Artemis Corporate Bond Fund update

Source for all information: Artemis as at 31 March 2025, unless otherwise stated.

Performance review

Gilts were the main discussion point in January. The market was weak in the first half of the month before mounting a strong recovery and ending up pretty much back where it started. This weakness was part of a global trend, with US Treasuries also falling on strong employment data. The UK did underperform on the way down on concerns about an unpopular government and a Budget that the market didn’t warm to. But this was no Liz Truss moment.
 
Bond vigilantes aren’t back, but they have polished their shoes and are ready to step out. There isn’t much room for more missteps. Our view is that gilt yields will end the year lower as base rates are simply too high for the mediocre growth environment. The Bank of England will have to focus more on low growth rather than the slow pace of falling services inflation.  
 
February saw credit spreads reach their tightest point since early 2022, before creeping out towards the end of the month, but there were no wild moves. Gilts remained rangebound throughout and, even with some strong intraday and intraweek moves, they finished the month relatively unchanged. 
 
Credit spreads then moved sharply wider in March. Some of this was due to market fears over the economic impact of tariffs initiated by the US. Then again, credit and equity markets have enjoyed a bull run, so perhaps they were due a reset and correction. Spreads essentially gave up all their gains over the past six months. 

Against this backdrop, the fund made 0.7% over the quarter, compared with 0.7% from its iBoxx £ Collateralized & Corporate index benchmark and 0.9% from its IA Sterling Corporate Bond sector average. 

Contributors/detractors 

Spread weakness was largely responsible for our modest underperformance in March, with the fund being overweight credit risk. The silver lining is that despite credit spreads being weaker in 2025, the fund hasn’t underperformed its benchmark in the quarter to date.
 
There was no dominant driver of the weakness, it was somewhat random. Some high-quality names performed badly, while some higher-risk or lower credit-quality names hardly moved. Sometimes it can be hard to rationalise the market. The best reason we can conjure up is that there has been a significant amount of passive selling. So, the big index components such as GSK, where we had no exposure, were heavily sold given their high weighting in the index. Our job is to actively manage the fund and exploit these opportunities, irrespective of what is driving them.
 
While 10-year gilt yields barely changed during the quarter, March was a weak month for the asset class. We have yet to commit to market direction. As we aren’t a macro fund, we aren’t playing intra-month government bond volatility and will wait until we feel the market can trend in a certain direction. We started the year with a very small long-duration bias but cut that very quickly. We have been running a neutral to duration, while our curve-steepening position helped towards the latter part of the quarter.

Activity

Compared with the end of last year, the credit market had a busier month in January, but it remained modest. The deals that came were well subscribed and traded well. The fund bought new issues from Nationwide, J Sainsbury and Motability. We switched out of existing holdings to buy bonds in the latter. While owning Motability has been a modestly poor decision, our relative value switching between its bonds has helped. We also performed a relative value switch in Barclays and bought back into Vonovia, which had underperformed, before trimming this later in the quarter as it recovered.
 
In February we bought new issues from Athene, Places for People, Caterpillar, Johnson & Johnson and Imperial Tobacco, selling Anglian Water and Freshwater Finance to help pay for them. Imperial Tobacco has since been sold, while we also reduced our property exposure by selling Grainger and Blackstone Property Partners. Property bonds were looking shaky 18 months ago, but have since recovered strongly. We still like the sector, but with less valuation support and government bond yields remaining healthy, reducing exposure appeared sensible. This proved to be a good decision given events since February.
 
March proved to be a busy time for activity. After months of low turnover, market weakness presented us with an opportunity to make relative value switches, including in bonds from the same company, such as Rothesay, J Sainsbury, Caterpillar, Motability and CPI Property. We also carried out numerous name-adjacent switches, selling Lloyds to buy Barclays, selling Wessex Water to buy Anglian Water, selling Places for People to buy Notting Hill Genesis and selling Logicor to buy Digital Realty. In addition, we took profits from outperformers and recycled the proceeds into underperformers. The market was indiscriminate during the weakness in March, with many blue-chip bonds selling off more aggressively than high-beta ones. 
 
Rationally, you would expect the market to punish the more cyclical and lower credit-quality names while rushing to quality in names such as GSK and Walmart. This has happened in some cases, but it has been an unusual sell-off. Time will tell if we have made the right decision, but we’ll be bold and say that the fund should benefit from the trades, irrespective of the future direction of the market. If tariffs push economies into difficulties, buying the higher-quality names will benefit the fund and make it more defensive; if the market recovers, it should be the stuff that has sold off and underperformed that should recover fastest.

Outlook 

Tariff uncertainty remains a major headwind to accurate forecasting – though our view at the margin is it increases the chance of more cuts this year.
 
Higher tariffs act as a headwind to global growth while also raising inflation. We believe central banks will focus on the former and the impact on domestic demand, leading to lower interest rates, all else being equal. 

Ultimately, we believe that the US president will back-pedal on aggressive tariffs should it become clear that US growth is falling rapidly. At this stage it's just the survey/soft data that has rolled over while hard data is holding up well. Yes, US consumption was weaker in Q1 and US GDP is tracking more like 1% versus the 3 to 4% seen in Q3 and Q4, but this is more likely a temporary retrenchment amid higher tariff/policy uncertainty. Real income growth is still rising at a healthy clip and the labour market continues to look resilient (we doubt the reduction in federal workers is enough to drag domestic demand into negative territory). 

If the administration does not pivot to a less aggressive tariff regime and it’s not, as has been claimed, a negotiating tactic, then a global growth slowdown is inevitable.