Artemis’s Jack Holmes explains how investors can benefit from the multiple quirks of an often-overlooked asset class.
Jack Holmes, Artemis Funds (Lux) – Short-Dated Global High Yield Bond
Can you give an overview of the team running the fund and your investment process?
The fund is managed by David Ennett and Jack Holmes. We focus on shorter-dated high yield, an area where there are numerous inefficiencies we aim to exploit.
To begin with, the global high-yield market is made up of about 1,600 companies, but just 100 account for about 40% of the index by weight. In contrast, this fund focuses on ‘the undiscovered tail' – the other 1,500.
In high yield, the largest index positions are those that have borrowed the most. This is why medium- and smaller-sized issuers have delivered higher returns than larger ones over the long term, without taking on extra risk. In addition, there is less analyst coverage the further you go down the market, making it easier to gain an informational advantage.
Another inefficiency relates to the siloed approach of most of our competitors. About 90% of assets in high-yield funds are in those that focus on a particular region (mainly the US).
Taking a genuinely global approach lets us benefit from a quirk whereby an international company can issue two bonds from the same part of the capital structure and with the same maturity, but that offer different yields depending upon which country they are issued in.
What do you see as the big opportunities and risks for your fund for the rest of the year and moving into 2026? How are you positioned in this environment?
While March saw risk and rates sell off in unison following the war in Iran, the market consensus now appears to be that inflationary pressure is a problem for government bond markets, with risk assets emerging largely unscathed.
However, we are not dismissive of the threats the conflict poses to growth and will continue to rely on stock selection, as opposed to beta allocation, to drive returns. We have no intention of chasing CCCs as, if we are wrong about the growth outlook, this is where the pain will be most acute.
Our approach will avoid becoming wedded to any given timeline and, as such, we will continue to invest in companies that have sold off but that are not fundamentally endangered should the conflict last longer than feared. Our strategy generates a high degree of cashflow and we have already put this to work where we have seen opportunities to profit from a rebound, although the investment case is never dependent on this scenario.
Looking further ahead, we believe that our low-duration exposure and desire to forgo the most marginal areas of the credit market (such as CCC-rated or emerging market debt) will serve us well in 2026. Yields have backed up nicely and we are exploiting these to the best of our ability.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio?
MI Windows & Doors focuses more on the former than the latter. The company has higher margins than peers in the building materials space, a more rational market (because windows tend to be custom made, it doesn't suffer the same inventory de-stocking/re-stocking cycles as providers of other building products) and a strong market position in the south-east US.
The company acquired a major competitor a few years ago in PGT, the dominant producer of high-impact windows in the region (anyone who has experienced a Florida hurricane will appreciate the strong demand for these products).
MI sold off in March to a low of 84 cents, declining from 97 cents in late February. We felt this was overdone, so we bought in.
We recently bought bonds in Capsugel, the market leader in drug capsules. These make up a tiny portion of the cost of producing a drug, but are vital to the customer experience. Because the regulatory approval process for pharmaceuticals includes a capsule manufactured by a certain company, the cost of switching is prohibitive. We are big fans of businesses like this – dominant positions in market niches with high free cashflow generation and strong barriers to entry.
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