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Artemis Monthly Distribution Fund update

The managers of the Artemis Monthly Distribution Fund, report on the fund over the quarter to 30 June 2024 and their views on the outlook.

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

Performance: another solid quarter

Despite signs of slowing economic growth and political turmoil, the second quarter of 2024 saw equity markets building on the gains made in the first quarter. Once again, investors’ enthusiasm for everything AI-related meant that the gains were led by mega-cap US technology companies. Nvidia rose by 37% (in sterling terms), adding $780 billion in market cap. Apple rose by 23%, increasing its market capitalisation by $581 billion as the market welcomed its new partnership with Open AI.

Given the low (or non-existent) dividend yields offered by many of the largest, highest-profile AI beneficiaries, our portfolio has relatively little invested in this part of the market. However, its holding in Broadcom (which yields 1.3%) gives it some exposure to the AI theme. Its shares have risen by 51% over the first half of the year.

Returns from bonds lagged those from equities over the quarter. Mixed signals on inflation and fresh worries about the sustainability of government finances due to the electoral gains made by free-spending populists in Europe pushed yields slightly higher (and prices lower). Despite this, the high levels of income being delivered by the fund’s holdings in investment-grade and high-yield bonds ensured that its fixed-income component delivered a (modest) positive return over the quarter.

With a return of 1.7%, the fund outperformed the average return of 1.2% IA Mixed Investment 20-60% Shares sector, with its outperformance largely being driven by its equity allocation. We examine some of the biggest contributors – and at a handful of laggards – below. Over the longer, term, meanwhile, we believe the returns the fund has produced, both in absolute terms and relative to its IA peer group, speak for themselves.


Three months Six months One year Three years Five years  Since launch 
Artemis Monthly Distribution Fund 1.7% 10.2% 19.4% 18.0% 31.8%  165.9% 
IA Mixed Investment 20-60% Shares 1.2% 3.7% 9.5% 2.8% 15.3% 75.9% 
Quartile  1 1 1
Past performance is not a guide to the future. Source: Lipper Limited/Artemis from 31 March 2024 to 30 June 2024 for class I distribution GBP. 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. Classes may have charges or a hedging approach different from those in the IA sector benchmark.

Contributors

Broadcom (equity)

Broadcom’s shares built on the gains made in the first quarter with the result they have returned 51% (in sterling terms) over the first half of the year. It has a long track record of adding value through M&A and its recent acquisition of cloud provider VMWare already looks to have been a shrewd move. Its second-quarter earnings came in above expectations and it raised its revenue guidance for the year by US$1 billion largely on the strength of faster-than-expected adoption of its AI networking chips1.

Kinross Gold (equity)

Gold producer Kinross continued to play catch up with the rise in the gold price. Its first-quarter earnings announcement showed both production and earnings coming in ahead of expectations. While the gold price has retreated from the all-time highs it set in late May, the fiscal stimulus taps in the US remain firmly jammed in the ‘open’ position, with the national debt forecast to expand by around $1 trillion every 100 days2. This should provide support for the gold price, resulting in a favourable earnings environment for Kinross and Newmont, the fund’s other gold miner

HSBC, Erste Bank (equity)

Financials have continued to generate strong excess returns for the portfolio. HSBC and Erste Bank were particularly strong performers over the quarter. HSBC announced another £3 billion of share buybacks while Erste Bank rallied in line with other European financials.

Heimstaden (bond)

Swedish real estate company Heimstaden rebounded along with the rest of the European property sector.

Victoria Plc (bond)

Flooring manufacturer Victoria reassured markets by providing an upbeat outlook on demand and by offering some clarification regarding questions its auditors had raised regarding accounting practices at one of its subsidiaries.

Detractors

Tenaris (equity)

While Tenaris’ earnings significantly beat expectations, the market was disappointed by its guidance. Although we shared that disappointment, a number of factors remain in Tenaris’ favour. Its shares trade on a price-to-earnings multiple of less than 6x and offer a 13% free cashflow yield. It is also buying back its own shares: the third tranche of its $1.2 billion buyback programme began in June. It is, meanwhile, one of very few Western producers of high-quality steel tubes used by the energy industry. Quality is increasingly important in an industry whose environmental impact is being scrutinised closely: for example, the cost to stakeholders of a pipe rupturing in the sea would be enormous.

