Artemis High Income Fund update

David Ennett, Ed Legget and Jack Holmes, managers of the Artemis High Income Fund, report on the fund over the quarter to 31 December 2023 and their views on the outlook.

David Ennett

Source for all information: Artemis as at 31 December 2023, unless otherwise stated.

A strong quarter but lagging the peer group

The fund returned 6.4% over the quarter, slightly behind its peer group the IA £ Strategic Bond Average., which returned 7.0%. This capped out a good year for the fund: it returned 10.9% over 2023, ahead of the peer group's 7.9%.

Over the quarter, the fund's holdings in inflation-linked bonds made the best contribution. On the negative side, holdings in Heimstaden (real estate), Pfeiderer (construction) and At Home Group (retailers) detracted.

Among equities, 3i Group, Melrose and Legal & General were the best performers. Sanofi and British American Tobacco were weak.

An active time for the fund

Early in the period, we added some government bond exposure through topping up our pre-existing position in US Treasury Inflation-Protected Securities (or “TIPS”) and some longer-dated UK nominal government bonds. We did this following the significant sell-off in government bonds, which saw yields on longer-dated UK government bonds rise to the highest level in over 20 years.

In high-yield bonds, additions included Hilton Worldwide, the hotel group and Concrete Pumping, a North American provider of specialist concrete delivery trucks that had short-dated bonds that we believed had material upside to a potential near-term refinancing. We find this part of the market very attractive – good quality companies that are likely to redeem bonds before maturity through refinancings, which offer meaningful upside to current prices. We also bought a position in Paprec, a recycling company that we have owned before. Elsewhere we participated in the refinancing of AMS, an Austrian producer of advanced sensors that we have owned for several years. Activity continued into December (usually a quiet month) when we added a new issue from Loxam, the French equipment rental company. We also added two small positions in the European real estate sector - AroundTown and CPI.

On the sales side, early in the period there was a bit of a rally in longer-dated credit and we sold our positions in Ithaca Energy and Jaguar Land Rover following strong performance from both holdings. We also sold some senior US bank bonds following strong performance and rotated the proceeds into US government bonds. Later on we sold positions in Ancestry.com (the online genealogy business) and Energia (the Irish energy company). The former we sold as a result of their announcement of conducting a large releveraging transaction. While we like the business, we believe the company is currently carrying too much leverage and we were not getting adequately compensated for the risks this entailed. Energia was sold as a result of the bonds performing well and no longer looking as attractive against alternative opportunities.

Equities

We added to our holding in Vistry following a change in their business model (to focus more on their partnership model) which we believe will unlock capital to be distributed to us as shareholders, and fundamentally improve the return on capital employed within the business going forward. While the company’s targets are perhaps a little ambitious, we believe even achieving part of the proposed improvements to capital/return on capital will be materially positive for our position.

Outlook

We have had a significant run over the past two months. We would expect some kind of turbulence in the first quarter of 2024 – it usually happens at this time of the year and seems more likely to occur given the extent of the rally. However, for investors looking out over 12 months we find it hard to argue that the bond market isn’t attractive here. Yields remain at historically attractive levels, central banks do appear to be more open to loosening monetary policy through rate cuts, and credit risk looks reasonably healthy given conservative balance sheet management and a global economy that looks reasonably benign.

We currently have structured the portfolio to extract some very high levels of current income (and potential capital upside) in near-term credits, particularly in the higher-quality end of the high yield market (BB and B rated bonds). Alongside this, we have a c. 17% exposure to government bonds where we believe we are both getting paid attractive levels of income (something that we couldn’t have said for most of the last decade) and have a real source of diversification (and even capital upside) in a meaningful economic downside scenario. The final piece of the jigsaw is our equity holdings, where we believe we are currently getting very attractive valuations for high and growing dividend streams that can deliver both attractive yields and attractive capital growth over the years to come.

Past performance is not a guide to the future.
Source: Lipper Limited/Artemis from 31 March 2023 to 31 December 2023 for class I quarterly distribution GBP.
All figures show total returns with dividends and/or income reinvested, net of all charges.
Performance does not take account of any costs incurred when investors buy or sell the fund.
Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class.
Classes may have charges or a hedging approach different from those in the IA sector benchmark.
Benchmark: IA £ Strategic Bond NR; 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. Management of the fund is not restricted by this benchmark.

David Ennett

Manages:

‘Global high yield', 'High income', 'Monthly distribution', 'Strategic bond'

David co-manages Artemis‘ ‘global high yield‘, ‘monthly distribution‘ and ‘high income‘ strategies.

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Ed Legget

Manages:

‘UK select‘ strategy, ‘high income‘ strategy

Ed manages Artemis‘ ‘UK select‘ strategy and also co-manages Artemis‘ ‘high income‘ strategy.

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Jack Holmes

Manages:

‘Global high yield', 'high income', 'monthly distribution', 'short-duration strategic bond'

Jack co-manages Artemis’ 'global high yield bond' strategy, 'high income' strategy and 'short-duration strategic bond' strategies, plus the bonds element of Artemis‘ ‘monthly distribution‘ strategy.

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