Artemis Funds (Lux) – Global High Yield Bond update

Source for all information: Artemis as at 31 March 2025, unless otherwise stated.

Objective

The fund is actively managed. It aims to increase the value of shareholders’ investments through a combination of income and capital growth.

Performance

The fund returned 1.0% during the three months to the end of March 2025, compared with 1.2% from its ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged Index benchmark.

The fund’s lack of exposure to emerging market high yield hurt relative returns during the period as this segment of the market outperformed. We avoid this area as we believe that our skill set lies in understanding companies and their core operational quality, rather than in trying to figure out the complex political environments that could make an emerging market company successful. Also, emerging market high yield doesn’t produce meaningfully different performance from developed market high yield over the long run, so we are not missing out on a significantly different return stream.

As the quarter ended, we got sight of a variety of tariff levels that Donald Trump has applied to different countries exporting to the US. Please see the 'Outlook' section below for our views on how this is likely to play out. 

Positives

Our single biggest contributor to performance during the period was Asmodee, a UK distributor of tabletop games and accessories. In January it announced strong sales and profit growth during the third quarter, largely driven by new releases based on third-party intellectual property. 

French games developer Ubisoft announced the creation of a new unit to develop its next tranche of blockbuster titles. While Ubisoft will retain 75% ownership, the remaining share is to be taken by Chinese technology group Tencent, which will invest €1.16 billion as part of the transaction. This obviously bodes well for Ubisoft’s ability to refinance its bonds due to mature in 2027 and 2031, and the bonds responded in a predictably upbeat fashion. 

Our holding in Constellation, the market leader in dealer-to-dealer used cars in the UK, moved higher as it announced it was going to call its bonds at a premium early in May 2025. Constellation has delivered strong returns after receiving a significant equity injection, illustrating the ability of high-yield bonds to exhibit different return profiles from their sector. 

Elsewhere, Austrian circuit-board manufacturer AT&S and German engineered-wood producer Pfleiderer also did well.

Negatives 

Among the biggest detractors from performance were At Home, Alta Equipment and Isabel Marant.

Our portfolios are reasonably well set up for the threat from tariffs, with almost no direct exposure to US retail and auto OEMs (original equipment manufacturers). We do have one small position in At Home, the US discount home furnishings retailer, but this is already trading at very distressed levels.

After rallying close to 10 points in the previous quarter, our holding in US construction equipment-leasing firm Alta Group was a couple of points lower. French fashion label Isabel Marant underwhelmed the market with its cautious outlook for the remainder of the year, which hit its bonds' performance.

Fund 10-year discrete performance

Purchases

Towards the start of the period, we made a number of portfolio adjustments aimed at ‘nudging for singles’ (capturing lower-risk small gains based around market inefficiencies, rather than the larger beta trades). The fund therefore bought a number of bonds on the basis that a re-rating from high yield to investment grade was likely at some point.

We also bought a number of positions where we believe the market underappreciates the fundamentals of the business, namely in digital services platform Angi, specialty chemicals business LSB Industries and W&T Offshore, an oil & gas producer operating a number of legacy wells in the Gulf of Mexico.

During February, we decided to move up in quality by reducing our B-rated exposure and increasing our exposure to BB-rated bonds, as the former part of the market had been remarkably resilient while the spread differential between the two had compressed significantly.

Later in the quarter we added positions in Canadian-headquartered copper miner Capstone Copper, Norwegian oil & gas producer DNO and US sports retailer Foot Locker. We also bought a position in some of the longer-dated Ubisoft bonds (2031s) in addition to the 2027s we already owned.

Sales 

We sold a number of positions, generally in areas where bonds had performed well and we saw limited further upside. These included: Barclays and Santander AT1s, Burger King owner Restaurant Brands, Hilton Worldwide, Spanish homebuilder Neinor Homes and Italian specialty chemicals business Italmatch.

Later in the quarter, we also sold data storage company Iron Mountain, UK supermarket Iceland, US conference software provider Cvent and US pet food producer Central Garden & Pet. In each case this followed a period of strong gains, but we will consider re-investing in these names should this performance unwind and an attractive entry point open.

Outlook

Following the announcement of Trump’s tariffs, we are pleased to say that none of the importers into the US that we are lending to have business models that should be fundamentally broken as a result. We are also reasonably confident in the health of the US consumer, who is relatively lightly indebted versus history and has seen real disposable income rise over successive years. They therefore look largely capable of dealing with price jumps on imported goods, although these tariffs are likely to see demand slow down.
 
We believe the autos sector will be one of the hardest hit sectors, given the high tariff rate and the amount of cross-border trade that facilitates the manufacture of a car to be sold into the US. This could therefore be negative for many OEMs with low margins that are reliant upon US demand. However, we think some auto suppliers – the producers of car parts – could potentially be well set up after significantly de-risking in the 15 years since the Global Financial Crisis, including through adopting production processes that make them less exposed to tariffs within their own production chain. We had reduced our position in auto suppliers after their strong performance in 2022 and 2023, but will likely be reviewing our exposure if significant valuation opportunities present themselves.

Overall, we think it is important to bear the following in mind:

1. The announced tariffs are likely to be a starting point rather than an ending point, with President Trump taking an aggressive position so there is more to sacrifice in return for compromise on the other side as he looks for ‘deals’.
2. Barring a more significant sell-off in risk assets than we have already seen, the technical backdrop should remain relatively robust as the number of bonds in the high-yield market is not enough to provide for all the yield-based buyers.
3. We are still in an environment where focusing on short-dated high yield (as this strategy is very much concentrated at present) provides for an attractive risk/reward even in significant risk-off scenarios.