Artemis Short-Duration Strategic Bond Fund update
Stephen Snowden, Liam O'Donnell and Jack Holmes, managers of the Artemis Short-Duration Strategic Bond Fund, report on the fund over the quarter to 30 June 2025.
Source for all information: Artemis as at 30 June 2025, unless otherwise stated.
Performance
The Artemis Short-Duration Strategic Bond Fund made 2.5% during the quarter, compared with 2.3% from its benchmark, the Markit iBoxx 1-5 year £ Collateralized & Corporates index (before 18 March 2024, the fund used the Bank of England base rate +2.5% as its benchmark).
| Three months | Six months | One year | Three years | Five years | |
|---|---|---|---|---|---|
| Artemis Short-Duration Strategic Bond Fund | 2.5% | 3.9% | 7.7% | 21.7% | 24.3% |
| Bank of England Base Rate +2.5% / Markit iBoxx 1-5 year £ Collateralised & Corporates index* | 2.3% | 3.7% | 7.0% | 20.9% | 27.7% |
Source: Lipper Limited/Artemis to 30 June 2025 for class I accumulation GBP.
All figures show total returns with dividends and/or income reinvested, net of all charges.
Performance does not take account of any costs incurred when investors buy or sell the fund. *The target benchmark is the Markit iBoxx 1-5 year £ Collateralized & Corporates index; before 18 March 2024 it was the Bank of England base rate +2.5%.
Credit
The fund was active over the quarter. In the primary market, we bought IG Group, the RAC, Arqiva and Czechoslovak Group. We bought into some higher-beta bonds after the market weakened post-Liberation Day, including hybrids in Vattenfall, Centrica and BP and Tier 2 bonds from Legal & General, Lloyds and KBC. Other purchases included Heathrow and Greene King. We topped up Electricity North West, SSE, Logicor, Inchcape, London & Quadrant and Nationwide.
Sales included IGT, Bunzl, Volvo and BMW, all of which had performed well.
We also made a number of switches: between two bonds of Verizon, HSBC, Anglian Water, TCAP, Mercedes-Benz, Whitbread, Athene, Phoenix and Coventry Building Society. In addition, we switched between Swedbank into Schroders and Rabobank into ING.
Credit spreads recovered over the quarter after a strong sell-off on Liberation Day. The summer is traditionally a good time for credit spreads and we see no reason why this one should be any different. Although many analysts point to tight credit spreads, we are still short of peaks both year-to-date and over the past five years.
Rates (government bonds)
Rates performance was strong in April, largely through disciplined, tactical trading. While we have held a curve-steepening view, which was the biggest contributor to outperformance, we also seized on market dislocations to add cross-market strategies throughout April.
In May, rates positions acted as a slight drag on performance. Our overweight exposure in dollar bloc rates suffered on a sharp reversal led by the front end of the US curve. We held a short position in Australian rates versus US ones, which we closed following the Reserve Bank of Australia meeting mid-month. We added some UK versus European duration into the month end.
In June, US and UK rates outperformed other markets, with European rates lagging yield moves over the month. While the rates sleeve was positive, at a portfolio level our more global mix meant we were underweight UK duration versus the benchmark, which led to underperformance. The portfolio started the month with duration of 2.7 years and ended it at 2.6 years.
In terms of our inflation protection, while the fund increased US real yield exposure during the month, we ended the period with a more neutral exposure by going short EU and French inflation in June.
We retain our long US real yield exposure in anticipation of tariff-driven inflation coming through over the next few months, while reducing US nominal duration exposure. At current yield levels and looking at what’s priced into the market regarding cuts (almost three are priced into the US market by year end), it’s difficult to see many central banks matching market expectations without a more significant deterioration in economic data. The same could be said in the UK, where market expectations for cuts this year outpace previous Monetary Policy Committee guidance. In keeping with our belief that we are in a new environment where markets gyrate between hawkish and dovish extremes, we have been selling 10-year UK duration in search of better risk/reward opportunities.
Outlook
In the past month, markets have begun to price in further cuts to policy rates while economic activity shows broad resilience and fiscal policy becomes more rather than less supportive of growth. While the market always feared that a second term in the White House for Donald Trump could mean more unfunded spending, it is other governments that have turned towards greater expenditure and less fiscal discipline. In June, most countries agreed to meet the new NATO 5% spending target. In spite of this, yields have moved lower as markets focused on potential downside risks to labour markets/growth and not the ever-growing government bond supply that this new regime heralds.
Against a backdrop of more price-sensitive buyers and the almost bullet-proof nature of risk sentiment favouring equities, we feel something has to give. And while we still believe that lower policy rates will anchor bonds somewhat, longer-dated government yields should face continued upward pressure.
On the credit side, we continue to encounter a corporate sector that is cautious, focused on deleveraging and navigating policy volatility. Robust balance sheets among both corporates and households continue to underpin the seemingly confounding strength of demand. In high yield, we continue to avoid those areas that will suffer if we are wrong and macro conditions deteriorate meaningfully, notably emerging market high yield and lower-rated CCC credit.