Artemis Funds (Lux) – Global High Yield Bond update

Source for all information: Artemis as at 31 December 2024, unless otherwise stated.

Objective

The fund is actively managed. It aims to increase the value of shareholders’ investments through a combination of income and capital growth.

Performance

The fund returned 1.3% during the three months to the end of December, ahead of the 0.5% gain from its ICE BofA Merrill Lynch Global High Yield Constrained USD Hedged index benchmark.

It would be remiss if we didn't mention that the fund celebrated its fifth anniversary in November. It has been a good five years, in which we have delivered significant outperformance. Having said that, we are entering the next five years in a far better position to generate alpha for clients. Yields are considerably higher than they were when we first launched the fund, while market and company fundamentals are no longer being suppressed by quantitative easing, meaning there is more room for our bottom-up approach to create value. We are excited about where we can take the strategy by the time it celebrates its 10th anniversary.

Positives

Our holdings in the real estate sector were a notable highlight in October, with Swedish residential landlord Heimstaden AB the best performer in the quarter overall, rallying on news its operating company was accessing public debt markets.

IHO Verwaltungs, the holding company of auto parts manufacturers Schaeffler and Continental, did well after the market’s perception of the correct risk premium moved closer to our own – we previously felt that its valuation had been excessively pessimistic.

Oil & gas company BlueNord received positive news around the redevelopment of its Tyra field.

Later in the quarter, we benefited from our holding in Constellation Automotive Financing, the UK market leader in dealer-to-dealer used car sales, following a significant equity contribution from its sponsor and news it had begun to discuss the refinancing of its bonds. This was a great example of one of our core philosophies – if we can identify a company that can generate longer-term profitability for shareholders, those same shareholders are likely to find the resources needed to survive lean periods of cyclical demand.

November addition Asmodee, a producer of table-top board and card games, got off to a strong start. Although one of its games, Ticket to Ride, has been the cause of many familial disputes in the Holmes household, we like the company’s diversified portfolio of strong brands, good earnings momentum and the potential for a significant deleveraging transaction in six months’ time that didn’t look to us to be in the price we bought it at.

Negatives

US medical real estate investment trust Medical Properties Trust saw continued underperformance of its largest client, which led us to become more cautious on its ability to manage upcoming 2026 and 2028 maturities. We sold out.

German pharmaceutical Cheplapharm suffered following a disappointing set of Q3 results. While these were below our expectations, the underperformance of the bonds looks overdone to us now.

Our holding in At Home, the US discount furnishings retailer, underperformed due to concerns around higher tariffs post-election and strikes at US ports, while French fashion house Isabel Marant underwhelmed the market with a cautious outlook for the remainder of the year.

Purchases

One notable purchase over the quarter was Belron, the global leader in windscreen-repair, operating in North America, Europe and Australasia. It is known through its Autoglass brand in the UK. Windscreen repair is hugely profitable, especially to market leaders with the largest fleets. In addition, the increasing use of sensors located just behind windscreens means minor repairs now require specialised equipment to recalibrate said sensors, which acts to both increase pricing and drive out smaller competitors unwilling to invest. As the market leader, Belron is set to capture the natural consolidation in the industry.

Bonds from two of the highest-quality businesses in high yield, beauty company Coty and bookmaker IGT, entered the portfolio. At least one agency has upgraded both companies to investment grade and we believe they will be receiving further upgrades in the months to come. As they move into the investment grade indices, spreads should tighten as a new larger and less price-sensitive buyer base steps in.

We also added a position in Deluxe Corporation, known for being the leading provider of cheques in the US. While this business model may not seem like an obvious winner, the cheques part of the company is shrinking at a low single-digit rate per year, but it has high margins and produces plenty of cash. Management has been using the cash to invest in other, growing and profitable business lines such as digital payment processing and data-driven marketing services. A large yield premium suggests the market still regards Deluxe as a cheques business and has ignored its transformation.

Sales

We took profits from a number of positions, including: Applus, a provider of industrial testing; Picard, the French frozen food specialist; and Sani Ikos, the Mediterranean hotels business. Because these bonds were all trading at or above their next call price, they effectively had little further upside (but all the same downside, if not more) compared with our recent purchases.

Other bonds we sold included Multiversity, an Italian online university, and Bertrand Franchise, a French restaurant group which owns the rights to Burger King in France. Nothing extraordinary has happened in either of these businesses since we invested in them, but both bonds have significantly outperformed the wider market. The point is that just because these kinds of issuers are not in the group of over-covered index constituents towards the larger end of the high-yield market, they are often structurally mispriced and able to generate alpha even without significant market bets going in their favour.

We trimmed our position in Catalent (the drug delivery producer), which performed well following the announcement that the European regulator would not be opposing its purchase by the Novo Nordisk foundation.

Outlook

Last year was supposed to be one when interest rates were cut, government bonds rallied and high-yield spreads widened. While the first of these three trends materialised, the latter two did not. Yields on 10-year US Treasuries, German bunds and UK gilts are all higher now than they were at the beginning of 2024. High-yield spreads are almost 100bps tighter, rather than wider. In other words, the consensus going into 2024 – a weaker global economy and stronger government bond performance – has not played out.

So what will 2025 hold? While we are not macro investors, there are three good reasons to believe this year will look similar to the last one from the perspective of high-yield spreads.

• Fundamentals: Net leverage remains low and interest cover high. Economic performance, particularly in the US, remains robust. And with yields elevated, issuers are incentivised to pay off debt rather than increase it.
• Valuation: Although spreads are tight, they can remain so for extended periods, as they did in the mid to late 1990s and mid-2000s. And tight spreads matter a lot less when yields are high – even if they widen, the starting carry can soften the blow of any volatility. Remember, yields drive returns, not spreads – and these look healthy.
• Technicals: The increasing demand and falling supply of high-yield bonds create a strong backdrop for the asset class.

The two main risks to the bull case are at opposite ends of the spectrum – either a significant downturn in the economy will cause concern about corporate fundamentals, or a combination of stronger economic performance and worries about stubborn inflation will cause central banks (notably the Federal Reserve) to stop cutting. In the former scenario, strong underlying fundamentals and higher starting yields will soften any blow. In the latter scenario, we think high yield is probably reasonably well insulated due to its lower duration and higher levels of carry.

In short, there are good reasons to believe spreads will remain tight in 2025 and a combination of robust fundamentals and a strong technical backdrop will drive another year of strong performance. However, given the potential for a surprise to the downside (and reasonably tight spreads), we believe focusing on the front end, driving high levels of carry and exploiting single-name opportunities as and when they present themselves will provide much better risk/reward opportunities in the year ahead.