Artemis Strategic Bond Fund update

Source for all information: Artemis as at 30 June 2024, unless otherwise stated.

The Artemis Strategic Bond Fund’s objective is to provide a combination of income and capital growth over a five-year period.

• The fund returned 0.5% over the quarter versus an average return of 0.4% from its benchmark, the IA’s Sterling Strategic Bond sector. 
• Holdings in short-dated high-yield bonds made a useful positive contribution to returns. 
• Although we are positive on the prospects for the bond market, growing government deficits and political populism mean we remain cautious towards longer-dated government bonds. 

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 0.5% over the quarter, just ahead of the average return of 0.4% from its benchmark, the IA’s Sterling Strategic Bond sector1. Over the quarter, the fund’s holdings in investment-grade and high-yield bonds performed well – particularly those in short-dated high-yield bonds. We retain a strongly positive view of this part of the bond market.  

Over the year to date, meanwhile, it has returned 1.9% versus an average return of 1.3% from its benchmark.   

Government bonds (18% of the fund)

These are widely viewed as being among the safest type of bond. The interest rate, or ‘yield’, available here is now significantly higher than it was through the long era in which central banks held yields down by buying bonds (‘quantitative easing’).  

We still believe that we are moving closer to the point at which we see all of the world’s major central banks – rather than just a select few – cutting interest rates. The fund’s positioning reflected that expectation, running with a duration (a measure of how sensitive returns from a bond portfolio are to changes in rates) that was well above its long-term average.  

Going into the end of the quarter, we further increased the fund’s capacity to benefit from interest rate cuts as economic data in the US continued to deteriorate. In our view, it seems possible that the US Federal Reserve will start cutting rates in the third quarter of this year. 

Investment-grade bonds (51% of the fund)

These are issued by companies 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 slightly higher yield (rate of interest) than government bonds. 

Within the investment-grade market, we shifted some of the fund’s UK property exposure out of Blackstone and into Tesco’s property-secured bonds and bonds secured on Sheffield’s Meadowhall Shopping Centre. We also added bonds issued by UK industrial property operator Prologis. 

Elsewhere, we bought newly issued bonds of UK energy supplier Centrica, continued to add to the fund’s position in UK pub operator Mitchells & Butlers and reduced its holding in Thames Water. 

In financials, we reduced our positions in ING, Admiral Group, Deutsche Bank and Met Life and sold out of Investec. Set against this, we increased the fund’s exposure to Lloyds Bank, Coventry BS and Danske Bank.  

High yield (28% of the fund)

These are issued by companies who ratings agencies regard as being at greater risk of defaulting on their debts and which therefore offer a higher yield to compensate for that risk. Their returns are influenced by movements in the underlying yields on government bonds and by changes in investors’ appetite for risk and their views on the economy. 

We took a small position in Picard, a French food retailer. Picard sells high-quality frozen food to affluent urban consumers and occupies an attractive niche in French life, where consumers see frozen food as a premium option. Due to French political tumult, Picard was obliged to issue its bonds at what we regarded as a very attractive price.  

We also invested in US kitchen and bathroom cabinet maker Masterbrand. It benefits both from the construction of new homes and from increased renovation activity as people choose to stay in existing properties longer. Staying in the US, we established a position in equipment-rental chain Herc Holdings.  

We trimmed the fund’s holdings in records-management company Iron Mountain, payments provider Worldpay and concrete-pumping specialist Brundage Bone.  

Outlook

Inflationary pressures continue to moderate – and rate cuts are coming 

This is the central fact that informs our positive view of the bond market. It seems quite clear that most developed-market central banks (except for maybe those in New Zealand and Norway) would like to cut rates to help ensure a slowdown in economic activity does not turn into a recession.  

There are, meanwhile, reasons for optimism about the UK and European economies, which look set to reverse their recent pattern of underperformance relative to the US. Energy bills are falling and, as inflation falls, disposable income is rising, boosting the financial positions of households who are putting the worst of the rate-hiking squeeze behind them.  

We continue to favour shorter-dated bonds 

Although we are positive on the prospects for the bond market, we remain cautious towards longer-dated bonds (those that are not due to mature – repay capital – for 10 years or longer). We cannot ignore the threats posed by political populism. This is not just a French issue and it presents risks to bond markets in two main ways. One risk is that government deficits widen even further, adding to outsized debt burdens and resulting in an increased supply of government bonds. A second risk is that rising protectionism reawakens inflation.  

This is one reason why we don’t see prices of longer-dated bonds (those not due to mature for 10-years or longer) rising significantly over the next 12 months. At the same time, however, we continue to believe that with respect to shorter-dated bonds, rate cuts will outweigh the forces pulling in the other direction (political populism and rising bond supplies) and so support their prices.  

There is a possibility that central banks will have to cut rates by more than the market expects – and the potential gains under that scenario are sufficient to compensate us for the risks posed by the fractious political environment.