Artemis Strategic Bond Fund update

Review of the quarter to 30 September 2023.

The fund returned 0.4% during the quarter, slightly ahead of the 0.3% return from its peer group. The fund’s yield-to-worst is 6.6%.

A rise in government bond yields once again took centre stage during the quarter. As the market readjusted to the ‘higher-for-longer’ narrative about interest rates, we saw meaningful moves higher in yields. Within that, however, gilts outperformed, a welcome relief after a period marked by notable underperformance. Against this backdrop, the fund’s exposures to government bonds were generally net negative contributors.

Set against that, our holdings in investment-grade and high-yield credit provided a positive offset, particularly in the sterling and euro-denominated credit markets. While credit spreads were mixed, the general direction of travel across the core developed markets saw credit spreads tightening.

Outlook and positioning

At this juncture, we tend to favour government bonds and high-quality credit over the lower-quality end of the corporate bond market. This reflects our concerns regarding the economic impact of the meaningful and rapid rises in interest rates seen across the major developed economies.

At the same time, however, we are conscious that the economy’s response to rate hikes can be lagged: it takes time for higher funding costs to work their way through the system. So we are moving the fund’s positioning at a measured pace. In the current environment, positioning the fund entirely defensively - solely in expectation of imminent recession - would come at too high a cost in terms of foregone yield.

Seeking out the optimal blend of fixed income assets

We remain broadly positive on the outlook for certain areas of the government bond market over the medium term, especially given current yields. We therefore believe it is prudent to be running with some interest-rate sensitivity: the fund’s duration is currently six years. At the same time, we remain focused on not letting that duration position swamp all other exposures within the fund. In addition, we appreciate that there are added headwinds for government bond markets, including a large overhang of supply and continuing inflationary pressures. These are likely to partially dilute the traditionally defensive characteristics of high-quality government bonds.

At this (late) stage of the economic cycle, we believe a degree of moderation, both in terms of duration and in credit risk, is appropriate. The fund therefore remains positioned with a relatively defensive blend of fixed-income assets. We still like credit risk although we are currently positioning the fund towards the higher quality end of the ratings spectrum, where spread compensation and all-in yields remain attractive in selected issues.

Activity

Investment grade

We were active in the new issue (primary) market for investment-grade credit over the quarter - and particularly in the primary market for euro-denominated credit. We participated in a number of new deals including issues from:

• Sartorius (equipment/products used in drug manufacturing);
• Worldline (payments);
• Eurofins Scientific (testing, inspection and certification);
• Mölnlycke (wound care); and
• Carlsberg.

In the sterling investment-grade market, meanwhile, we bought new issues from:

• HSBC;
• Caterpillar; and
• Nestlé.

In secondary markets, we added to recently issued euro-denominated bonds from TDF Infrastructure (mobile towers). We sold our holding in dollar-denominated bonds from Pfizer, which had performed well. We trimmed the fund’s holdings in investment-grade bonds from Nasdaq (dollar-denominated) and Mizuho (sterling bonds) following strong spread performance

High yield

In high-yield credit, we further trimmed Ocado (sterling denominated) after a notable run up in bond prices and bought into new issuance from Worldpay, a deal that received particularly strong demand.

Government bonds

In sovereign markets, we took some profit on our inflation-linked UK gilts. We retain a short bias towards longer-dated European government bonds and continue to view real yields in the US and Canada as attractive.