Artemis Corporate Bond: May 2023 fund update

• Stephen Snowden is a seasoned corporate bond investor and has over 20 years' experience
• We like the manager's clear, disciplined investment process which we think could drive returns over the long term
• Snowden has delivered strong returns for investors over the long term, outperforming the corporate bond peer group with funds he's previously managed
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The fund aims to generate a combination of income and growth over the long-term and could form part of a diversified bond portfolio or diversify an equity-focused portfolio. We think the fund could be a good choice as part of a portfolio that has a long term view but be aware this could be more volatile than other bond funds.

Manager

Stephen Snowden has been the manager of the fund since joining Artemis to launch it in October 2019. He's a seasoned corporate bond investor though, having accumulated over 20 years' experience running similar strategies at Old Mutual and Kames. This means Snowden has navigated the corporate bond market through a range of economic conditions. We believe making use of this experience leaves him well positioned to continue his success at Artemis and our conviction lies with him. Snowden became Head of Fixed Income at Artemis in 2021 and leads a team of bond investors mostly based in Edinburgh.

Snowden has the support of co-manager Grace Le who also moved across to Artemis from Kames in December 2019 where she co-managed some bond funds.

Process

The fund's investment process blends 'top down' macro-economic research with 'bottom up' fundamental analysis of individual companies' bonds. The macro analysis involves building up a picture of where countries are in the economic cycle as well as considering the implications of monetary and fiscal policy for key indicators like inflation and interest rates. This helps Snowden evaluate which sectors and areas of the economy could benefit from any trends or shifts that might be occurring.

This macro-economic research is combined with 'bottom up' analysis of bond-issuing companies. This helps Snowden determine which bonds are attractively priced and he thinks could offer the most compelling opportunities to generate returns. Snowden also spends time meeting company management to assess both their quality and their strategy for the business. It's important for him to dig deeper into the company strategy to understand what they're trying to achieve, its implications and to ensure that it isn't likely to disadvantage bondholders.

At least 80% of the fund is invested in investment grade bonds (those with a credit rating of BBB or above) that are issued in sterling or hedged back to sterling from other currencies, like the Euro or the Dollar. The fund also has the flexibility to invest in derivatives and high yield bonds which if used adds risk. Snowden achieves diversification by owning bonds issued by a range of different companies. There are currently around 140 bonds in the fund, but this number can be anywhere between 75 and 150 at any one time. Some of these bonds may be more illiquid than others, which could make them more difficult to sell.

In recent months Snowden has been active, in some areas increasing the quality of the fund’s investments without giving up much yield. He invested into bonds issued by the AA, the UK car breakdown operator, due to the attractive yield on offer and an improved view of the company following ownership changes. He also invested in some bonds issued by BT, who are seeing higher demand for their fibre broadband roll out than expected, as well as seeing a reduction in the cost of financing their large pension scheme. He’s also continued his active approach through relative value trades in bonds issued by companies like EDF and Credit Agricole. This means he sold some bonds issued by those companies and bought others with more attractive payment terms.

He’s sold some bonds from the portfolio too, including those issued by Toyota, GlaxoSmithKline and Wessex Water following strong performance.

At a sector level, the fund’s largest exposures are to banks, utilities and insurance. The duration of the fund is similar to the fund’s benchmark at the end of April at 6.3 years. Duration is a measure of how sensitive the fund is to interest rate changes.

Culture

Snowden 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. 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.

ESG integration

Snowden believes environmental, social and governance (ESG) considerations have become issues investors and companies can't ignore. And that in the future, companies that encounter issues and perform poorly in these areas are likely to be viewed negatively by more and more investors and as such, have the potential to be value traps – investments that are cheap for a reason. That said, this is not an ESG labelled fund and the risk-return profile of the bonds Snowdon invests in remains the most important thing.

Investment teams at Artemis are encouraged to think for themselves and invest according to their own style, so the quality of ESG integration across the firm varies. Artemis does have a firm-wide policy to support the aims of international conventions on cluster munitions and anti-personnel mines and therefore the firm will not knowingly invest in companies which produce these weapons.

Artemis votes on all their holdings, unless restricted from doing so, and fund managers engage with firms to develop their understanding, raise issues with management and monitor subsequent developments. Artemis produces a monthly voting summary, and these summaries include rationales for some of the more controversial votes. Engagement case studies can be found in the firm’s annual Stewardship Report.

Cost

The fund has an annual ongoing charge of 0.37%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.05%. This means you’ll pay a net ongoing charge of 0.32%. 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.

Please note the fund takes charges from capital, which could boost the income paid, but reduce the potential for capital growth.

Performance

Snowden has delivered strong performance over the long term, outperforming the wider corporate bond peer group average. Like all fund managers though, he's had weaker periods too. He endured a tough time during the financial crisis, for instance, but bounced back reasonably well after. Please remember past performance is not a guide to future returns.

Since moving from Kames to Artemis in October 2019 and launching this fund, Snowden has performed strongly. In the initial months when coronavirus hit, the fund's positions in higher quality bonds and a rotation away from bonds issued by companies more exposed to the effects of COVID-19 helped relative performance. Snowden also managed to pick up bonds at attractive valuations during the market turmoil which went on to perform well. This led to the fund outperforming the IA £ Corporate Bond peer group significantly in 2020, returning 14.49% versus 7.75%*. The level of outperformance achieved during 2020 is unusual and is outside our expectations for this fund.

Since then, the fund has returned to a performance profile that is more in-line with our expectations. Over the last 12 months, the fund has delivered a return of -6.12%*, falling by less than the IA £ Corporate Bond peer group average which returned -6.90%. The high inflation and rising interest rate environment in 2022 was challenging for bonds, with notable losses throughout bond markets. Bonds began to rebound during the fourth quarter of 2022 though, and while performance has been volatile so far in 2023, most bonds have continued to increase in value.

Holdings in real estate and certain financials lost value for the fund. In particular, holdings in Credit Suisse AT1 bonds detracted from performance.

Due to stresses in the banking system in March 2023, Credit Suisse came under significant pressure and following intervention from the Swiss National Bank, was bought by UBS. As part of the negotiations for the purchase of Credit Suisse by UBS, it was agreed that Credit Suisse would default on some of the bonds they had issued. A default means that the issuer will not meet the payment terms of the bond. Every default is slightly different so the impact on the value of the bonds is case specific. In this particular instance, the outcome was that Credit Suisse stopped all payments relating to these bonds, which means the fund lost all of its investment in them. While this is disappointing, the move to completely default on these bonds was highly unusual given the circumstances.

While this fund is mainly an investment grade bond fund, it has the option to invest in some high yield bonds. These particular bonds issued by Credit Suisse were classified as high yield, which highlights the risks of investing in bonds further down the capital structure.

It wasn’t all bad though, with positive contributions to performance for the fund over the last 12 months coming from the utilities and telecommunications sectors, including bonds issued by EDF and Engie SA. Government bonds have also added value over the period.

Snowden’s a seasoned corporate bond investor with over two decades of experience. His performance navigating bond markets over this time is the reason for our conviction.

At the end of April, the fund offered a yield of 5.15%, although yields are variable and aren’t a reliable indicator of future income.

Past performance isn't a guide to the future. Source: *Lipper IM to 30/04/2023.

**N/A - full year performance data unavailable.

Find out more about Artemis Corporate Bond including charges

Artemis Corporate Bond Key Investor Information