Artemis Funds (Lux) – Global High Yield Bond update
David Ennett and Jack Holmes report on the fund over the quarter to 31 December 2023 and their views on the outlook.
Source for all information: Artemis as at 31 December 2023, unless otherwise stated.
Performance
The fund returned 5.9% in Q4, behind the 6.7% made by its ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged index benchmark.
Our relative underperformance in the early stages of the quarter can be attributed to bonds secured on oil & gas fields in Israeli waters, which suffered following the attack by Hamas. We trimmed the position sizes to manage risk, but retain a smaller position in one of the securities where we felt the downside was more priced in.
Towards the end of the quarter, we suffered from our lower exposure to CCC-rated securities, which were the best-performing segment of the market in December. We generally lag behind large moves in the index due to our focus on smaller issuers – these tend to be much less important in the context of ETFs, which can drive market flows on such occasions.
While yields fell during the strong rally over the quarter, they remain relatively high compared with most of the last decade.
Activity
Purchases
In October, we sold out of some of our best performers and rotated the proceeds into short-dated bonds with capital upside potential over the next 12 months. These included hotel group Hilton Worldwide, auto dealer Penske Automotive and waste management company GFL Environmental.
Later on, we bought Raising Cane's, a US fast-food chicken restaurant, and Paprec, a recycling company that we have owned before. We also participated in the refinancing of ams Osram, an Austrian producer of advanced sensors we have owned for several years.
Activity continued into December, which is usually a quiet month, with a new issue from French equipment-rental company Loxam and two small positions in the European real estate sector, Aroundtown and CPI.
Sales
To fund the December purchases, we sold positions in Ancestry.com (the online genealogy business) and Energia (the Irish energy company). We sold the former after it announced a large releveraging transaction. While we like the business, we believe it is carrying too much debt and bond holders are not adequately compensated for the risks this entails. We sold Energia after strong performance meant better opportunities were available elsewhere.
In US housebuilders, we took profits from Dream Finders Homes and recycled them into LGI Homes, which has lagged significantly behind.
Other sales during the quarter included German pharmaceutical Grünenthal and US online dating company Match Group.
Outlook
Following a significant rally in high yield over the past couple of months, we expect a bout of turbulence in the first quarter of 2024 – it is usual at this time of the year and seems more likely given how far the market has come in such a short space of time.
However, for investors with a medium- to long-term mindset, this area of the market still looks attractive. Yields remain at historically attractive levels, central banks appear more open to loosening monetary policy through rate cuts, and credit risk looks reasonably healthy given conservative balance sheet management and a benign global economy.
In addition, we are operating in a market with low cash-price bonds relative to most periods in history. This is important for high yield as most bonds don’t remain outstanding until their maturity date, but are redeemed by the company beforehand.
Why is this important? Well, if this happens early and bonds trade to maturity at cash prices below 100, there is a pop in performance to this early redemption. This happens because the market tends to view bond yields on a 'yield to worst' basis (effectively the lowest possible yield based on the bond’s call structure).
However, early redemptions above current market prices mean there is room for potential surprises to the upside. The chart below, demonstrating the split of average cash prices, shows the market's share of bonds trading below 100 is comparable only to the aftermath of the Dotcom Bubble in the early 2000s and the Global Financial Crisis. This provides additional room for future upside.
Cash prices provide upside potential but also downside insulation
ICE BofA Merrill Lynch Global High Yield Constrained Index price splits (% of face value)
Cash prices provide upside potential but also downside insulation
Source: Lipper Limited/Artemis from 31 March 2023 to 31 December 2023 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.
Benchmark: ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged Index; the benchmark is a point of reference against which the performance of the fund may be measured. Management of the fund is not restricted by this benchmark. The deviation from the benchmark may be significant and the portfolio of the fund may at times bear little or no resemblance to its benchmark.