Artemis High Income: April 2022 fund update

• We think David Ennett is a talented high yield bond fund manager with plenty of relevant experience
• Ennett and Holmes benefit from the support and challenge provided by a strong fixed income team at Artemis, led by Stephen Snowden
• 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 focuses 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

David Ennett is lead manager of the fund. He joined Artemis in February 2019 from Kames Capital, where he was Head of High Yield. Prior to this he was Head of European High Yield at Standard Life Investments and a high yield portfolio manager at Old Mutual Asset Managers. We think Ennett is a talented high yield bond fund manager with relevant experience which has resulted in him developing a good track record. He is focused on producing a high income for clients and we think he has the experience, support and resources to do a good job for investors.

Ennett is supported by Jack Holmes. Holmes joined Artemis in June 2019 from Kames Capital, where since 2016 he co-managed a range of high-yield bond funds. Ennett and Holmes benefit from the support and challenge provided by a strong fixed income team at Artemis, led by Stephen Snowden.

Ed Legget also contributes to the running of this fund by selecting the UK and European shares that feature. He has been with Artemis since December 2015.

Process

The managers look to identify bonds offering attractive yields and trading at attractive valuations from companies they believe will be able to service their debts and pay bondholders. They focus on finding cash generative companies which possess pricing power. This includes spending time analysing the dynamics of both the industry in which the company operates in and the company itself. The managers will typically introduce new investments to the fund at a position size of 0.5%, rising up to around 3.5% for the positions where they have the highest conviction. AAA rated government bonds can exceed this position size though.

Ennett and Holmes are equally focused as the fund’s previous manager on the fund’s objective to provide a high level of income to investors. They think including some company shares in the fund (which are selected by Ed Leggett) can add to the fund’s income and growth potential and compliment some of the fund’s bond investments. Derivatives can also be used in the fund, which adds risk.

Since taking over the fund the managers have made some changes to the fund’s investments including a reduced focus on European high-yield bonds in favour of adding more US high-yield bonds. The managers think there’s a wider opportunity set to exploit in this larger market and continue to hedge these bonds back into Sterling.

In recent months the managers have added the bonds of a number of companies to the fund including those of global consumer battery company, Energizer and Danish energy technology solutions company Welltec. They also added the bonds of vehicle manufacturer Ford to the fund. The managers think the company can recover to achieve investment grade status in time.

A number of bonds were sold from the fund in the financials sector including those of Macquarie Group, Bank of Ireland, M&G, ING Group, and Phoenix Group. The managers felt there was little performance potential left in these bonds and preferred better opportunities elsewhere.

Culture

Ennett and Legget are partners 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, so Ennett and Holmes are supported by a strong team. Fund managers are required to invest their own money into the funds they manage. This means the managers succeed when their investors do. We feel there are strong incentives in place for the managers to continue to strive for good performance.

ESG integration

The managers incorporate analysis of ESG factors into their investment process when analysing opportunities and risks for different bond issuers. They also have access to and meet with Artemis’ stewardship team and use a range of external ESG data to inform their work.

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 0.72%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.16%. This means you’ll pay a net ongoing charge of 0.56%. 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

Since Ennett and Holmes took over management of the fund in September 2021, the fund has delivered a return of -3.84%* compared with a return of -5.01% for the IA £ Strategic Bond peer group sector average. We’re pleased that the new managers have made a good start on the fund, but it should be noted that this is a short timeframe to consider performance over.

To generate a high income for investors, the fund invests in high-yield bonds and also invests in some company shares. Both of these can increase volatility and mean that we don’t expect the fund to hold up quite as well as some other funds in the sector when bond markets go through a tough patch but expect it to perform better than peers in a rising market. We think it has the potential to perform well over the long term though, although there are no guarantees.

At the time of writing, the fund offers a yield of 4.65%, although yields are variable and aren’t a reliable indicator of future income. 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 31/03/2022.

Find out more about Artemis High Income including charges

Artemis High Income Key Investor Information