Alex Ralph, manager of the £1.2bn Artemis High Income Fund, explains her fund's strategy which aims to look 'through' market risks and economic cycles to achieve its target income and capital growth
After the longest bull market in history, bond markets have been challenged by a number of political and economic surprises. In response, at times the market has been very volatile (and yet has held up). As a result, investors may feel the ability of bond managers to maintain or even increase income is now unrealistic.
Yet there are some fixed income funds providing a higher level of yield that is proving sustainable, and is offered alongside the aim of some capital growth.
The Artemis High Income Fund is one such fund. The £1.2 billion* fund invests predominantly in fixed income, but has the ability to invest up to 20% of its assets in higher-yielding equities. It does so in order to achieve an ‘above-average' level of income, alongside the prospect of some long-term capital growth.
The fund, managed by Alex Ralph, has returned 15% over three years ahead of the IA Sterling Strategic Bond sector average of 12%**.
It is also first or second quartile over one, three and five years. The fund does not adhere to an external benchmark, but returns are significantly ahead of key UK indicators including CPI and RPI at 3% and 6% respectively** over the same period.
The fund sits in the Investment Association Sterling Strategic Bond sector. It is known to position itself more aggressively than traditional strategic bond funds however, with just over half of the portfolio invested in sub-investment grade debt. Alongside this, up to 20% of the portfolio is invested in equities. Together, these assets assist in delivering the high income the fund aims to provide to investors.
"There is no actual measure or way that we define an ‘above-average' level of income" explains Ralph. "Without taking on too much risk, we want to generate a high level of income. Getting that balance right is crucial."
The firm employs a collegiate approach when researching ideas. Artemis' fixed income and equity teams sit side-by-side and discuss ideas on a continual and day-to-day basis.
As the fund's manager, Ralph has overall responsibility for portfolio selection. To select equities for the fund, Ralph works closely with Artemis' UK equity income team, led by Adrian Frost.
The manager looks ‘through' market risks and economic cycles, rather than increasing or decreasing risk for different types of market environments.
Ralph's fixed income strategy focuses on finding companies where the risk is mispriced, in particular where risks have been under- or over-estimated in her view. Ralph also looks for companies that she believes could de-lever through growth or cashflow generation in the coming years.
As the fund is set up to perform through economic cycles, it is more likely to experience short periods of underperformance relative to traditional strategic bond funds.
Ralph explains: "When credit risk widens, as it did during the financial crisis in 2008 and the European crisis in 2011, there will be periods of volatility and/or underperformance.
"But our job is to make sure we take advantage of that volatility and make a call on when to increase the credit risk."
*Artemis. As at 30 June 2017. **FE/Artemis. As at 30 June 2017.
Click here to read more about how the Artemis High Income fund manager assembles a diversified portfolio with a low-to-medium risk profile that aims to navigate key market volatility.