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

Source for all information: Artemis as at 30 June 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 2.0% during the second quarter of 2024, compared with gains of 1.3% from its Sterling Overnight Index Average (SONIA) benchmark and 1.1% from its IA Global High Yield Bond sector average. Having recently celebrated its fifth anniversary, the fund can look back at top-quartile performance over this timeframe, as well as over one, two, three and four years.

Markets were dominated by two developments towards the end of the second quarter. The first of these was positive news on the inflation front, with core US CPI surprising to the downside, especially in the crucial ‘services’ component.

As expected, government bonds took the development well, with global front-end rates rallying as the timing of Fed cuts was – again – brought forward.

The second major theme was the unexpected flare-up of French political risk when President Emmanuel Macron decided to call a snap election in the wake of a heavy defeat in the European Parliament election to Marine Le Pen’s far-right National Rally.

Markets feared France’s already weak fiscal position would be called into question if populist policies originating from the far left or right (which are often the same) came to pass. As could be expected, risk in
France underperformed, while the country’s five-year government bond yields were flat over the course of June, representing considerable underperformance against German bunds.

We were mercifully light in French risk, but later added some exposure to a higher quality name, Picard, to try to exploit the backdrop. See below for more details on the company.

Positives

The biggest contributors to performance during the quarter were German engineered wood-products maker Pfleiderer, Swedish real estate company Heimstaden and flooring manufacturer Victoria.

Pfleiderer had received a negative reaction to soft first-quarter earnings figures in April. After a part recovery in May, its bonds rallied further as its shareholders announced an equity injection. They are now trading well above their starting level for the quarter.

Meanwhile, Heimstaden rebounded along with the rest of the European property sector and Victoria reassured markets with its outlook and a clarification over a subsidiary’s accounting.

Negatives

Performance was hampered by positions in Sotheby's, which saw a softening auction outlook for the remainder of 2024; medical device maker Owens & Minor, whose chief financial officer left the group unexpectedly; and Ocado, which terminated an agreement with Canadian supermarket chain Sobeys.

Activity

We are fortunate that there continues to be new issuance of five to five-and-a-half years in the global high-yield market. In more sanguine times, higher-quality businesses tend to issue for longer, seven- to 10-year periods, with only the riskiest opting for five years out of necessity. The uncertainty around government bond yields has resulted in more high-quality issuers opting for shorter maturities from the outset. This is why the primary market has played an unusually prominent role in the fund’s activity this quarter.

For example, we bought bonds from cruise operators Carnival and TUI Cruises. These offer a high degree of revenue visibility, impressive pricing power and buoyant demand due to a trend for spending on experiences over physical goods. In our opinion, Carnival will likely re-enter investment-grade territory in two to three years given its prodigious cashflow generation and modest capex plans.

Another was Picard, a retailer of luxury, high-margin frozen food, at the other end of the scale to what would appear to be the closest UK comparison, Iceland. The company is well known to the European high-yield market and while we have owned its bonds in the past and long admired its business, valuations usually offered little in the way of risk versus reward. Yet political noise at the time it issued a new five-year bond meant it came with a 6.375% coupon and a spread of some 410bps, which we considered to be attractive for a business of that quality.

Due to less supportive valuations in what is an inherently risky sector, we continued to reduce exposure to autos via complete sales of our holdings in German drivetrain supplier ZF Friedrichshafen and French vehicle interiors specialist Forvia. We have tilted our cyclical exposure towards areas such as travel & leisure and equipment rentals in the US. In the case of the latter, we like rental firms’ ability to quickly adjust capex fleet spend to adapt to prevailing conditions.

Outlook

The soothing CPI prints we saw in June are good news. The balancing act between inflation, monetary policy and growth remains the dominant concern for markets and is likely to continue to oscillate between worries of further hikes and economic shocks caused by policy error.

We seek to position accordingly via our low-duration exposure (about two years) and avoiding the outer reaches of the high-yield market in CCC-rated or emerging market bonds.

At present, we see better news on the inflation front and while there is certainly a degree of softness in both labour markets and company outlooks, there is nothing to fear in terms of a recession. If we zoom out and 2024 comes to be characterised as the year ‘inflation was tamed’, it will be a good one for most markets and an excellent one for our area of focus. In the meantime, there is ample opportunity for us to continue to execute our strategy and we will seek to use periods of volatility to add exposure to attractively priced bonds.