Artemis Strategic Bond quarterly review, September 2023

Source for all information: Artemis as at 30 September 2023, unless otherwise stated.

Fund objective 

To provide a combination of income and capital growth over a five-year period. 

About the fund

The Artemis Strategic Bond Fund provides investors with exposure to a blend of different types of bonds. The managers dynamically manage this blend, shifting between different areas of the bond market in response to changes in the economy and financial markets.  It invests in three broad types of bond: 

Government bonds – These are widely viewed as being among the safest type of bond. The interest rate, or ‘yield’, available here is usually quite low but it has risen significantly over the past two years as investors began to anticipate that interest rates would need to move higher. This pushed their prices lower (bond prices fall when yields rise and vice versa). 

Investment-grade corporate bonds – These are issued by companies with higher credit ratings. These are businesses that independent agencies (such as S&P and Moody’s) consider to be at relatively low risk of defaulting on their debts. They tend to offer a higher yield (rate of interest) than government bonds and changes in this additional yield (the ‘spread’) reflect investors’ changing views on the economy.  

High-yield bonds – These are issued by companies that ratings agencies regard as being at greater risk of defaulting on their debts and which therefor offer a higher yield to compensate for the higher level of risk. Their returns are influenced by investors’ appetite for risk and their views on the economy.  

Performance

For full five-year discrete performance, please see the table below. Please remember that past performance is not a guide to the future.

The fund returned 0.3% during the quarter. This was in line with the 0.3% average return from its peer group, the Investment Association’s Sterling Strategic Bond sector, which acts as a ‘comparator benchmark’ against which the fund’s performance can be compared¹.

The most notable event over the past three months was that the market began to adjust to the idea that interest rates would need to remain ‘higher-for-longer’. The result was that yields on government bonds rose and their prices fell. In this environment, the fund’s holdings in government bonds were generally negative contributors to returns. Set against that, the fund generally enjoyed positive returns from its holdings in investment-grade and high-yield corporate bonds.

Changes to the fund

Government bonds

After a strong run of performance, the managers sold some of the fund’s holdings in index-linked UK gilts (these are UK government bonds where the interest increases in tandem with the Retail Price Index – to keep in line with inflation). They continue to regard inflation-linked bonds in the US and Canada as attractive.

Investment grade

The managers bought newly issued bonds from companies including:

• Sartorius (equipment/products used in drug manufacturing);
• Worldline (payments);
• Eurofins Scientific (testing, inspection and certification);
• Mölnlycke (wound care);
• Carlsberg.
• HSBC;
• Caterpillar; and
• Nestlé.

The managers added to the fund’s existing holding in euro-denominated bonds from TDF Infrastructure (mobile towers). They sold the fund’s holding in dollar-denominated bonds from Pfizer, which had performed well. They also trimmed the fund’s holdings in investment-grade bonds from Nasdaq and Mizuho.

High yield

In the high-yield market, the managers reduced the fund’s holding in Ocado after a good run of performance and bought newly issued bonds from Worldpay.

Outlook

The managers remain broadly positive on the outlook for certain areas of the government bond market. But at the same time, they appreciate that there remain a number of challenges, including a large overhang of supply (governments are currently spending significantly more than they are receiving in taxation and central banks are no longer buying government bonds as they were doing the period of ‘quantitative easing’). Inflationary pressures, meanwhile, have eased a little but have not entirely gone away.

At this juncture, the managers tend to favour government bonds and bonds issued by financially strong companies (high-quality issuers) rather the lower-quality end of the corporate bond market. This reflects their concerns regarding the economic impact of the meaningful and rapid rises in interest rates. At the same time, however, it takes time for higher borrowing costs to work their way through the system. So they are moving the fund’s positioning at a measured pace. In the current environment, positioning the fund too defensively - solely owning the safest, highest-quality bonds in expectation of imminent recession - would come at too high a cost in terms of foregone yield.

Risks specific to this fund

Market volatility risk

The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.

THIS IS A MARKETING COMMUNICATION. BEFORE MAKING ANY FINAL INVESTMENT DECISIONS, REFER TO THE FUND PROSPECTUS, AVAILABLE IN ENGLISH, AND KIID/KID, AVAILABLE IN ENGLISH AND IN YOUR LOCAL LANGUAGE DEPENDING ON LOCAL COUNTRY REGISTRATION, FROM WWW.ARTEMISFUNDS.COM OR WWW.FUNDINFO.COM.
ARTEMIS DOES NOT PROVIDE INVESTMENT ADVICE ON THE ADVANTAGES OR SUITABILITY OF ITS PRODUCTS AND NO INFORMATION PROVIDED SHOULD BE VIEWED IN THIS WAY. ARTEMIS ONLY PROVIDES INFORMATION ABOUT ITS OWN PRODUCTS AND SERVICES AND DOES NOT ADVISE INVESTORS. SHOULD YOU BE UNSURE ABOUT THE SUITABILITY OF AN INVESTMENT, YOU SHOULD CONSULT A SUITABLY QUALIFIED PROFESSIONAL ADVISER.