It’s a near perfect record. The Artemis Monthly Distribution fund ranks top quartile for every cumulative performance period – except for the last six months. The £548m income fund is number one in its sector over three years, five years and since launch. In the last six months, however, it ranks 104 out of 143. That has also dragged its rank down for the one-year period to seventh against its peers.
But fund manager James Foster says currency and growth stocks are to blame for its relative underperformance over the last six months, which have landed it in the third quartile. “It is an international fund. We will benefit when sterling goes down and vice versa.” As an income product the fund has had a relative lack of exposure to the recent outperformance of growth stocks, such as the FAANGs.
The fund is in the Mixed Investment 20-60% Shares sector, currently popular with advisers, and aims to be around the middle of that allocation with 43.5 per cent currently allocated to global equities, managed by Jacob de Tusch-Lec. Foster manages the remainder, which is primarily allocated to US, European and UK credit.
In the last six months the fund has returned 1.7 per cent compared to 2.2 per cent in the sector. But it passed the five-year mark in May, and has more than doubled the sector over that time horizon, delivering 79.4 per cent compared to the 36.1 per cent average of its peers.
Forty per cent of the portfolio is in other currencies, which benefited from last year’s sterling devaluation, but has also contributed to underperformance over the last six months. “We would argue it’s in our clients’ best interests to have overseas exposure in the long run, but short-term performance can be influenced by that. Longer term our positioning has wiped out some of that.”
Foster anticipates Brexit-related underperformance of the pound over the longer term, but notes they “don’t actively try to make a lot of money out of currency”. “The chances of a deal happening, who knows. I don’t want to make predictions, but it is easy to imagine queues at the border with lorries racked up on both sides. That’s not going to be great for our trade. I say that slightly in jest, but it’s easy to envisage that happening. If it does, currency will be proportionately weaker as a result.”
Broadly, rising interest rates have helped the portfolio. Financials are the largest sector allocation at 36.9 per cent. “We have swapped out of bank bonds into bank equity, but we’ve also increased our insurance positions,” he says. The recent hurricane season that created volatility in the insurance and reinsurance sector was a signal to buy for Foster and he added Hiscox, Swiss Re and RSA.
Rival fund houses Fidelity and Aberdeen both feature in the bonds portfolio. “Aberdeen I was getting a bit wary about, but the merger with Standard Life gave me some comfort they would pay their bonds.” They are coming up for redemption next year and pay a 7 per cent coupon, Foster notes.
Regarding the outlook for monetary policy, Foster says he is “dangerously going to say that interest rates are still going up”. The US drives the global direction, he notes. “Unemployment in the States is falling to essentially record low levels. We’re getting to the point where wage inflation may increase in the States and that will therefore lead to more increases in interest rates. “ US unemployment sat at 4.4 per cent in the September figures.
“We’ve already had a few, we’d expect more rate rises over time.” Europe will gradually scale back quantitative easing, Foster adds. But he warns: “If interest rates are raised too far, which is historically what’s always happened, then we would swap out of high yields and into government bonds. That’s not today’s story.” The fund currently has 35.9 per cent in non-investment grade debt.
Even in high yield Foster notes a step change down in yields. Centre Parcs junior bonds have gone from over 11 per cent in 2012 to 5 per cent for an issue this year, Foster notes. “For us to continue to generate good yields is quite hard work,” he says.
In 2015, when Fund Strategy last profiled the fund, Foster had forecast UK rate rises in May the following year. Brexit sent that forecast astray and Foster says business investment is now lower and the housing market is struggling. “The path for rates is going to be lower than it would have otherwise been, but we’re still in the rising trend.”
UK consumer credit is a potential pinch point, Foster warns. “We’ve seen that in Provident Financial, for example, which was not something we owned. The subprime borrower is under real pressure and struggling and Provident Financial has got their own issues.” The payday lender caught most attention for a 74.2 per cent drop in share price in August when it issued a profit warning, dropped an interim dividend, and lost its chief executive. Simultaneously the yield on its 10-year debt maturing in 2019 jumped from 1.9 per cent to 17 per cent.
The fund currently has 4.7 per cent in government bonds. “That’s just a liquidity position for us. We’re slightly waiting for a bit of indigestion and new deals to come through. It’s cash essentially.”
Artemis represents another long tenure for Foster, who was at Sun Alliance for 17 years and remained with it under various guises as it underwent a number of mergers, ultimately ending up within F&C Asset Management. He joined Artemis in 2005. Alongside the Monthly Distribution fund, Foster manages the Strategic Bond Fund, while de Tusch-Lec separately manages the Global Income fund.
“I do think a partnership structure is a much more sensible way for a fund management company to operate than a shareholder basis, where the share price reacts to the slightest bit of news and is very unsettling to staff. Because when fund managers’ wealth is orientated towards that it creates a very unsettling effect.” At Artemis manager remuneration is linked to fund performance.
Thirty members of the UK management team own the business through its partnership structure, alongside Affiliated Managers Group in the US, which owns small stakes in a number of boutique investment managers and private equity firms. Artemis see very low turnover as a result, the company boasts on its website. It’s like a lobster pot, Foster jokes about the firm. “Once you’re in you can’t leave.”