Artemis Global Income Fund update

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

Review

After turbo charging global equities in late 2024 and early 2025, US exceptionalism has more recently encountered some potential challenges. The advent of DeepSeek – a Chinese competitor to ChatGPT that was allegedly developed at a lower cost and capex intensity – challenged the long-held view that American companies reign supreme in technology and AI.

Latterly, talk – and the implementation – of tariffs on some of the US's largest trading partners has resulted in soft economic data deteriorating and inflation expectations hitting a 30-year high. The gold price rose 15% (its largest quarterly gain in 40 years), extending recent gains and reflecting investors' concerns around a deterioration in the global macroeconomy. 

The S&P 500 posted its worst quarter since mid-2022 as a result. Technology companies, which have been so dominant in global equity markets for a number of years, de-rated sharply, with the S&P 500 Info Tech index falling more than 15% in Q1. 

Meanwhile, Europe saw the most significant quarterly outperformance of the US for a decade. Aerospace and defence was the strongest sector, partly boosted by Germany’s abandonment of the world’s strictest fiscal rules to unlock up to €800bn for spending in this area. 

Performance

The fund made 7.6% over the quarter, compared with a loss of -4.3% from its MSCI AC World index benchmark and a flat return (0.0%) from its IA peer group.

Contributors

Rheinmetall was the biggest contributor to the fund this quarter, having rallied along with other defence shares in February and benefiting from Germany's plans to increase spending in this area. Earnings and dividends per share have grown faster than many technology companies in recent years, while the upcoming defence ‘super cycle’ suggests that this growth could continue and the company's six-year order backlog could lengthen. Three other defence companies, Hanwha Aerospace, BAE Systems and Mitsubishi Heavy Industries also performed strongly.

European bank Commerzbank was a strong performer after it pre-announced robust Q4 results, with a significant increase in earnings per share and a near doubling of FY23’s dividend per share. Similarly, CaixaBank’s earnings beat estimates, helped by the Spanish economy's continued outperformance of most eurozone peers.

Our underweight position in technology contributed to performance from a relative point of view as the likes of Tesla and Nvidia suffered heavy falls.

Detractors

Fluor was weak, having been caught in the AI sell-off (Fluor builds data centres among a range of other large and complex projects) and suffering from weak US macroeconomic data. Fluor’s long-term prospects remain attractive as a beneficiary of capex and infrastructure spending, but we have been trimming the position of late as a source of capital to increase our exposure to core income at the margin.

General Motors shares sold off with autos more broadly as a result of tariff concerns (GM has a large manufacturing presence in both Mexico and Canada). However, earnings have thus far remained robust and management has guided for expected FY25 free cashflow generation of $12 billion (significantly ahead of the $7.5 billion consensus). This would leave the shares on a 2025 free cashflow yield of 25%, an undemanding valuation to say the least. We will continue to monitor policy developments with interest, but still believe GM to be relatively well placed and with ample headroom to increase shareholder returns.

Another significant detractor was Hon Hai, which sold off on concerns around AI demand and tariffs (the company plays a significant role in Apple’s supply chain). The stock is one of many positions that we are debating at present, but on a P/E of 11x, a dividend yield of 4% and a net cash balance sheet, the valuation looks compelling.

Activity

We have been boosting our allocation to core income – traditional income sectors that tend to fare better when the economy is weak and interest rates are falling or low – by adding to AbbVie, AstraZeneca and Hess Midstream, and buying shares in Bristol Myers and Japan Tobacco. Staying on this theme, we bought shares in US REIT Simon Property Group, which has a 4.5% dividend yield that should rise thanks to rental growth, while leverage has reduced materially in recent years; and in British American Tobacco, which has an 8% dividend yield supplemented by share buybacks and a much-improved balance sheet. Our exposure to 'core income' has increased by about 7% from recent since-inception lows.

The increase to our core income allocation was funded by taking down some areas of cyclicality such as Fluor, CRH and Komatsu.

Outlook

Since ‘Liberation Day’ and what many investors have since referred to as the ‘chart of death’ unveiled by Trump, equity markets have lurched lower (with several entering bear market territory) as investors have attempted to reconcile the effects of sweeping US tariffs on the majority of its trading partners. Despite postponements and reductions to most tariffs in recent days, uncertainty still looms large. We would offer the following thoughts at this stage:

1. The probability of recession has increased significantly: corporate uncertainty is much higher, with the return on invested capital of new investments highly questionable given a more unpredictable environment. As a result, corporates are less willing to commit, while consumer confidence is also likely to fall (having already done so in the US). The big question we are weighing as a team is whether this leads to a recession, as that would damage corporate profits and multiples.
2. We are likely at or past peak tariffs and peak uncertainty: uncertainty is always challenging for markets, and this is amplified when valuations are high. Given just how uncertain the outlook remains at this stage, we have seen something of a ‘shoot first, ask questions later’ attitude from investors, with significant profit-taking from some of the strongest-performing areas year to date, such as European banks and defence. Despite weak equity markets, it was likely the disorder in the bond market – with Treasury yields climbing despite the S&P 500 selling off – that forced Trump to announce the 90-day suspension to reciprocal tariffs. This sparked a significant relief rally, with the NASDAQ climbing 14% in dollar terms, its third-largest daily gain in history.
3. This is more evidence of regime change: Trump’s aggressive rollback of the global order and the norms that have underpinned global trade over the past 30+ years play into our roadmap of regime change. The world is de-globalising and these tariffs look problematic for ‘global platforms’ in particular. The Magnificent Seven are totemic examples of these sorts of businesses – take Apple, which designs products in California and assembles them in Taiwan with Chinese components before selling them all around the world with little friction. The viability of this sort of model looks more challenged going forward. ‘National champions’ may be better equipped to weather this sort of environment; that is to say businesses that produce and sell their products domestically and are therefore relatively well insulated from protectionism and de-globalisation. None of this is good for markets as a whole. Supply chains will be more inefficient, with a higher degree of deadweight loss.

What are we doing in the fund?

After a strong run of performance, recent days have been challenging. Generally speaking, the fund is positioned for a de-globalising world, but it has not been positioned for a recession. Some of the areas that have driven our outperformance over the last few years – namely European banks, defence and Japan – have sold off materially.

Following strong Q1 performance – led by our ‘growth’ and ‘risk’ buckets – we have been boosting our allocation to 'core income' over the last two months to take some risk off the table in the face of increased threats to economic growth. Nonetheless, the portfolio retains a significant allocation to ‘risk’, the majority of which is through financials, which look well equipped to deliver double-digit annual cash returns and are well capitalised and well provisioned for a hit to profitability and/or deterioration in their credit books. We believe that these utility-like returns are sustainable, but the market will test this view if the regime change that we have long argued for is expedited by a tariff-induced recession.

In this backdrop of increased volatility and uncertainty, we can take some comfort in a portfolio that looks very different to both the market and peers, with a substantial (50%) valuation discount to – and twice the dividend yield (4% versus 2%) of – the MSCI AC World index, and that has raised its income distribution at a compound annual growth rate of 8% since the fund’s inception in 2010.