Artemis Monthly Distribution Fund update

Source for all information: Artemis as at 31 March 2024, unless otherwise stated.

The Artemis Monthly Distribution Fund’s objective is to generate a monthly income, combined with some capital growth over a five-year period. It seeks to give investors access to the income-generating potential of a blend of bonds and shares across:

• Dividend-paying company shares – These are shares in companies worldwide that return a portion of their profits to their shareholders through regular cash payments (‘dividends’).
• High-yield bonds – High-yield bonds are issued by companies that ratings agencies (such as S&P and Moody’s) deem to be at greater risk of defaulting on their debts. As their name suggests, they offer a higher ‘yield’ (rate of interest) to compensate for the higher level of risk.
• Investment-grade corporate bonds – These are issued by companies with higher credit ratings. These are businesses that ratings agencies consider to be at relatively low risk of defaulting on their debts.
• Government bonds – These are widely viewed as being among the safest bonds (governments in developed economies rarely default on their debts). The interest rate, or ‘yield’, available here is lower than it is on high-yield and investment-grade corporate bonds – but they can provide a useful counterweight to the fund’s holdings in more economically sensitive bonds and shares.

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 8.3% over the quarter versus a return of 2.5% from its peer group, the Investment Association’s ‘Mixed Investment 20-60% Shares’ sector.¹

The returns the fund produced this quarter were largely driven by its investments in the shares of dividend-paying companies. In particular, our holdings in defence companies continue to lead the way. Rheinmetall (Germany), Mitsubishi Heavy (Japan) and BAE Systems (UK) all made healthy contributions. In recent years, rising geopolitical tensions – and particularly Russia’s invasion of Ukraine – have resulted in a sharp increase in defence spending. All three companies remain cornerstones of the fund.

Building materials group CRH is one of several companies in the portfolio benefiting as a boom in US manufacturing is resulting in construction of new factories. In a presentation accompanying its results, the company pointed to “robust infrastructure activity underpinned by historic increase in government funding” and looked ahead to what it describes as “a golden age for construction”.

In the bond market, our holdings in UK government bonds – to which we added after their prices fell in late February – contributed to returns. The fund’s relative performance was also aided by our successful avoidance of the high-yield bonds of three European companies who imposed painful losses on their owners:

• French telecoms group Altice.
• Global packaging group Ardagh.
• European debt consolidator Intrum.

On the negative side, the food producer Archer Daniels Midland (down 12%) came under pressure, but we retain the holding. It postponed a scheduled update to investors due to a probe into accounting practices in its nutrition division. The shares fell sharply in response. Towards the end of the quarter, however, the shares rallied sharply as the company confirmed that the issue was relatively minor and did not pose any systemic threat. News of an 11% increase in its dividend was also welcomed².

The fund’s lack of exposure to mega-cap technology stocks was a negative. In what was an overwhelmingly positive quarter, that the fund doesn’t invest in some of the largest US technology companies such as Nvidia (up 84%) and Meta (up 39%) was a negative. As a reminder, given their modest (or non-existent) dividends, most of these companies are not natural investments for a fund designed to deliver income. Other minor negatives included small positions in US energy company Baker Hughes (down 4%), Abu Dhabi Commercial Bank (down 4%) and Japanese optics and photography group Nikon (down 7%).

Activity and positioning

52% of the portfolio is currently invested in shares; 48% is invested in bonds. During the quarter, we reduced our holdings in bank shares and added to holdings in insurers such as Aegon and AXA. Insurers continue to be beneficiaries of higher interest rates and are delivering attractive capital returns to shareholders.

We also added shares of two gold-mining companies to the portfolio: Newmont and Kinross. Although the gold price recently hit an all-time high, the shares of gold producers have not risen as sharply. This was due to sharp rise in input costs and supply-chain issues. We think both pressures are now easing.

The outlook for income-seeking investors remains attractive

The bond market continues to offer attractive yields, with high-yield bonds still offering some of the highest yields seen over the last decade. We are, meanwhile, finding no shortage of attractive dividend-paying companies whose shares to buy.

The US central bank had to change course slightly in April, as rising inflation – fuelled by the strength of the US economy – compelled investors to revise their expectations for rate cuts. Bond prices tend to rise when interest rates fall. If interest rates are cut by less than was once anticipated, it might result in muted capital gains from bonds but we believe we are being compensated by the attractive income – the yields – they generate.

In contrast to the situation at various points over the past decade, therefore, we now have two significant ‘engines of income’ in the fund. Bonds are back, and we find no shortage of dividends in the stockmarket. All in all, therefore, we believe the outlook for income investors is very attractive, and we are optimistic that our portfolio can generate compelling total returns going forward.