While the high-yield sector did not yet look overextended, manager Alex Ralph said there had been a few “red flags” recently.
Ms Ralph said she had already begun selling some of the bonds she bought at the start of this year because of the extent of the capital gains made, and she was just concentrating on protecting the fund’s dividend for the foreseeable future.
The manager pointed to a recent bond issue from German packaging firm Klöckner Pentaplast as a warning sign.
The company had issued a bond with a 7.25 per cent coupon, rated CCC, in order to fund a £300m dividend payout to shareholders.
The extent of the deal has meant the business was only just covering the repayment on the debt with its free cashflow, giving it very little room to manoeuvre if anything went wrong.
Ms Ralph said this type of “dividend deals” was a danger sign for fixed income markets, as companies took advantage of high fixed income demand to reward shareholders to the detriment of the business.
However, she said “the quality of the bond issues is still not too bad” because there were not yet enough of these “dividend deals” happening.
But she warned if the Klöckner Pentaplast deal marked the start of a trend then things would have run too far.
Ms Ralph said the high-yield market – having struggled in the second half of 2014 after US Federal Reserve chairwoman Janet Yellen issued a warning on the asset class – had “showed signs of cheapness” at the start of this year.
She said she had taken advantage by adding to a number of cyclical companies, such as Thomas Cook, which had performed well.
But given warning signs in the new issue market so far this year and the extent of the high-yield rally, which has seen the Artemis High Income fund already generate a return of 4 per cent, the manager said she expected a sell-off to be imminent.
She said the new issue market was starting to feel “heavy”, with an “incredible amount” of new issues – particularly in investment grade but now also in high yield – as companies looked to take advantage of low yields and high demand from investors.
The demand for income had meant some higher-rated high-yield bonds, on a BB rating, were now yielding less than 3 per cent, which Ms Ralph said was “too low” and gave “very little cushion” in case the bonds started to sell-off.
However, she said any pull-back was likely to be small due to the supportive environment for bonds, thanks to low inflation, recovering developed world economies and the bond-buying activities of the European Central Bank.
She added the amount of leverage companies were taking on for new bond issues had also not yet reached levels seen in 2006-07 – a time when companies were gearing up significantly at the top of the market.
The manager said this indicated the market was not at the euphoric stage of sentiment yet.
