Artemis Strategic Bond Fund update

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

Performance

The fund returned 1.6% over the quarter, just ahead of an average return of 1.5% from its IA peer group. We entered the year with a positive view on risk (spreads) and duration (rates). While spreads widened over the period, strong stock selection and active duration management resulted in another quarter of outperformance. 

Activity

Government bonds

We have said in the past that, at times, where you hold duration is just as important as how much you own. While we kept the fund’s duration close to six years during the quarter, we continually rotated between markets as regional yields gyrated around domestic monetary policy, shifting supply profiles and changes in investor sentiment.

As an example, the fund started March with a short in European duration, via two separate strategies. The first was short European rates versus gilts, based on the market pricing in widening policy divergence which we doubted would materialise. The second was an underweight in 30-year bunds, which we had initiated in February to replace a short in Japanese 10-year bonds. This worked well as a major fiscal announcement in Germany caused large underperformance of European duration. We added Swedish rates because the curve is now pricing in modest tightening which we believe is incorrect.

Higher fiscal spending pushed yields higher across the eurozone and UK markets. However, yields fell in the US as it was clear that rising tariff concerns were beginning to weigh on consumer and business sentiment – raising possibilities that Donald Trump’s administration could inadvertently tip the economy into recession. As the tariff uncertainty began to mount, markets began to experience larger risk-off moves. Our overweight in US real yields and US curve steepening positions boosted performance.

Credit

Credit markets began the year strongly, with spreads compressing in January and into mid-February. March was a difficult month as spreads widened in response to growth concerns emanating from a far more aggressive tariff regime.

The fund was active in new issue markets early in the quarter. We participated in new issues such as Imperial Brands and insurer Athene which were largely funded with profit taking from prior new issues including Sainsbury’s and Bayer Landesbank. We added several high-quality short-maturity positions where we continue to see excellent risk-adjusted returns. These included Danish oil services specialist Welltec at a 6.75% yield up to its anticipated call in October of this year. In a similar vein, we added positions in entertainment ticketing and venue operator Live Nation and UK car auctioneer and logistics provider Constellation. In each case, we have a clear line of sight to repayment in the next 12 to 18 months. Elsewhere, we topped up positions in European postal locker operator InPost and US medical consumables distributor Medline.

While credit spreads widened, there was very little decompression, so the fund generically trimmed some of the higher-beta holdings and recycled the proceeds into lower-beta holdings that had underperformed. With US bank equity wobbling and US bank credit spreads underperforming in other currencies, the resilience of this sector in sterling credit was stark. We reduced exposure.

We also sold our position in French optical chain Alain Afflelou and reallocated the proceeds into water purification specialist SNF. Finally, we added US multi-family property manager and developer Greystar. This was on our ‘substitutes' bench’ of names that we have been monitoring closely, waiting for a valuation opportunity before we buy. While volatility is rarely enjoyable, we normally look back at such periods fondly.

Outlook

Higher tariffs act as a headwind to global growth while also raising inflation. We believe central banks will focus on the former and the impact on domestic demand, leading to lower interest rates, all else being equal.

Ultimately, we believe that the US president will back-pedal on aggressive tariffs should it become clear that US growth is falling rapidly. At this stage it’s just the survey/soft data which has rolled over while hard data is holding up well. Yes, US consumption is weaker in Q1, and US GDP is tracking more like 1% for the quarter versus the 3 to 4% seen in Q3 and Q4, but this is more likely a temporary retrenchment amid higher tariff/policy uncertainty. Real income growth is still growing at a healthy clip and the labour market continues to look resilient (we doubt the reduction in federal workers is enough to drag domestic demand into negative territory).

If the administration does not pivot to a less aggressive tariff regime (market consensus seems to be that reciprocal tariffs will be of the order of 15% across the board) and it’s not, as has been claimed, a negotiating tactic, then a global growth slowdown is inevitable.

However, we believe a more significant change in fiscal policy globally presents a new wildcard for bond markets. What is clear from recent months is that fiscal policy outside the US is set to become more expansionary while the Trump administration is intent on reducing government/federal spending and directing that towards the private sector via tax cuts.

The US is focusing on reducing state/government spending and at the same time forcing other countries to look at greater spending to fund defence spending/subsidies. The difference this time (as opposed to the previous Trump administration) is that the stakes are higher and more immediate for Europe, which is why the German fiscal response has been so shocking. It’s also likely that Canada will boost defence spending.

Across the globe, governments are likely to take a more activist fiscal approach to combat the hardened US protectionist agenda. This means greater spending and greater government bond supply (or EU bond supply in the case of the bloc) compared with the US where the administration is hoping to reduce the deficit from its current level of about 6.5% towards 3% through a combination of tariffs and reduced government spending. This leads us to continue favouring US duration versus peers, while steeper curves remain the most likely path ahead for all government bonds.