Artemis Corporate Bond Fund update
Stephen Snowden and Grace Le, managers of the Artemis Corporate Bond Fund, report on the fund over the quarter to 31 December 2024.
Source for all information: Artemis as at 31 December 2024, unless otherwise stated.
During a turbulent quarter (and year) for bond markets, the Artemis Corporate Bond Fund outperformed
In what was a difficult quarter for the UK government bond market, the fund fell by 0.1% versus a 0.4% fall in the benchmark iBoxx £ Collateralized & Corporate Index. The UK 10-year gilt yield started the quarter just below 4% but ended it at 4.6%.
Amid the turbulent market conditions seen for much of 2024, meanwhile, the fund achieved a 3.1% return versus 1.7% from the index. We view that outperformance as further evidence that our active approach to exploiting the inefficiencies in the investment-grade corporate bond market continues to deliver.
| Three months | One year | Three years | Five years | |
|---|---|---|---|---|
| Artemis Corporate Bond Fund | -0.1% | 3.1% | -3.9% | 9.2% |
| iBoxx £ Collateralized & Corporate index | -0.4% | 1.7% | -9.9% | -4.2% |
| IA £ Corporate Bond | -0.4% | 2.7% | -6.1% | 0.7% |
Yields on government bonds rose but credit spreads tightened
Political news dominated the quarter. Chancellor Reeves delivered her first Budget on Halloween and promptly spooked the gilt market. A combination of higher borrowing, increased spending and a lack of policies deemed likely to deliver a surge in growth stimulated a selloff in UK government bonds.
A few days later, Donald Trump's comprehensive election victory triggered an initial selloff in US government bonds due to concerns over runaway spending. However, his subsequent nomination of Wall Street veteran Scott Bessent as his Treasury secretary helped to reassure markets that there would be some limits to President Trump’s fiscal exuberance.
In the sterling corporate bond market, meanwhile, credit spreads tightened thanks to a combination of attractive all-in yields and a shortage of supply. From our perspective, however, the story of the quarter was Annington, whose bonds produced a total return in excess of 15% on the quarter after it announced it would sell its portfolio of housing for UK armed forces personnel back to the MoD for £6 billion. It will use part of the proceeds to buy back its outstanding bonds at a generous level.
Activity: A busy quarter for the fund in both primary and secondary markets
The fund was active in both the primary and secondary markets over the quarter. We added new issues from:
- Morgan Stanley;
- Iberdrola;
- Center Parcs;
- Snam SpA; and
- South West Water.
In the secondary market, we continued to seek value by switching between different bonds from the same issuer. These included Motability, Annington and CPI Property Group. Elsewhere, we switched out of Yorkshire Building Society and into Bank of America. We also made a number of switches in the insurance sector, from Royal London into Zurich and from Reckitt Benckiser into New York Life. We sold bonds from European real estate group Vonovia and reinvested the proceeds into bonds from UK leisure group Whitbread. Finally, in the water utilities sector, we switched some of our existing holdings into a new issue from Anglian Water.
Outlook
Like many people, we felt interest rates would fall further than they did in 2024. When the year began, the gilt market indicated a belief that the Bank of England would cut interest rates aggressively, lowering rates by 140 basis points over the year. In the event, however, it cut rates by just 50 basis points. Many factors contributed to that outcome: strong economic growth in the US and stickier-than-expected inflationary pressure in the UK services sector were a part of it. Equally, the new government has made a series of missteps in its first six months in power and its first budget was poorly received by the bond market.
The net result was that last year brought fewer rate cuts than either we or the market had expected despite the fact that the UK economy struggled to grow. At the time of writing, the market is pricing in UK base rates falling from 4.75% to 4.13% in 2025. We suspect that might be too cautious and that base rates of 4.75% may prove to be too high for an economy where growth is in danger of flatlining. Base rates will fall in 2025 and probably by more than a chastened market is currently pricing in. That should be supportive for gilts and, by extension, for sterling-denominated corporate bonds.
Benchmarks: iBoxx £ Collateralized & Corporates Index; A widely-used indicator of the performance of sterling-denominated corporate investment grade bonds, in which the fund invests. IA £ Corporate Bond NR; A group of asset managers’ funds that invest in similar asset types to the fund, collated by the Investment Association. These act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.