Artemis Strategic Bond - flexibility key in an uncertain environment

Kate Marshall | Wed 01 February 2017

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• James Foster and Alex Ralph employ a flexible approach to fixed-income investing
• A bias to corporate and high yield bonds, including those in the financials sector, is maintained
• Fund is also positioned to benefit from any rise in gilt yields

Our view

The ability of James Foster and Alex Ralph to combine their wider economic and bond market views with their assessment of the prospects for individual companies is one of the main attractions of the Artemis Strategic Bond Fund.

We feel the managers fully utilise their flexibility to exploit opportunities across the fixed-income spectrum and are prepared to alter the fund’s positioning based on where they see the greatest value. Their flexible approach has paid off over the long term. Since launch in June 2005 the fund has delivered a total return (income and capital growth) of 79.7%* compared with 53.8% for the average fund in the sector, although past performance is not a guide to future returns. The fund currently yields 4.1%, although this is not a reliable indicator of future income.

Past performance is not a guide to the future. Source: Lipper IM *to 31/12/2016

We believe this fund is run by high calibre fund managers, although a bias to corporate bonds, including higher-risk high-yield bonds, means we consider the fund higher risk than the average fund in the sector. We feel the fund presents a good option for a combination of capital growth and income from the bond markets and it remains on the Wealth 150+ list of our favourite funds.

Review of 2016

Bond market investors witnessed a volatile start to 2016, with concerns over slowing economic growth and the potential for political upheaval weighing on sentiment. Bank bonds, in particular, suffered amid fears that interest rates would stay lower for longer, which reduces their profits on cash deposits.

The fund’s bias to banks and other financials bonds (currently one third of the portfolio) weighed on performance in the early part of the year. James Foster and Alex Ralph took advantage of the market weakness by adding to bonds in weaker-performing sectors, such as financials and oil, at more attractive yields. This benefited performance later in the year.

In mid-2016 the shock outcome of, and the uncertainty created by, the UK’s vote to leave the EU led many investors to turn to the perceived safety offered by UK government bonds (gilts). The fund’s gilt investments proved beneficial in this environment, as did increased exposure to the US dollar, which strengthened against the pound, and US government bonds. A temporary reduction in banking exposure also helped.

The managers maintained a relatively high weighting in hybrid bonds throughout the year, which currently comprise 20% of the fund. These bonds have some of the features of equities, such as an ability to suspend interest payments, and typically offer higher yields to compensate for the additional risk taken. Hybrid bonds issued by companies the managers feel have been unfairly dismissed by other investors, including EDF and Total, are currently held in the portfolio.

Outlook

James Foster and Alex Ralph believe we are entering a period of higher inflation. Rising oil prices; weaker sterling, which increases the costs of imports for UK companies; and rising wages could all lead to the rising cost of goods for UK consumers. Rising interest rates could also be on the horizon. As rates rise, bond prices often fall (and their yields rise) as the interest rates available on cash looks commensurably more attractive to savers.

The gilt markets, in particular, have also been supported by the Bank of England’s quantitative easing programme in recent years; however, the managers are mindful of the impact the withdrawal of this support will have in future. They have therefore taken a short position in gilts, which means the fund could profit if their prices fall (and yields rise).

The managers have also focused some of the portfolio, particularly investments in high yield bonds, towards shorter-dated options, which are less sensitive to rising interest rates. In effect they expect the fund to offer some relative shelter in an environment of rising interest rates and bond yields, although there are no guarantees and the fund could still fall in value so investors could get back less than they invest. They will also continue to take advantage of periods of volatility by investing in bonds at lower prices and more attractive yields.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.