Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

• We think David Ennett and Jack Holmes are talented high-yield bond fund managers 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% of its assets in UK and European shares. A focus on high-yield bonds and shares that pay a dividend 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 and Jack Holmes are co-managers of the fund. Ennett 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.

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 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 Legget) can add to the fund’s income and growth potential and complement some of the fund’s bond investments. Derivatives can also be used in the fund, which adds risk.

In recent months the managers have added the bonds of a number of companies to the fund including those of AA, the UK car breakdown operator, and some senior issues from banks RBS and Bank of America. All of these bonds are from the investment grade part of the credit spectrum (better credit rating than high-yield) but were offering income equivalent to high-yield bonds for company specific reasons. This made them particularly compelling investments. In terms of shares, the team trimmed their position in British American Tobacco and added to Natwest and Barclays.

They also sold some bonds, including HomePoint, a US mortgage originator and United Site Services, the largest provider of portaloos in the US. These were some of the riskier bonds held in the fund and both had been purchased as they were considered to be trading at an attractive price during 2022. Having increased in value a lot since then, they were sold with the managers seeing 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. 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.

While the fixed income team at Artemis is smaller in number when compared to many of the larger asset managers in the industry, we have a very positive view of the team, particularly Head of Fixed Income Stephen Snowden. We therefore think that Ennett and Holmes are suitably resourced to run their funds.

ESG integration

Investment teams at Artemis are encouraged to think for themselves and invest according to their own style, so the quality of Environmental, Social, Governance (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.

The managers are gradually taking ESG issues into account more when analysing companies for this fund. Along with the wider team, they engage with companies on sustainability issues and vote on key issues. That said, this is not an ESG labelled fund and the risk-return profile of the bonds they invest in remains the most important thing.

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.

Please note charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Performance

Since Ennett and Holmes took over management of the fund in September 2021, the fund has delivered a return of -7.52%* compared with a return of -10.92% 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 for considering performance.

Over the 12 months to the end of March, the fund returned -3.87% compared to the IA £ Strategic Bond peer group sector average of -6.23%. Past performance is not a guide to future returns.

The largest loss for the fund within the bond portion of the fund over the period was its holding in Credit Suisse AT1 bonds. 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. It does however highlight the risks of investing in high-yield bonds.

Other bond losses came from the real estate sector, which is under pressure due to high inflation and increased interest rates. It wasn’t all bad though, with investments in some US and UK government bonds providing positive returns over the 12 months.

In terms of company shares, Adecco Group and Entain provided negative returns over the period while 3i Group and TotalEnergies added value.

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 typically, 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 the fund 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 5.34%, although yields are variable and aren’t a reliable indicator of future income.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2023.

Find out more about Artemis High Income including charges

Artemis High Income Key Investor Information

Important information – Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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