As strategies investing in credit for capital growth struggle in today's difficult market environment, Artemis' Alex Ralph explains why the best option for some investors may be to look at strategic bond funds that provide a higher income and an element of capital growth protection.
Market volatility has made investing for income a difficult task for some investors today. However, Alex Ralph, manager of the £1.2bn Artemis High Income Fund, argues that while pockets of value do exist; the fact her fund is focused on income, rather than on capital growth, should mean it is more likely to succeed.
She says: "In the current environment, which has shown itself to be not particularly good for investing in credit for capital growth, the best option may be to invest in a fund that at least provides a higher level of income - and also tries to protect your capital at the same time."
Cashflow analysis, creditworthiness and bond pricing are the key factors used by Ralph and her team to identify which assets to include in the fund. Indeed, Ralph notes the research of any bond issue is very much about "drilling into the numbers" and determining a bond's relative value. However, the fund has little restriction in terms of the types of companies it can invest in, and Ralph never discounts any issues.
Currently, she does have several sectoral biases in play, including financials, which accounts for just over 40% of the portfolio. Ralph describes the sector as offering high levels of income relative to risk. However, she admits the fixed income market remains challenging.
"Markets are changing and companies are coming in and re-financing at cheaper rates. Take Center Parcs, for example. A few years ago it was not very well received because most investors did not know or understand the company. But we researched it, and bought it at issue with an 11% coupon. It re-financed four years ago at 7% - a reflection of the fact that people trusted the brand more. It recently re-financed again at an 8% coupon. And that is purely because the market has changed."
Ralph maintains a low turnover on the fund, in spite of recent volatility. This is in part a result of the market remaining expensive. "We are in an environment where it is very difficult for me to suggest anything other than the fact that it is quite expensive. Will it stay expensive? Yes. There are so many factors in play that we think credit will stay broadly expensive," she explains.
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.