Artemis Monthly Distribution Fund update
The managers of the Artemis Monthly Distribution 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.
- The fund returned 8.3% over the quarter versus 2.5% from its IA peer group.
- Holdings in short-dated high-yield bonds and the shares of defence companies made useful contributions to returns.
- We added shares in two gold mining companies to the portfolio.
Economic growth saw equity markets continuing to move higher even as hopes of rate cuts began to fade
The first quarter of 2024 brought fresh evidence of the resilience of the global economy, particularly in the US, which grew at an annualised rate of almost 4% in the second half of 2023 and which has created 7.5 million jobs since the start of 2022. In parallel, the stalling of the downtrend in inflation made the market less certain that the US Federal Reserve would cut interest rates as soon or as aggressively as it once hoped.
As a result, bond yields – though volatile – climbed through the quarter, with the US 10-year Treasury yield, the world’s most closely watched barometer of borrowing costs, hitting 4.20% at the end of March. Despite this, equity markets continued to power higher, with robust corporate earnings – and the US Federal Reserve’s insistence that it would cut interest rates this year – providing support.
Perhaps the most significant policy decision of recent months, however, came when the Bank of Japan pushed its benchmark interest rate into positive territory, which represented a definitive end to the long era of ultra-low rates.
The fund delivered another strong quarter of performance
With a return of 8.3%, the fund comfortably outperformed the IA Mixed Investment 20-60% Shares peer group average return of 2.5%.
| Three months | Six months | One year | Three years | |
|---|---|---|---|---|
| Artemis Monthly Distribution Fund | 8.3% | 14.5% | 16.9% | 19.8% |
| IA Mixed Investment 20-60% Shares | 2.5% | 8.3% | 7.8% | 5.3% |
Source: Artemis/Lipper Limited, class I Inc GBP to 31 March 2024. All figures show total returns with dividends and/or income reinvested, net of all charges.
The fund’s strong relative performance was largely driven by the portfolio’s equity allocation. Here, our defence holdings continue to lead the way. Rheinmetall (Germany), Mitsubishi Heavy (Japan) and BAE Systems (UK) have all made healthy contributions to relative returns in recent years amid a step change in global attitudes to defence spending. Thanks to these structural tailwinds – and the vast market opportunity before these companies over the next decade – all three remain cornerstones of our equity component.
Building materials group CRH (up 27%) updated the market on its performance in 2023: its cashflows grew by more than 30% compared to the previous year and its margins expanded by 18%1. Through a combination of dividends and share buybacks, it returned $4 billion to its shareholders last year. It did this while also continuing to pay down debt, with net debt-to-Ebitda falling to 0.9x by year end. CRH is just one of several companies in the portfolio benefitting from the boom in US manufacturing. In a presentation accompanying its results, the company pointed to “robust infrastructure activity underpinned by historic increase in government funding” and looked ahead to what it describes as “a golden age for construction”.
Our bank stocks enjoyed another strong quarter
Yes, interest rates may have peaked, but a return to a zero-interest-rate environment looks increasingly unlikely. While interest rates remain in positive territory, banks should continue to generate excess capital and then return it to their shareholders through dividends and share buybacks. As a result, we believe bank shares remain an attractive home for capital for income-seeking investors.
In bond markets, our preference is to invest in short-dated high-yield bonds
Here, we continue to find opportunities to buy the debt of what we believe are high-quality, resilient companies at extremely attractive valuations. Elsewhere, UK gilts – to which we added after UK government debt sold off in late February – were additive to relative returns. It could be that the UK is able to cut rates more quickly than the US, a scenario that was largely unthinkable not too long ago.
Within fixed income, the fund’s relative performance was also aided by our successful avoidance of the bonds of three companies who imposed painful losses on their owners:
- French telecoms group Altice.
- Global packaging group Ardagh.
- European debt consolidator Intrum.
All three companies’ bonds were widely held by other managers. In recent years, individual credit selection – which we regard as our strength – has played second fiddle to getting big ‘macro’ calls right. But the evidence continues to mount that this is beginning to change.
52% of the portfolio is currently invested in equities; 48% is invested in bonds
In high yield (c.25% of the portfolio), shorter-dated high-yield bonds continue to offer up opportunities aplenty. At current levels, they offer an attractive level of income and the potential for capital returns, too: high-yield bonds are often being called at their par value a year early. We see the total-return opportunity here are as compelling.
In equities, we moved some of our allocation to banks into insurers
Insurers are major beneficiaries of higher interest rates and are delivering attractive capital returns to shareholders.
We also added two gold mining stocks: Newmont and Kinross. Although the gold price recently hit an all-time high, the shares of gold producers have lagged due to sharp input-cost inflation and supply-chain issues. We think that the worst of this is now behind them.
The outlook for income-seeking investors remains attractive
The bond market continues to offer attractive yields, with high-yield bonds priced at close to historic lows despite a resilient global economy. We are finding no shortage of attractive equities. The equity component of the portfolio currently yields around 5%, with dividends from our holdings predicted to grow by more than 6% over the next year.
The Federal Reserve had to change tack once again in April, as rising inflation – fuelled by this economic strength – compelled investors to revise their expectations for rate cuts. Yes, fewer interest rate cuts than had been anticipated might result in muted capital returns from bonds but we believe we are being compensated by today’s attractive yields. It is also important to remember that the quality of the high-yield market has increased significantly in recent years – with the riskiest companies turning to private sources of credit for their financing. As a result, default probabilities are lower than they were in the past.
In contrast to the situation at various points over the past decade, therefore, we now have two significant ‘engines of income’ in the fund. Bonds are back, and we find no shortage of yield in equities. All in all, therefore, we believe the outlook for income investors is very attractive, and we are optimistic that our portfolio can generate compelling total returns going forward.
Source: Lipper Limited/Artemis from 31 December 2023 to 31 March 2024 for class I 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 Mixed Investment 20-60% Shares 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 ‘comparator benchmark’ against which the fund’s performance can be compared. Management of the fund is not restricted by this benchmark.