Artemis Corporate Bond Fund update
Stephen Snowden and Grace Le, managers of the Artemis Corporate Bond Fund, report on the fund over the quarter to 31 March 2024 and their views on the outlook.
Source for all information: Artemis as at 31 March 2024, unless otherwise stated.
Through what was a choppy quarter for bond markets, the fund returned 0.7%, ahead of the benchmark the iBoxx £ Collateralized & Corporate index, which was flat (up 0.0%). It was also ahead of the IA £ Corporate Bond sector, which returned 0.4%.
| Three months | Six months | One year | Three years | |
|---|---|---|---|---|
| Artemis Corporate Bond Fund | 0.7% | 9.7% | 9.1% | -3.7% |
| iBoxx £ Collateralized & Corporate index | 0.0% | 8.7% | 7.4% | -10.7% |
| IA £ Corporate Bond | 0.4% | 8.3% | 7.4% | -7.0% |
The fund’s excess returns can largely be attributed to good credit selection
Credit selection was particularly strong in the real estate, financials and utilities sectors.
Credit spreads in the real estate sector compressed throughout the quarter, providing a useful tailwind to returns from holdings such as MPT (a healthcare REIT) and Vonovia (a German property company). We initially abstained from Vonovia’s debut sterling issuance in January as we felt the pricing was a little too aggressive. This proved to be the right decision: its bonds underperformed the wider market immediately following the new issue. We were then able to pick this bond up in the secondary market in late February on what we felt were more attractive terms. Those bonds then made a useful contribution to returns over the remainder of the quarter.
It was, however, our credit selection within the financials sector that provided the strongest support to the fund’s performance. Over the quarter, we saw particularly strong returns from, among others, TP ICAP, BFCM - Crédit Mutuel and Rothesay Life.
The fund was active in the new issue market
The early days of the new year brought a rush of new issues, as borrowers looked to take advantage of lower rates following the Fed’s dovish pivot in December. The primary market normally waits a few days to get going, but not this year... This clamour for financing wrongfooted the market with the result that the first few deals of 2024 went badly. Prices then backed off meaning subsequent new issuance was slightly cheaper, allowing us to invest some of our accumulated cash at more attractive levels.
Although new issues were thin on the ground in February, March saw a pick-up in activity. We subscribed to new issues from Virgin Money, Southern Water, Coventry Building Society, Telereal Securitisation, Anheuser-Busch, Land Securities, KBC, Nestle, Northumbrian Water and Paradigm Housing Association.
To pay for these additions, we were active in taking profits on strong performers, including Reality Income, Direct Line, McDonalds, Scottish Hydro, Morgan Stanley, National Grid and Bunzl. We also sold Orsted (it has since been downgraded).
We remain active in exploiting the inefficiencies that are inherent in the corporate bond market
This quarter we made relative-value switches between different bonds from EDF and Motability. We also made a cross-currency relative value switch between two bonds issued by Blackstone Property Partners.
In terms of duration, the fund moved to a modestly short position relative to the index at the end of February but we reversed this at the end of March. We are positioned in anticipation of a cut in rates. We think central banks have been pretty clear: rate cuts are coming this year. It is just a question of when and by how much...
Interest rates in the UK may need to be cut by more than the market expects
Markets tend to be slow to recognise changes in policy direction. They were late in realising how quickly and by how much the Bank would need to push rates higher in 2022-‘23. And they were slow to realise how aggressively rates would need to be cut after the Global Financial Crisis.
The wage inflation recently seen across the West was a response to the rising price of goods; it was not a symptom of economic overheating. That ‘cost push’ dynamic is now fading. UK CPI has already fallen to 3.2% and the Bank of England forecasts that it will fall to 2%.
The last time rates in the UK were above 5%, in 2007, the UK economy was flying; that is clearly not the case today. UK households are responding to higher rates by sitting on cash, rather than investing or spending it; the savings ratio is moving higher. Higher interest rates are doing what they are supposed to do: choking off demand. This will be negative for long-term economic growth.
So, interest rates will have to come down. The market is pricing in UK interest rates falling to 4.5% by Christmas. That may still be too high. If rates are cut by more than the market expects, that would be very supportive for bonds.
Source: Lipper Limited/Artemis from 31 December 2023 to 31 March 2024 for class I accumulation 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.
Benchmarks: iBoxx £ Collateralized & Corporates Index; A widely-used indicator of the performance of sterling-denominated corporate investment grade bonds, in which the fund invests. IA £ Corporate Bond NR; A group of asset managers’ funds that invest in similar asset types to the fund, collated by the Investment Association. These act as ‘comparator benchmarks’ against which the fund’s performance can be compared. Management of the fund is not restricted by these benchmarks.