Artemis High Income – is there income left in bonds?

Kate Marshall | Fri 25 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.

Alex Ralph is a manager that does, in our view. She is prepared to alter the positioning of the Artemis High Income Fund depending on where she sees the greatest value, and when she feels wider economic or market conditions have changed. The manager also has the ability to invest a portion of the fund in high-yielding shares, which could help boost the level of income paid and differentiates the fund from others in the sector.

In doing so the manager has provided investors with a regular and high 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 5.6% 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). Please note charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Past performance is not a guide to future returns. Source: Lipper IM to 31/07/17

We favour the manager’s flexible investment approach and are also encouraged she has the support of the wider fixed-interest and UK equity income teams at Artemis. That said, a bias towards high yield bonds, in addition to exposure to stock markets, makes this fund a higher risk and more volatile proposition than the average fund in the sector.

We view the fund as a good option for a higher income from the bond markets and it remains on the Wealth 150 list of our favourite funds across the major sectors.

Where has the manager found income from the bond markets?

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, Alex Ralph believes there is now less value to be found across the bond markets. She is particularly cautious about government bonds, which have performed strongly for several years and have limited scope to rise much higher, while the yields on offer are also relatively unattractive.

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

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

Source: Artemis, correct at 30/06/2017

Bonds issued by financial firms, including banks, also offer good value and income, according to the manager. Many investors have overlooked the banking sector since the global financial crisis in fear the banks 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 over the past year by investing in this area and recent contributors to performance include bonds issued by Barclays and Société Générale.

The fund also has a healthy weighting in insurance companies. Alex Ralph suggests these companies offer attractive yields and will continue to generate good cashflows. Investments in Phoenix Group and Catlin Insurance have recently contributed positively to performance.

The equity portion of the fund is also biased towards the financials sector. Shares in Legal & General, for example, currently feature in the fund, while the manager also recently added to an investment in Nordea Bank on account of its attractive yield, supported by a strong balance sheet. Elsewhere, the manager has sold some more domestically-focused companies from the portfolio, such as Royal Mail, on account of her slightly more subdued outlook for the UK economy.

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.