Get a resilient income with Artemis High Income

So if you need exposure to bonds, those with shorter durations might be a good way to get exposure to this asset because they are less sensitive to changes in inflation and interest rates. 

One way to access them is Artemis High Income Fund (GB00B2PLJN71). Its current average duration is 2.77 years, if you include its futures and hybrids, or 3.31 years excluding these factors, so historically low. The fund's manager, Alex Ralph, is investing mainly in shorter-dated bonds to reflect her view of the direction of interest rates. She reports that exposure to shorter-dated bonds was helpful during April, and that "credit curves have steepened so far this year – longer-dated bonds have underperformed shorter-dated issues – so our positioning at the short end has protected us from those moves".

Artemis High Income has met its aim of producing a higher-than-average yield and some capital growth. It has an attractive 12-month yield of 5.4 per cent, and in terms of total returns is in the first quartile of the Investment Association (IA) Sterling Strategic Bond sector over one, three and five years.

Artemis High Income is a strategic bond fund so can allocate to various types of debt, including government, corporate and high-yield bonds. This means its managers have greater flexibility to stay ahead of interest rate and inflation rises, and move around the fund's average duration accordingly. And perhaps even more importantly they can steer away from problematic areas.

The fund can also invest up to a fifth of its assets in equities, in which it had 15 per cent at the end of April, further diluting its exposure to the risks of bonds. This portion used to be run by Artemis's UK equity income team, but has recently been transferred to Ed Leggett, manager of Artemis UK Select Fund (GB00B2PLJG05), and Paul Casson, manager of Artemis Pan-European Absolute Return Fund (GB00BMMV4J16).

"At this point of the cycle, it is appropriate to change the focus of our equity exposure to a more balanced approach of growth and income," explains Ms Ralph. "Furthermore, we think it is in unit-holders' interests that we increase our geographical diversification by investing in selected European equities."

Mr Leggett joined Artemis in December 2015, before which he managed a number of UK equity funds at Standard Life Investments, including a successful run with Standard Life Investments UK Equity Unconstrained (GB00B0LD3C08).

Ms Ralph has worked on Artemis High Income since 2014, but has 17 years investment experience. She has run Artemis Strategic Bond (GB00BJT0KT28) since launch in 2005, which has also made strong total returns.

With Artemis High Income she aims for a relatively high level of income by investing in bonds with a lower credit rating. She analyses the prospects of companies that issue these bonds to try to find the right risk/reward balance.

Artemis High Income has over half its assets in non-investment-grade bonds, which offer higher yields but are considered more likely to default, and it has had a high correlation with high-yield markets, according to fund research company Morningstar.

Although the fund's equity exposure has contributed positively to long-term returns, it has tended to make it more volatile than some of its peers. 

However, the fund's investment team lookl to invest in bonds from issuers that have a high probability of meeting their coupon and principal repayments. And the bouts of volatility have not prevented the fund from making good long-term total returns.

So if you can wait out those periods of volatility, and want an attractive income and exposure to bonds, Artemis High Income looks like a good way to access the more resilient ones. Buy. 

ARTEMIS HIGH INCOME (GB00B2PLJN71)

Source: Morningstar, *Artemis

Performance

Source: Hargreaves Lansdown/FE as at 14 May 2018

Top 10 holdings as at 30 April 2018 (%)

Source: Artemis

Asset allocation (%)

Bond rating allocation (%)

Source: Artemis