Best in Class: Artemis Target Return Bond
“Attempting to deliver positive returns in all market conditions is a noble quest – but it is doomed to fail. It is an unbreakable law that returns can only come if we accept risk.”
That is the view of this week’s Best in Class manager Stephen Snowden, when discussing the much-maligned targeted absolute return sector.
Maligned is putting it mildly – no sector saw greater net retail outflows in 2019 and 2020, as investors lost patience with the disparity in performance.
In the past I have labelled the sector a zoo, with many different 'animals' with long-only, long-short, UK-centric, global and fixed interest funds being just some of the beasts sitting there – which makes no sense to me at all.
But there are good funds in there, so for investors simply to put a black mark against all of them is a mistake. Some do exactly what they say on the tin.
The Artemis Target Return Bond is case in point. It is a ‘steady Eddie’ targeted absolute return fund, with a heavy emphasis on controlling risk.
It targets an annual return of at least the Bank of England Base rate + 2.5 percentage points a year after fees by investing in government and corporate bonds as well as asset-backed and mortgage-backed securities.
Snowden is keen to highlight the term ‘target return’ rather than ‘absolute return’. He says: “Many of the concepts and techniques used by managers of absolute return bond funds remain perfectly valid and fit for purpose. But we accept the limitations of the asset class. Fund managers should be straight with investors as to what can be achieved in the fixed income market – and what can’t.”
I cannot overstate how refreshing it is to hear that from a fund manager.
The fund’s philosophy is that markets are inefficient and financial operators often behave irrationally. Liquidity constraints, portfolio and benchmark restrictions – and increasingly passive strategies – all create opportunities for active managers. To take advantage of this, the fund is flexible, with investments across the fixed income spectrum and the ability to go both long and short.
In terms of those challenges mentioned, Snowden says there are two headwinds facing those investing in absolute return bonds funds. The first is that bonds are expensive to short (meaning you pay out an income rather than receive one) and that they tend to do best in volatile markets (something we have not seen too much of since the global financial crisis in 2008-09).
Maximising risk-adjusted returns is the goal and the fund looks to generate returns from six different sources: asset allocation, stock selection, ratings, sector selection, yield curve and duration.
The fund is broken down into three different modules: credit, rates and carry – these are the measured risks Snowden talks about. The carry module is generally expected to be the least volatile and consists of short-duration investment-grade credit.