Artemis Global Income Fund quarterly review, December 2023

Source for all information: Artemis as at 31 December 2023, unless otherwise stated. 

Fund objective  

To grow both income and capital over a five-year period.

Review of the quarter to 31 December 2023

The defining event of the fourth quarter was the market’s embrace of a comforting fairytale: ‘Goldilocks’. This is a scenario where economic growth is ‘just right’ – hot enough to avoid recession but not so hot that it creates inflation. Only time will tell whether investors’ belief in Goldilocks is wishful thinking. But, towards the end of last year, it was a story many were eager to believe and, in combination with promises of interest-rate cuts, it was sufficiently convincing to trigger a move higher in share prices.

The gains over the quarter were once again led by rises in the share prices of a handful of large US technology companies – the ‘Magnificent Seven’ (Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta and Tesla). At the same time, the expectation of interest-rate cuts brought about a sharp rebound in areas of the market that employ a significant amount of debt (‘leverage’) to help them generate returns, such as real estate companies.

At the other end of the performance spectrum, share prices of large energy companies fell. By the end of 2023, oil prices had fallen by almost a quarter from their late-September peak despite the threat of an escalation in conflict in the Middle East and its potential effect on energy supplies.

Performance

• Over the quarter, our fund returned 4.2%.
• Over the same period, MSCI AC World NR showed a 6.3% return. (This is a widely-used indicator of the performance of global stockmarkets, in which the fund invests. 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.
• The fund’s second comparator benchmark, IA Global Equity Income NR showed an average return of 5.5%. (This a group of other asset managers’ funds that invest in similar asset types as this fund, collated by the Investment Association. It also acts as a ’comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by this benchmark.)

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

The quarter’s biggest negatives

The main reason for the fund’s short-term underperformance was not owning shares in the ‘Magnificent Seven’

Share prices of large US technology companies rose sharply over the quarter. As income investors, we look for companies that share some of their profits with their shareholders through regular dividend payments. The meagre (or non-existent) dividends that these companies offer means we choose to invest our clients’ capital elsewhere.

A fall in the price of crude oil put Exxon’s shares under pressure

Energy companies were among the market’s weakest performers over the quarter as the oil price fell by almost a quarter from its late-September peak. With a return of 100% in sterling terms (sterling is the currency of the representative share class) Exxon made a huge contribution to the fund’s strong performance in 2022. In the final quarter of 2023, however, it was the single biggest detractor, falling by 18% in sterling terms. In part, that was due to its $60 billion acquisition of Pioneer Natural Resources, a domestic shale energy company¹. That seemed to signal a change in Exxon’s emphasis towards securing long-term energy supplies and away from maximising short-term cash returns to its shareholders.

Although we have trimmed our allocation to the energy sector, some 12% of the fund remains invested in this part of the market. We view the cash returns this sector produces as attractive, particularly at a time of economic uncertainty.

The quarter’s biggest positives

The fund’s holdings in defence contractors performed well

Shares in Rheinmetall and BAE Systems rose by 18% and 13% respectively over the quarter. In part, this was a response to the ongoing war in Ukraine and the conflict engulfing the Middle East. Governments worldwide are starting to address significant shortfalls in defence spending. Our exposure to the sector – through holdings in Rheinmetall, BAE and Mitsubishi Heavy Industries – currently amounts to around 10% of the fund.

Semiconductor and software group Broadcom was a beneficiary of AI-related earnings

Unusually for a technology company, Broadcom pays dividends to its shareholders, making it one of the few companies that we find attractive in this part of the market. Growth in its dividend has been strong, with its quarterly payouts to its shareholders having risen from $1.75 per share in 2018 to $5.25 today. Its shares rose by 29% on the quarter in reaction to a good set of results and guidance that suggested that its AI-related earnings could grow rapidly in 2024².

Building materials group CRH delivered total returns of 25% to its shareholders in 2023

Owning CRH gives the fund a way to profit from the manufacturing boom in the US that was triggered by the Inflation Reduction and CHIPS Acts³. Even after last year’s strong performance, the shares still offer a 7% dividend yield.

Activity

We added AGNC as part of our efforts to allow the fund to profit from falling interest rates. This is a real estate investment trust that invests in residential mortgage-backed securities guaranteed by US government-sponsored agencies. At the end of December, its shares paid the fund a dividend yield of 15%, a level of payout we believe is sustainable in a world in which US interest rates have peaked.

We added a new holding in global telecoms giant Verizon. After performing poorly for much of 2023 due to its high debt levels, we think shares in parts of the telecoms sector have begun to appear attractive.

We bought BlackRock. As the world’s largest manager of bond funds, it is a clear beneficiary of the rally in the bond market. It also pays the fund a 3% dividend yield.

Outlook

Inflationary pressures have yet to be vanquished

Global shipping rates have lurched higher in recent weeks and oil prices have ticked up. The recent escalation of violence in the Middle East, particularly in the Red Sea – a crucial shipping lane through which 15% of global trade passes⁴ – could mean that inflation proves more persistent than some hope. If that view comes to be more widely accepted, it could put the share prices of some of 2023’s winners under pressure.

Our core view is that the market may be in danger of getting ahead of itself by expecting the US central bank to cut interest rates aggressively in 2024. And while interest rates may have peaked, we’re not going back to a world of zero rates and quantitative easing. The next stage in the battle to bring inflation back towards its target could prove to be hard going.

Debt is something investors should remain wary of

A long period of near-zero interest rates encouraged companies – including a number of lossmaking businesses – to take on debt. We don’t expect interest rates to return to pre-pandemic levels and don’t believe the most indebted (‘leveraged’) companies will thrive in this new environment. We therefore continue to avoid investing in the market’s most leveraged stocks.

So, what are we investing in? The world still needs massive investment in the physical economy – in areas such as energy and defence. We prefer to invest in areas such as these, where there is objective, measurable scarcity. We remain wary of interest-rate sensitive technology companies and more leveraged names within the tobacco, consumer staples, real estate and infrastructure sectors.

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.

Currency risk – The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.

Charges from capital risk – Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Emerging markets risk – Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.

Income risk – Although the fund aims to pay a regular income, the payment of income and

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