Artemis Strategic Bond - where we are finding value in bond markets

Kate Marshall | Wed 16 August 2017

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• Managers continue to make good use of the flexibility afforded to them
• Financial and high yield bonds are favoured and have helped recent performance
• Fund continues to offer an attractive income in the fixed-interest sector

Our view

Strategic bond funds have the flexibility to invest globally and across the fixed-income spectrum; from government bonds to more esoteric and higher-risk areas of the market. Yet not all bond fund managers take full advantage of the spread of investments and tools available to them.

James Foster and Alex Ralph are two managers that do, in our view. They are prepared to alter the positioning of the Artemis Strategic Bond Fund depending on where they see the greatest value, and when they feel wider economic or market conditions have changed. In doing so they have provided investors with an attractive and regular income, alongside some capital growth, over the long term, although please remember past performance is not a guide to future returns. The fund currently yields 4.0% and investors have the option of receiving income on a monthly or quarterly basis (please remember yields are not a reliable indicator of future income).

Past performance is not a guide to future returns. Source: Lipper IM to 30/07/2017.

We favour the managers’ flexible and nimble investment approach and believe they have used their experience of fixed-interest markets to the benefit of investors. That said, a bias towards corporate bonds, including high yield bonds, means we consider the fund higher risk than the average fund in the sector. We believe 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.

Is there any value left in bonds?

In a world of low interest rates and economic uncertainty, investors have continued to seek sanctuary in the bond markets. They have generally performed well in recent years, and as bond prices have risen, yields have fallen.

With yields at historically-low levels, James Foster and Alex Ralph believe there is now less value to be found across the bond markets. They are particularly cautious about government bond markets, which have performed strongly for several years and have limited scope to rise much higher, while the yields on offer are also relatively unattractive. As such, the managers have recently initiated some investments that would allow the fund to profit if US government bonds fall in value. Please note the use of derivatives adds risk to the portfolio and past performance is not a guide to the future.

James Foster and Alex Ralph are more optimistic in their outlook for bonds issued by companies. In their view, they should remain supported by the buying of bonds (quantitative easing) from global central banks, in addition to a relatively stable economic backdrop. They also feel many companies are more prudently managed than they once were, which could decrease the likelihood of companies defaulting on their debt liabilities.

The managers are encouraged by the relatively low rates of default in the high yield bond market and this is an area where they continue to see value. Over half the fund is currently invested in high yield bonds, which has recently benefited performance.

Bonds issued by financial firms, including banks, also represent good value, according to the managers. Many investors have overlooked the banking sector since the global financial crisis in fear they will continue to struggle. Yet over the past ten years these businesses have worked hard to strengthen their balance sheets and cut costs, which means they are now in a much stronger position. The fund has done well by investing in this area over the past year and recent contributors to performance include bonds issued by Barclays and Société Générale.

The fund also has a healthy weighting in insurance companies. The managers suggest these companies offer attractive yields and will continue to generate good cashflows. Investments in RSA Insurance Group and Liverpool Victoria have recently boosted returns.

Elsewhere, James Foster and Alex Ralph have maintained a relatively high level of cash at around 10% of the portfolio. Given the limited value currently on offer across fixed-interest markets, they are prepared to be patient and invest in new opportunities at more attractive prices if markets experience a setback.

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.