After a volatile year for bond markets Richard Troue, Head of Investment Analysis, reports on our view of the Artemis Strategic Bond Fund.
The ability of James Foster and Alex Ralph to combine their wider economic and bond market views with their assessment of the prospects for individual companies, is one of the main attractions of this fund.
We were encouraged to see the managers take advantage of higher yields at the beginning of 2016, and invest some of the fund's cash when bond markets fell. This decision paid off as the market subsequently rebounded strongly, but please remember this is only over a short period.
We continue to believe this fund's managers are of a high calibre, although a bias to corporate bonds, including high-yield bonds, means we consider this fund higher risk than the average fund in the sector. We feel the fund presents a good option for a combination of capital growth and income from the bond markets and it remains on the Wealth 150+ list of our favourite funds.
Corporate bonds and higher-risk high-yield bonds did not perform well during 2015 and early 2016. Bonds issued by energy and commodity companies were among the worst performers, as businesses in these sectors started to feel the effect of lower oil and commodity prices. Indeed, some companies could not maintain the interest payments on their bonds and default rates increased. This affected sentiment across the whole market.
Bonds issued by the UK government performed better - they are seen as relatively safe in comparison to high-yield bonds and often do well when investors are cautious.
The majority of the Artemis Strategic Bond fund is invested in corporate and high-yield bonds. The managers avoided the energy and commodity sector in general, but did not escape the negative sentiment and broader market falls. The fund lost 1% over the past year, although this compared favourably with the average fund in the sector, which lost 1.6%*.
|Annual percentage growth|
| April 11 -
| April 12 -
| April 13 -
| April 14 -
| April 15 -
|Artemis Strategic Bond||1.2%||10.4%||7.9%||4.7%||-1%|
|IA £ Strategic Bond||4.6%||10.2%||3.2%||6.7%||-1.6%|
Past performance is not a guide to future returns. Source: Lipper IM *to 01/04/16
Over the longer term the higher-risk approach has tended to see the fund struggle compared with others in the sector when markets have fallen. However the managers have performed well enough at other times to more than offset this and their long-term track record is impressive. Since James Foster and Alex Ralph began managing this fund together in July 2005, it has grown by 68.8%*, compared with 45.5% for the average fund in the sector. Please remember past performance is not a guide to the future.
Performance under James Foster and Alex Ralph
Source: Lipper IM
Outlook & portfolio positioning
James Foster and Alex Ralph believe the yields available on corporate bonds, including high-yield bonds, offer sufficient reward for the additional risk associated with lending to companies over governments. Approximately 47% of the fund is currently invested in high-yield bonds, with around a further 40% in investment-grade corporate bonds. The managers are also able to make use of derivatives which can add risk.
In terms of sectors, they are finding some of the best opportunities among bonds issued by financial companies, including banks. The sector continues to face challenges, including the potential for low interest rates to reduce profits on cash deposits. However, the managers felt sentiment turned overly-negative at the beginning of the year and this provided the opportunity to invest in some bank bonds at attractive yields.
Elsewhere, the managers also invested in bonds issued by BHP Billiton and Rio Tinto, the mining companies. Both recently made large reductions to their dividends, which is positive for bond holders as it frees up cash to pay the interest on the bonds and makes the payments more secure. While both companies are battling with lower commodity prices, James Foster and Alex Ralph do not believe they will default on their bonds.