividend yield (4.3% at the end of July⁴). Both characteristics should provide us with some measure of protection if equity markets do come under pressure.

¹ Past performance is not a guide to the future. Our benchmark index is the MSCI AC World NR Index. Source: Artemis/Lipper Limited, class I distribution units, in sterling, to 31 July 2023. 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. MSCI AC World Index is a widely used indicator of the performance of global stockmarkets, in which the fund invests. It acts as a ’comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by this benchmark.