Artemis Corporate Bond Fund update

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

The fund returned 9.0% over the quarter, ahead of its benchmark the iBoxx £ Collateralized & Corporate index, which rose by 8.3%. It was also ahead of its peer group, the IA £ Corporate Bond sector, which returned 7.9%.

This quarter proved to be a particularly memorable one. In December, the Federal Reserve indicated that it could start unravelling its series of rate rises as soon as next Spring. This 'pivot' prompted a huge rally in global bond markets and the biggest quarterly performance seen for over a decade.

Government bonds started the quarter trading in a volatile but range-bound fashion, as they had been since the summer. They then moved higher from November onwards with further fuel added to the fire on the Fed pivot. For corporate bonds it was a tale of two halves. The weaker start to the first half of the quarter was well contrasted by a stronger second. Spreads tightened to see out the new year with a more optimistic tone.

We made several changes to the duration (interest rate risk) of the fund, which added to performance. We conducted several switches following a sharp sell-off in the third quarter, mainly by extending maturities. We also used the sell-off to buy back several longer-dated bonds we had sold, which had sharply fallen in price. This proved to be timely as they strongly benefited from the rally in November and December. Lastly, our curve steepener position also proved the correct play, as yields on longer-dated bonds rose faster than those of shorter-dated bonds. Our overweight in subordinated (less senior) financials and logistics real estate further contributed to the fund's performance, especially given that most of the credit rally was captured within these two sectors.

Activity

In the primary markets, a busy October and November were followed by a quieter December. In October we participated in new issues from Thames Water, Barclays, and Coventry Building Society which all performed well. In November we bought UBS, Realty Income, Places for People, Nestle, London Power Networks, Aviva, Pension Insurance Corp, and Northern Powergrid. In December, we switched out of Thames Water to buy Southern Water.

Following a sharp sell-off in Q3 the fund did several switches, adding back risk into the fund, mainly through extending maturities. We also used the sell-off as an opportunity to buy back several longer-dated bonds which had sharply fallen in price. This proved to be timely as they caught the wind of the rally in December. After the rally we rotated back into shorter-dated bonds ready for the start of the new year.

Outlook

At the end of November, our message to buy bonds and then walk away for a year spread through the markets a little wider and more rapidly than we expected. In kind, the narrative shift on interest rates from “higher for longer” to “rate cuts in 2024” was equally wider and faster than most were expecting. The catalyst proved to be the 'dot plot' in the minutes from the Federal Reserve's December meeting, which revealed rate cuts in 2024. The market dutifully rushed into bonds.

The fund returned 4.8% in December, and 9.0% in the quarter. So while our expectation of strong returns proved correct, they have been faster and of greater magnitude than we anticipated.

But even with a powerful finish to 2024 we still see the market as a buy. As of now, UK economic data points not towards disaster but mediocrity. The Bank of England was slow to raise rates. It would be no surprise if they were slow to cut.

Anyone who has met us recently will know one of our key messages has been pointing out the historical significance of these base rates. The last time UK rates were this high, the country thought (incorrectly) the mid-noughties economic boom would continue. So, with rates north of 5% and mediocre economic premonitions, it looks like someone is wrong. We reiterate what we said at the end of November - buy bonds and forget about it.