Artemis High Income quarterly review, September 2023

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

Fund objective

To provide a combination of a high level of income and capital growth, before fees, over a rolling five-year period.

Review of the quarter

The third quarter of 2023 was a volatile period in bond markets, marked by uncertainty over the outlook for the economy. Yields on UK government bonds – gilts – are near the highs seen in the Global Financial Crisis, but the economy does not yet appear to be slowing. Economic data remains robust and inflation appears to be falling. Meanwhile, central banks have raised interest rates faster than at any point in living memory and repeated the message that rates will stay ‘higher for longer’. The path forward for markets is understandably a little unclear.

The fund returned 0.7% over the quarter versus an average return of 0.4% from its peer group, the IA £ Strategic Bond sector. This is 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 ‘target benchmark’ that the fund aims to outperform.

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

Activity in the fund

July was a quiet month. We bought just one new issue: Energia. This is an Irish power producer with several attractive long-term supply contracts with large technology companies, as well as a stable retail electricity business.

In August, we added a new position in the seven-year bond issued by Veritext, a provider of ‘discovery services’ in the US legal system. This is a vital part of the system, involving the gathering and provision of evidence before cases come to court. It also has the added benefit of not being affected by the economic cycle.

We also added to positions in AMS (lighting and sensor components) and a short-dated Bank of America bond. We currently see a lot of value in shorter-dated corporate bonds (those that are due to mature within the next one-to-three years) as they have attractive yields but tend to be less volatile than longer-dated bonds.

We sold a number of positions in August. These included Enquest, the UK North Sea oil & gas producer. We still retain a reasonable amount of exposure to this sector through our positions in Ithaca Energy and Harbour Energy. We always regarded Enquest as the riskiest of our holdings in this area and decided to sell the position following a period of strong outperformance. In a similar vein, we sold our holding in TI Fluid Systems, a provider of fluid management systems for autos. Finally, we trimmed our holding in Ocado following a rally in the bonds on rumours of Amazon potentially acquiring the business.

We were reasonably active in September, adding a number of positions. These included: Arqiva, the UK broadcast infrastructure company; Concrete Pumping, the US-based provider of specialist concrete pumping vehicles; Williams Scotsman, the North American porta-cabin provider; Worldpay, the payment processor; and Yorkshire Building Society. The majority of the positions we added to were shorter-dated bonds.

We sold positions in: AroundTown, the German residential real estate company; ENI, the Italian energy group; Alder Pelzer, an auto parts producer. All of these sales followed strong performance. We also sold White Cap, one of our few remaining CCC-rated bonds (these are towards the riskier end of the high-yield market). Again, this followed a period of strong performance. Finally, we cut our position in MI Windows, a US windows and doors manufacturer, as a result of rumours around the company potentially bidding for a rival. Should this happen, we would anticipate that the company would likely issue more debt to fund the deal, so we wanted to be in a good position to take advantage of this potentially cheap new issuance.

Outlook

Investors looking for high levels of income in today’s market have the most favourable backdrop we have seen in over a decade (Chart 1). The jump in bond yields provides an abundance of opportunities for investors and allows for both strong income and total returns. By focusing on good-quality businesses that are now paying attractive yields we believe investors could extract attractive returns on an ongoing basis.

Bank of America US High Yield Index

Yields - attractive relative to the last decade

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. 

Bond liquidity risk

The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities. • Income risk: The payment of income and its level is not guaranteed. 

Credit risk

Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund. 

Higher-yielding bonds risk

The fund may invest in higher-yielding bonds, which may increase the risk to capital. Investing in these types of assets (which are also known as sub-investment grade bonds) can produce a higher yield but also brings an increased risk of default, which would affect the capital value of the fund.

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.

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. 

Investment in the fund concerns the acquisition of units 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 www.artemisfunds.com.