Artemis Funds (Lux) – Short-Dated Global High Yield Bond update

Source for all information: Artemis as at 30 September 2024, unless otherwise stated.

Objective

The fund is actively managed. It aims to generate a return greater than the benchmark, after the deduction of costs and charges, over rolling three-year periods, through a combination of income and capital growth.

Performance

The Artemis Funds (Lux) – Short-Dated Global High Yield Bond Fund made 3.6% during the third quarter of 2024, compared with gains of 1.3% from its Sterling Overnight Index Average (SONIA) benchmark.

After August’s volatility bought many of the best-performing areas of the market this year back down to earth, investors took comfort from the Federal Reserve’s September rate cut – its first since March 2020. Economic data also helped alleviate fears of a hard landing, with better-than-expected employment data in the US. Finally, towards the end of the quarter came the announcement of significant monetary and fiscal stimulus in China. In retrospect the abandonment of hope for any meaningful action from the People’s Bank of China earlier in the year should have been taken as the mother of all ‘buy’ signals, and accordingly the second half of September saw the CSI 300 rally more than 27%. It remains to be seen if the belated action in China feeds through to actual demand increases, whether domestically or for US/European exporters, but it represented genuinely positive news for risk appetites.

Either way, it is important not to get too carried away as experience tells us things are rarely as good or as bad as they seem in markets, especially during heightened volatility. We have written before about the next stage of the cycle being the contemplation of a lower earnings world and have been positioning the fund for this accordingly.

Positives

Holdings in property and related sectors dominated our list of top performers during the quarter, aided by falling interest rates. Our position in Swedish residential landlord Heimstaden was the pick of these on the back of a rebound in property prices in the country and increasing rents.

LGI Homes, New Home Company and Miller Homes also did well. As well as the positive tailwinds for the property sector, Miller Homes was also boosted by the improved sentiment towards UK assets, as was government contractor Kier Group.

However, our single best-performing position during the quarter was global auction house Sotheby’s, after it announced a combined $1 billion equity injection from existing owner Patrick Drahi and Abu Dhabi-based sovereign wealth fund ADQ.

Negatives

French fashion retailer Isabel Marant was our worst performer during the quarter due to weakness in the luxury sector. While frustrating, the position continues to earn its keep – the fall was driven by external factors and with a yield in the mid-teens, we feel we are being well compensated for further risks. Our position in US equipment distributor and rental firm Alta Group also held us back due to a disappointing outlook for the remainder of the year.

Car sealing-systems maker Standard Profil was another laggard. Our declining conviction in its bonds matched their performance, so we sold out, along with other high-beta areas of the auto sector.

Activity

We bought a new five-year issue from European speciality chemicals manufacturer Azelis, a company whose bonds we have held in the past and only sold on valuation grounds. It generates free cashflow equating to 22% of net debt and it has ridden out the recent chemicals slowdown with aplomb due to its attractive end-market focus and pricing power.

We also added exposure to Australian plant health and seed producer Nufarm as its bonds’ time until maturity became short enough for inclusion in the fund.

Frozen-food retailer Iceland continues to surprise with the quality of its earnings, with falling energy costs helping to boost margins. Additionally, we feel close competitor Asda has lost management focus and as such there is an opportunity for Iceland to increase its market share. Although historically we have been sceptical of the business, we have finally bought in. As John Maynard Keynes once almost said: “When the facts change, we change our mind.”

We exited our position in Victoria Carpets, following rumours it was considering a potentially disruptive fundraising. While our bonds were relatively insulated from any negative implications of this fundraising, the action fundamentally disrupted our view of the company’s value.

Another position we sold was US golf cart manufacturer Club Car, which has been struggling to compete against cheaper Chinese imports. In our view, the valuation didn’t reflect this growing threat and the potential implications if the market began to take it more seriously, as it has done in autos.

Following the release of UK water regulator Ofwat’s draft determination, we decided to sell our position in Thames Water’s Class 2025 A notes. We did this at only a few points lower than our entry price in April of this year as we could see that a haircut seemed more likely and front-end bonds such as ours had the most to lose. Once again, as the facts changed, we changed our mind, and acted quickly.

As the market continued to squeeze, we sold a number of names where the mathematics of bond returns meant holdings no longer made sense to us. These included US companies Brundage Bone (cement pumping) and fast-food operator Raising Cane’s as well as UK/US gaming operator Flutter.

Outlook

As we enter the final quarter, it looks as if 2024 will be known as the year when inflation was largely tamed and monetary policy could finally loosen, and this will be good for our asset class. We will continue to assess the market on a day-to-day basis and look for opportunities with strong risk/reward characteristics. The shorter end of the global high-yield market contains many opportunities to generate strong levels of income from sound companies, not overly exposed to the cycle. The market will at times continue to get too carried away, and in turn too pessimistic about, the pace of central bank cuts.

We will leave the aggressive rate bets to the boffins in government bond markets and concentrate on identifying sound sources of returns from corporates around the developed world, lending to them for a short amount of time, and repeating the process.