Artemis Strategic Bond – November 2020 fund update

Joseph Hill | Mon 23 November 2020

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• The fund is managed by James Foster and Alex Ralph, two highly experienced bond investors
• We think there’s a good culture at Artemis which gives Ralph and Foster autonomy to invest how they see fit
• The fund has performed well over the long term delivering good returns to patient investors
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long term performance potential

How it fits into a portfolio

The managers prioritise income, but they aim to provide some growth over the long-term too. It could add a little spice to a bond portfolio, add some diversification to a shares portfolio, or be considered for an income-focused portfolio.

Management team

The fund is co-managed by James Foster and Alex Ralph, two experienced fixed income managers who we rate highly. Both James and Alex joined Artemis in 2005 and combined, they have over 44 years’ experience in the investment industry. The duo’s willingness to invest quite a lot in higher-risk high yield bonds means we view it as a more adventurous option within the strategic bond sector. We think they’ve done a good job for investors so far, delivering strong performance and are confident they are well equipped to perform well in the future.

Process

The managers shift between different areas of the bond market, moving between government bonds, investment-grade bonds, and higher-risk high-yield bonds as conditions change. They can also invest in derivatives which if used can add risk. The fund's positioning is determined by Ralph and Foster’s views on where we are in the economic cycle combined with their analysis of the prospects for individual companies and governments.

When they're concerned about the economy, they're likely to invest more in lower-risk government bonds and less in high-yield bonds. They'll do the opposite and be more adventurous when they think the outlook's positive. They aim to have a good mix of investments across a variety of sectors, credit ratings and maturities to reduce the risk of one area dominating performance. The managers want the fund to be balanced, with the potential to perform well in a variety of economic conditions.

In recent months we’ve seen a wave of bond issuance as companies have looked to raise money to see them through the other side of the coronavirus crisis. Ralph and Foster have taken the opportunity to selectively participate in some new bond issues on attractive terms. This included bonds issued by investment grade rated Comcast and Siemens and high-yield rated TalkTalk. In March, they also increased the fund’s exposure to the US Dollar, an asset often perceived to be a safe haven during times of volatility, to shelter against possible further risks.

The managers also increased their exposure to companies they think aren’t cyclical and should perform well throughout the business cycle like Experian and Bunzl.

The fund’s allocation of just over 40% of its assets to government bonds heading into the coronavirus was helpful in providing a readily available source of money to buy some of the bonds mentioned above. The managers sold out of some of their government bonds holdings and increased their exposure to investment grade rated companies as a result.

Culture

Foster and Ralph are partners at Artemis, which is a private company. We think this structure is a good thing for investors, as both manager and firm are focused on the long-term prospects of the fund.

Fund managers at Artemis are required to invest their own money into their funds, and this means they succeed when their investors do. Artemis also provides an attractive environment for fund managers, allowing them the freedom to run money how they see fit without imposing a ‘house view’ on them. It’s also a collegiate atmosphere, with managers supporting and challenging each other.

We feel these are positive incentives for them to continue striving for good performance. Both managers also manage other funds in addition to this one with Alex Ralph also managing Artemis High Income and James Foster also managing Artemis Monthly Distribution.

Cost

The fund has an ongoing charge of 0.57%, but we’ve secured HL clients an ongoing saving of 0.11%. This means the fund is available for an annual ongoing charge of 0.46%. We think this is great value. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The managers have an excellent track record and have outperformed the strategic bond peer group over the long term. There have been uncomfortable periods over that time though, where the higher-risk nature of the fund has been demonstrated. This was evident during the financial crisis when the fund fell by more than its peers. It has rebounded strongly since though but it might not hold up as well as some other funds in tougher conditions. Past performance is not a guide to the future.

Since the turn of the year* the fund has performed well delivering a return of 3.3% compared with 2.4% for the strategic bond peer group. Coming into the coronavirus crisis in the first quarter of the year the fund’s high allocation to government bonds was helpful for performance as markets were hit. It's unlikely for developed market governments to fail to pay back their debts, so in times of uncertainty they're seen as one of the lowest-risk areas of the fixed income markets. And subsequently, when the managers sold down their government bond exposure, the bonds they invested the proceeds in have performed well. Performance since January is a short timeframe to compare performance over though and isn’t a guide to the future. We continue to believe that the managers will do a good job for long-term investors.

*Source: Lipper IM, 01/01/2020 – 31/10/2020

Past performance is not a guide to the future. Source: Lipper IM to 31/10/2020.

Find out more about Artemis Strategic Bond, including charges

Artemis Strategic Bond Key investor information