Artemis Monthly Distribution Fund update
The managers of the Artemis Monthly Distribution Fund report on the fund over the quarter to 30 June 2024 and their views on the outlook.
Source for all information: Artemis as at 30 June 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. The fund gives investors access to the income-generating potential of a blend of bonds and shares. It is actively managed.
- 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.
With a return of 1.7%, the fund outperformed the average return of 1.2% from its benchmark, the IA Mixed Investment 20-60% Shares sector, with its outperformance largely being driven by its allocation to company shares.1 We examine some of the biggest contributors – and notable laggards – below. Over the longer term, meanwhile, we believe the returns the fund has produced, both in absolute terms and relative to its IA peer group, speak for themselves.
Annualised performance, 12 months to 30 June | 2024 | 2023 | 2022 | 2021 | 2020 |
---|---|---|---|---|---|
Artemis Monthly Distribution Fund | 19.4% | 0.7% | -1.8% | 17.4% | -4.9% |
IA Mixed Investment 20-60% Shares | 9.5% | 1.2% | -7.2% | 13.3% | -0.9% |
Cumulative performance to 30 June | Since launch | 10 years | 5 years | 3 years | 1 year |
---|---|---|---|---|---|
Artemis Monthly Distribution Fund | 165.9% | 87.1% | 31.8% | 18.0% | 19.4% |
IA Mixed Investment 20-60% Shares | 75.9% | 45.9% | 15.3% | 2.8% | 9.5% |
Key positives
Broadcom (shares)
Semiconductor company Broadcom built on the gains it made in the first quarter. Its second-quarter earnings beat expectations largely thanks to faster-than-expected adoption of its AI networking chips2.
Heimstaden (bonds)
Bonds issued by real estate company Heimstaden rebounded along with bond prices across the European property sector.
Kinross Gold (shares)
Gold producer Kinross continued to play catch-up with the rise in the gold price. While the gold price has retreated from the all-time highs it set in late May, the fiscal stimulus (government spending) taps in the US remain firmly jammed in the ‘open’ position, with the national debt forecast to expand by around $1 trillion every 100 days3. If that causes the US dollar to weaken, it should provide support for the gold price.
HSBC, Erste Bank (shares)
Holdings in the shares of financial companies have continued to generate strong returns. HSBC and Erste Bank were particularly strong performers over the quarter. HSBC announced another $3 billion of share buybacks4 while Erste Bank’s shares rallied in line with other European financials.
Victoria (bonds)
Flooring manufacturer Victoria reassured markets by providing an upbeat outlook on demand and by offering some clarification regarding questions its auditors had raised regarding accounting practices at one of its subsidiaries.
Key negatives
Tenaris (shares)
While Tenaris’ profits significantly beat expectations, the market was disappointed by its guidance on future prospects. Although we shared that disappointment, a number of factors remain in Tenaris’ favour. In particular, it is one of very few Western producers of the high-quality steel tubes used by the energy industry. Quality is increasingly important in an industry whose environmental impact is being scrutinised closely: for example, the cost of a pipe rupturing in the sea would be enormous.
Sotheby’s (bonds)
Sotheby's reported a softening outlook for auction sales for the remainder of 2024.
Owens & Minor (bonds)
Medical device maker Owens & Minor’s bonds came under pressure after its chief financial officer left the group unexpectedly.
Vinci (shares)
Concerns around what a Marine Le Pen far-right government might mean for Vinci’s toll-road monopoly in France sent its shares sharply lower when President Macron called a snap election (nationalisation had been discussed by Le Pen’s National Rally in its 2022 manifesto). On balance, we viewed this as a buying opportunity. We thought it unlikely that National Rally would secure a majority and that the centre would retain more seats than some commentators feared. The good news is that the threat of radical policies (such as the nationalisation of Vinci) has receded for now.
Rheinmetall (shares)
A sell-off swept across the European market when the far right made gains in EU elections, with shares in defence companies falling sharply. Rheinmetall, however, announced two significant orders from the German defence ministry during the quarter. One, for military trucks, was worth €3.5 billion; the other, for ammunition, was worth €8.5 billion – its largest-ever order5. As the 90% rise in its share price over the past 12 months suggests, expectations for Rheinmetall have increased significantly. But these latest orders provide a reminder that the grim conflict in Ukraine continues to consume military hardware.
Activity and positioning
48% of the portfolio is currently invested in shares; 50% is invested in bonds, with 2% in cash.
Buy: Carnival and TUI Cruises (bonds)
These cruise companies’ sales are predictable and they are enjoying buoyant demand due to a post-pandemic trend for spending on experiences over physical goods. In our opinion, Carnival’s bonds have the potential to reclaim ‘investment-grade’ status over the next two-to-three years thanks to the prodigious cashflow it is generating.
Buy: Newmont (shares)
Gold prices rose sharply in the first half of this year, reaching all-time highs. Initially, the share prices of gold miners such as Newmont lagged the gains in the price of gold due to rising costs and problems in its supply chain. We believe these pressures are now easing.
Sell: BBVA; Buy: Banco BPM and Caixabank (shares)
We sold Spanish bank BBVA, which had performed well since we invested in it towards the end of 2022. We recycled the capital into two smaller European banks: Banco BPM (Italy) and Caixabank (Spain). In effect, we sold a bank that is looking to acquire one of its peers (BBVA recently made an approach for Sabadell) and shifted into two banks that may have the potential to become bid targets.
Sell: Petrobras (shares)
As capital began to flow back into Chinese equities, we reduced our exposure to Latin America, reducing our holding in Petrobras, whose shares had begun to weaken.
Outlook
We still believe that we are in a radically different economic and market regime to the one that prevailed prior to the pandemic and that inflation and interest rates will be structurally higher going forward than they were in the decade between 2010 and 2020. Nevertheless, the emergence of some mixed signals on the health of the US economy offers a reminder that there will be times when inflation and interest rates move lower. We do not believe, however, that we are returning to a world of zero rates and deflationary worries.
We have talked about the structural challenges faced by traditional income-paying sectors of the stockmarket for a number of years. These are companies with predictable and somewhat recession-proof earnings in areas such as consumer staples (food, beverages and tobacco), real estate and pharmaceuticals. If a recession is around the corner and interest rates are cut meaningfully, it could be that some of these sectors start to look interesting again given share prices of some of these companies have fallen substantially. This is something we are monitoring closely.
In the bond market, meanwhile, we continue to like the opportunity in short-dated high-yield bonds (those due to mature within the next five years). These tend to be much less volatile than the wider high-yield market and are often redeemed early by the companies that issue them, creating potential capital gains. It is this potential upside that we believe isn’t yet being fully recognised by the broader market.
2 Broadcom (AVGO) Gains After AI Computing Demand Fuels Sales Growth - Bloomberg
3 U.S. Debt Interest Payments Reach $1 Trillion (visualcapitalist.com)
4 https://www.reuters.com/business/finance/hsbc-reports-flat-first-half-profit-beats-estimates-2024-07-31/
5 Rheinmetall Wins Record €8.5 Billion Order for Ammunition Supply - Bloomberg