Artemis High Income Fund review of the six months to 7 February 2024
David Ennett, Ed Legget and Jack Holmes of the Artemis High Income Fund review its performance in the six months to 7 February 2024.
The fund’s objective
To provide a combination of a high level of income and capital growth, before fees, over a rolling five-year period. The manager defines a high level of income as equal to, or in excess of, the average yield of the funds in the fund’s Investment Association sector, the Strategic Bond sector.
About the fund
The managers of the Artemis High Income Fund search for attractive sources of income across the bond market. They also invest in the shares of a small number of dividend-paying companies.
- High-yield bonds – Holdings in high-yield bonds are at the heart of this fund. These are issued by companies that ratings agencies (such as S&P and Moody’s) deem to be at greater risk of defaulting on their debts. As their name suggests, they offer a higher ‘yield’ (rate of interest) to compensate for the higher level of risk.
- Investment-grade corporate bonds – These are issued by companies with higher credit ratings. These are businesses that independent agencies consider to be at relatively low risk of defaulting on their debts.
- Government bonds – These are widely viewed as being among the safest bonds (governments in developed economies rarely default on their debts). The interest rate, or ‘yield’, available here is lower than it is on high-yield and investment-grade corporate bonds – but they can provide a useful counterweight to the fund’s holdings in more economically sensitive bonds and shares.
Main changes to the fund
Over the last six months, our focus has been on identifying attractive sources of income towards the higher-quality end of the high-yield market (BB and B-rated bonds). These are bonds that ratings agencies such as S&P and Fitch believe to be at less risk of default than lower-quality CCC-rated bonds. As such, recent additions have included:
- Ardagh Metal Packaging, a global manufacturer of beverage cans.
- Talos Production, an oil and gas producer focused on the Gulf of Mexico.
- Keepmoat, a UK housebuilder.
Set against this, we sold our positions in a number of high-yield bonds that had performed well but which were no longer looking attractive relative to other opportunities in the market. These sales included:
- Ithaca Energy, a North Sea oil and gas producer.
- Jaguar Land Rover, the car producer.
- Energia, an Irish energy company.
In the investment-grade market, we added some exposure to the French banking sector by buying Credit Agricole’s bonds.
We believe current yields on government bonds are attractive. (This is not something we could have said for most of the last decade.) They also offer a useful source of diversification; government bonds would be likely to perform better than the fund’s more economically sensitive holdings in the event of a meaningful recession. Just under 19% of the fund is currently invested here.
In line with this view, we added some UK index-linked gilts to the fund after their prices fell in mid-January. (These are bonds issued by the UK government where both the interest payments and principal rise and fall with inflation.)
Performance
Bond markets enjoyed a strong rally through the final two months of 2023. That rally was driven by data releases pointing to an easing in inflationary pressures.
Central bankers in the US responded by indicating that they would probably start cutting interest rates in 2024. The resulting move higher in bond prices provided a helpful tailwind for the fund, which delivered a total return of 5.6% over the six months covered by this report.
Over the same timeframe, its target benchmark, IA £ Strategic Bond NR, also returned 5.5%. (This is a group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. Management of the fund is not restricted by this benchmark.)
While the fund’s returns over the last six months have been more than respectable, we believe that it is its longer-term performance record that really stands out. It has now delivered a ‘top quartile’ performance (meaning it is in the top 25% of the funds in its peer group) over one year, three years, five years and 10 years.
| 10 years | 5 years | 3 years | 1 year | 6 months | |
|---|---|---|---|---|---|
| Artemis High Income QI Inc GBP | 41.9% | 16.4% | 5.7% | 6.7% | 5.6% |
| £ Strategic Bond NR | 28.3% | 9.3% | -3.9% | 4.2% | 5.5% |
| Quartile | 1 | 1 | 1 | 1 | 3 |
| Annualised performance, 12 months to 31 December |
2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| Artemis High Income Fund QI GBP | 10.9% | -10.1% | 5.9% | 1.7% | 10.9% |
| £ Strategic Bond NR | 7.9% | -12.0% | 0.9% | 6.4% | 8.9% |
Key contributors over the last six months
Some of the biggest positive contributors to returns came from our holdings in bonds issued by: BCP V Modular (Modulaire Group; Europe and Asia Pacific’s leading specialist in modular services and infrastructure); the AA (roadside assistance) and Miller Homes. Our holdings in the shares of 3i (a private equity group), Vistry (a housebuilder) and TotalEnergies (the French energy company) also made useful contributions.
Set against that, the biggest negatives were our holdings in bonds issued by Heimstaden (European real estate) and Dignity (funeral services). Our holdings in the shares of Entain (sports betting), BMW and German chemicals group BASF also acted as drags on returns.
The wider context
Our central expectation is that interest rates will move lower from here. There are two main ways that investors can seek to benefit from that process. One way is to take a ‘long duration’ position by buying government bonds with many years to maturity. (Generally, the higher a bond’s duration, the more its value will rise as interest rates fall.) And, over the last six months, we have added some duration to the fund.
Overall, however, we prefer a different approach. We believe that the yields currently on offer towards the higher-quality end of the high-yield market are compelling. Buying them allows the fund to harvest those yields immediately while we await the rate cuts that we expect to occur at some point over the next year. To us, this appears preferable to buying lots of long-dated government bonds which would, in effect, represent an ‘all-or-nothing’ bet on rate cuts.
Looking ahead
We are not expecting bond yields to return to the levels we saw in the long era of quantitative easing (when central banks were buying bonds to drive down borrowing costs and stimulate growth). For the following reasons, however, we remain positive on the prospects for bond markets in 2024:
- Even after the sharp falls seen towards the end of 2023, bond yields remain elevated compared with much of the last decade.
- Hopes for a ‘soft landing’ in the economy (where growth slows without tipping over into outright recession) may yet prove to be misplaced.
- Central banks appear to be preparing to cut interest rates.
- Many companies have taken a conservative approach to borrowing in recent years, so the risk of widespread defaults would appear to be relatively modest.
Some volatility, of course, seems inevitable. Given the size of the recent inflation scare, markets will remain transfixed by monthly readings on inflation, growth, and unemployment. But given our view that the overall direction of travel remains clear, we would welcome any episodes of volatility, regarding them as buying opportunities rather than as something to be feared.