Vinci (equity)

Concerns around what a Le Pen government might mean for Vinci’s toll-road monopoly sent its shares sharply lower when President Macron called a snap election (nationalisation had been discussed by the National Rally in its 2022 manifesto). On balance, we viewed the sell off as a buying opportunity. We thought it unlikely that National Rally would secure a majority and that the centre would retain more seats than some commentators feared. France now likely faces a long period of tense negotiations to form its next government and political gridlock thereafter. The good news is that the threat of radical policies (such as the nationalisation of Vinci) has receded for now.

Rheinmetall (equity)

A sell-off swept across the European market when the far right made gains in EU elections, with defence stocks falling sharply. This was despite the fact that the company announced two significant orders from the German defence ministry during the quarter. One, for military trucks, was worth €3.5billion; the other, for ammunition, was worth €8.5billion – its largest-ever order. As the 90% rise in its share price over the past 12 months suggests, expectations for Rheinmetall have increased significantly. But these latest orders provider a reminder that the grim conflict in Ukraine continues to consume military hardware.

Sotheby’s (bond)

Sotheby's reported a softening auction outlook for the remainder of 2024.

Owens & Minor (bond)

Medical device maker Owens & Minor bonds came under pressure after its chief financial officer left the group unexpectedly.

Activity

Buy: Carnival and TUI Cruises (bonds)

These offer a high degree of revenue visibility, impressive pricing power and buoyant demand due to a trend for spending on experiences over physical goods. In our opinion, Carnival will likely re-enter investment-grade territory in two to three years given its prodigious cashflow generation and modest capex plans.

Buy: Kinross, Newmont (equity)

Gold prices rose sharply in the first half of this year, reaching all-time highs. Initially, the share prices of gold miners such as Newmont and Kinross lagged the gains in the price of gold due to rising costs and problems in their supply chains. We believe these pressures are now easing.

Sell BBVA; Buy Banco BPM and Caixabank (equity)

We sold BBVA, which had performed well since we invested in it towards the end of 2022. We recycled the capital into two smaller European banks: Banco BPM and Caixabank. In effect, we sold a bank that is looking to acquire one of its peers (BBVA recently made an approach for Sabadell) and shifted into two banks that have the potential to become bid targets.

Sell: Petrobras

As capital began to flow back into Chinese equities, we reduced our exposure to Latin America, selling some of the holding in Petrobras, whose shares had begun to weaken.

Outlook

The outlook remains uncertain. With respect to politics, a second Trump presidency now seems more likely. This could result in a radical shift in both US domestic and foreign policy. And while the advance of the far right in France has been largely thwarted, anti-establishment political parties continue to grow in popularity in Europe. The success of political populism more broadly suggests that government finances across the developed world will remain a cause for concern.

We still believe that we are in a radically different economic and market regime to the one that prevailed prior to the pandemic and that inflation and interest rates will be structurally higher going forward. Nevertheless, the more mixed data that has emerged on the US economy offers a reminder that there will be times when inflation and rates move lower. We do not believe, however, that we are returning to a world of zero rates and deflationary worries.

We have talked about the structural challenges faced by traditional ‘core income’ sectors of the equity market for a number of years, but if a recession is around the corner and interest rates are cut meaningfully, it could be that some of these sectors start to look interesting again given valuations have fallen substantially. This is something we are monitoring closely.

In the bond market, meanwhile, we continue to like the opportunity in short-dated high yield bonds. To briefly recap: this tends to be much less volatile than the rest of the high-yield market and bonds in this space tend to be redeemed early by the companies that issue them, creating capital upside for holders. It is this capital upside that we believe isn’t yet being recognised by the broader market.

1Broadcom (AVGO) Gains After AI Computing Demand Fuels Sales Growth - Bloomberg
2U.S. Debt Interest Payments Reach $1 Trillion (visualcapitalist.com)

 

Benchmark: IA Mixed Investment 20-60% Shares NR; A group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. 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.

Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information on sustainability-related aspects of a fund, visit the relevant fund page on this website.

For information about Artemis’ fund structures and registration status, visit artemisfunds.com/fund-structures

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Any statements are based on Artemis’ current opinions and are subject to change without notice. They are not intended to provide investment advice and should not be construed as a recommendation.

Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit artemisfunds.com/third-party-data.

Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.