Fixed IncomeMay 3 2016

Fund Review: Artemis High Income

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This £1.1bn fund was launched in 1995 and has been managed by Artemis since 2002, when the firm took over from ABN Amro.

The vehicle aims to achieve an above-average level of income, together with the prospect of rising income and some capital growth over the long term. Alex Ralph, who co-manages the fund alongside Adrian Gosden, explains: “Our aim is income. To find it we combine corporate and high-yield bonds – typically about 80 per cent of the fund – with holdings in a select group of higher-yielding equities.”

Ms Ralph, who joined the fund in 2014, points out Mr Gosden is one of the managers on the Artemis Income fund, the equity income vehicle, and this fits well with her experience in the bond market.

“By combining our different perspectives we reach a more complete understanding of a company’s capital structure than would be available to either a bond or an equity specialist investing alone,” she says. “[We] can assess whether a firm’s shares represent a more attractive claim on its future cashflows than its bonds, or vice versa, and invest accordingly.”

Macroeconomic factors play a part in the research process as the team examines the industries and markets in which the companies operate. But Ms Ralph adds: “When we buy a company’s bonds or shares, we must be sure that the yields they pay to us today will be sustainable in the future. As such, our focus is on corporate cashflows, so this is not primarily a macro fund.”

The fund’s I-share class sits at a risk-reward level of three out of seven, with ongoing charges of 0.69 per cent.

For the five years to April 21 2016 the fund’s I-share class has delivered a respectable 43.7 per cent compared with the average Investment Association Sterling Strategic Bond sector return of 25.7 per cent, data from FE Analytics shows.

The fund has also outperformed the sector across three- and 10-year periods, although its one-year loss of 1.6 per cent slightly lags the peer group’s average return of 1.1 per cent.

EXPERT VIEW - Ryan Hughes, manager, Apollo Multi Asset Management

Verdict

This is a hybrid fund with a focus on yield that combines both traditional fixed interest instruments with preference shares and some higher-yielding equities. The management duo of Adrian Gosden and Alex Ralph have extensive experience and have successfully navigated their way through challenging periods. The fund is typically positioned more aggressively than traditional strategic bond funds, which is likely to bring increased volatility at certain points, but this approach has proven its worth over a long period of time.

Ms Ralph notes: “Over the long term, our strategy of investing in high-yielding bonds and dividend-paying equities has been successful. But because of the fund’s distinctive positioning and active approach, there are periods in which it underperforms. That has been the case over the past six months. At times, worries about economic growth – and a diminishing belief that interest rates will rise – have rewarded funds with significant holdings in government bonds, to which our fund has little exposure relative to some of its peers.”

The manager points to European high-yield bonds as the largest positive contributor to performance in the past six months, partly due to the European Central Bank’s quantitative easing measures. However, the fund’s financial bonds exposure has weighed on performance since the start of the year, although the team added to positions during the recent sell-off.

“At the market’s lowest point, some types of junior debt – the so-called CoCos [contingent convertible bonds] – were yielding 11-12 per cent. At those levels they were pricing in a deep recession,” Ms Ralph explains. “But we did not believe the world was about to enter a recession or that financials were suffering from anywhere near the levels of stress seen in 2008. Meanwhile, banks are far better capitalised than they were five years ago. Some have even decided to buy back bonds to prove the strength of their balance sheets, so we used the steep falls in prices to add to the fund’s holdings in these areas.

“In addition, we added to corporate hybrids. The most junior part of corporates’ balance sheets had sold off aggressively as people sought refuge in government bonds. Dutch telecoms operator KPN was a new position, but we also added to Enel.”

In equities, the team added to holdings in BAE Systems and Centrica during the sell-off. The manager notes: “Both have large market caps and offer attractive valuations but were firmly out of favour. We think the management can begin to deliver, and that these will outperform in 2016 as the market’s fascination with smaller-cap growth companies fades.”