Artemis High Income - going against the flow

• Alex Ralph thinks lots of investors are piling into similar types of bonds and it could end badly
• She’s invested in unloved bonds as she thinks they’re attractively valued
• The fund’s lagged the benchmark recently but long-term performance is good

Our view

It’s easy to go with the flow. But in investing, doing the same thing as everyone else means you could get caught out when the market moves down. That’s why Alex Ralph isn’t following the crowd. As manager of Artemis High Income , she sometimes invests in areas where many others are afraid to go.

Ralph aims to use the flexibility of this strategic bond fund to provide a healthy, growing income with some long-term growth, although there are no guarantees. Her investments include corporate and government bonds from developed countries like the UK, US and France and some higher-risk high-yield bonds. The portfolio also contains some high-yielding shares in companies from the UK and Europe. This could help boost income but could also increase volatility compared to other funds in the sector.

We think Ralph is an experienced and talented manager. We like her courage to seek out investments others have shunned and the commitment to her investing approach, rather than simply following the herd into popular areas. You’ll find Artemis High Income on the Wealth 50 list of our favourite funds.

How’s the portfolio changed?

Ralph has been selling some of the riskier, higher-yield bonds and investing more cautiously recently. Many other managers have done this by investing in bonds of companies that are considered high quality and fairly insensitive to economic cycles. Ralph, however, thinks the swathes of people investing in them has pushed their prices beyond what she thinks is good value.

Instead she’s steering clear and looking at more attractively priced bonds in companies that are considered lower quality and shunned by many investors. One sector she thinks is particularly attractive at the moment is oil. That’s why she’s invested more in oil company bonds, such as Tullow Oil, than the market average.

On the shares side of the portfolio, more has been invested in Europe to dodge some of the Brexit risk, but the managers still like the yields many UK companies currently offer. Many market-perceived high-quality companies have also been avoided. Instead, more attractively valued unloved companies that the manager thinks are still good companies, like Vodafone, have been favoured.

How’s the fund performed?

Much of the fund’s short-term performance has been affected by what Ralph hasn’t invested in. Some of the best performing bonds recently have been those issued by the high-quality, less cyclical companies that Ralph’s stayed away from. She also tends to avoid bonds that are fairly sensitive to interest rate changes. Lately they’ve done better than the less sensitive ones she normally invests in. That meant the fund’s performance fell behind the benchmark over the past 12 months.

Over the long-term though Ralph has performed well. Since she took over the fund in March 2014 she’s grown the fund 36.5%* more than the IA Strategic Bond index. Our analysis suggests that’s because the fund’s normally done better than the benchmark when the market’s fallen. Past performance isn’t a guide to future returns.

£10,000 invested in the fund when Ralph took over would have generated an income of £2,615 after fund charges. The fund currently yields 5.3% although that’s not an indication of future income. Please note charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Artemis High Income performance under Alex Ralph

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2019

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2019

Manager’s outlook:

Ralph can’t see an end to the US-China trade war, as she thinks neither side will agree on a resolution. Closer to home she thinks a ‘no deal’ Brexit is now likely as time will run out to prevent it. If that happens she expects interest rates to be cut but thinks increased government spending will be the real saviour of the economy.

Ralph thinks the possibility of a recession is now quite high. She thinks this will encourage even more investors to pile into the same ‘defensive’ bonds, exacerbating their already extreme valuations. In her view it wouldn’t take much for them to turn sour. She thinks the value of bonds issued by unpopular companies could already be taking account of a recessionary scenario. If she’s right, the unloved bonds she’s invested in could hold up better if there is a market wobble, although nothing’s guaranteed.

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