Artemis High Income: April 2021 fund update

Joseph Hill | Fri 16 April 2021

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• Alex Ralph is prepared to be flexible by investing across the bond market and including UK and European shares to find the best income opportunities
• Ralph is a seasoned high-yield bond investor with almost two decades of investment experience
• The fund could be a good choice for a bond portfolio willing to accept more volatility in search of a higher income
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Artemis High Income fund is focused on paying a high income to investors, mainly by investing in bonds, but it can also invest up to 20% in UK and European shares. A focus on high-yield bonds and shares makes it a little different from most bond funds, though it also makes it a higher-risk option. The fund could be a good way to diversify a conservative bond portfolio, or a more adventurous shares portfolio seeking exposure to other asset classes.

Manager

Alex Ralph is the lead fund manager and we think she’s a talented investor with almost two decades of investment experience. We like her flexible investment approach and willingness to change how the fund is invested depending on her views of the wider economy and bond markets. Ed Legget also contributes to the running of the fund by choosing the UK and European shares that feature. Ralph also has other fund management responsibilities, co-managing the Artemis Strategic Bond Fund with James Foster.

Process

Alex Ralph looks for companies that make plenty of cash. This should leave them in a comfortable position to service their debts and pay bondholders. She tends to focus on high-yield bonds and aims to keep hold of them until she finds more attractive income opportunities elsewhere. But she’s prepared to be flexible and invest in higher-quality bonds and government bonds when she feels it’s time to be more cautious.

Up to 20% of the fund can be invested in shares of UK and European companies. Ed Legget runs this part of the fund, which can boost growth and income potential. Derivatives can also be used in the fund, which can add risk.

When coronavirus hit markets, Ralph was already cautious about valuations and so had the fund positioned more defensively than it has been in the past. The fund held over 10% of its assets in US treasuries and had a reduced allocation to shares. When the extent of the pandemic became clear, Ralph took action to cut the fund's exposure to companies that were more exposed. Once governments and central banks intervened to shore up markets, she also took the opportunity to add some attractively-valued bonds to the fund. In August Ralph started adding shares to the fund again as she felt monetary and fiscal policy could lead to higher inflation expectations. More US Treasuries were sold to raise money to buy the shares of some cyclical companies with attractive yields. This increased exposure to shares, along with a bias to short-dated credit, boosted performance in the final quarter of the year.

In the short term, Ralph expects suppressed supply and pent up demand to fuel inflation but doesn’t see it becoming a problem for the economy at this stage. She expects that the US Federal Reserve will continue to keep rates low for the next few years and will first look to change its approach to quantitative easing.

Culture

Ralph is a partner at Artemis, and Artemis 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 and can run funds without the distraction of short-term shareholder demands. Artemis is home to a well-resourced team of bond investors including Stephen Snowden and James Foster and so Ralph is supported by a strong team. Fund managers are required to invest their own money into the funds they manage. This means Ralph succeeds when her investors do. We feel there are strong incentives in place for Ralph to continue to strive for good performance.

Cost

The fund has an annual ongoing charge of 0.71%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.155%. This means you’ll pay a net ongoing charge of 0.555%. 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

Alex Ralph has a good long-term track record of delivering strong returns for investors. She's done better than the average Strategic Bond fund, and has delivered a good level of income since she started running this fund. Investments in high-yield bonds and shares can increase volatility though. This means the fund might not hold up quite as well as some other funds in the sector when bond markets go through a tough patch. We think it has the potential to perform well over the long term though, although there are no guarantees.

When coronavirus hit markets, the fund’s allocation to high-yield bonds hurt performance as they suffered greater falls than more financially-secure companies with higher credit ratings. The fund has bounced back reasonably well though and in the first three months of this year, the fund gained 2.6%* compared to a fall of 1.1% for the IA £ Strategic bond peer group. This is a very short timeframe to compare performance though and please remember past performance isn't a guide to the future.

The fund currently offers a yield of 4.5%, although yields are variable and aren’t a reliable indicator of future income. The income paid by the fund has fallen but Ralph feels that in order to maintain its previous level she would’ve had to sacrifice the quality of the fund. Instead, she decided to try and grow the income again from a lower level whilst maintaining the quality of the bonds and shares she holds. 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 the future. Source: *Lipper IM to 31/03/2021.

Find out more about Artemis High Income including charges

Artemis High Income Key Investor Information