January always marks a tough return to work after the Christmas and new year festivities. How best to combat the wet, windy, and glum weather? Taking a day trip up to Scotland to explore (mainly) fixed income managers probably isn’t top of the agenda for most to combat January blues.
Our trips to Edinburgh in the past have included an unexpected four-night hotel lock-in during the infamous ‘Beast from the East’ snowstorm, so forgive any PTSD inspired references used in this blog. We still curse we didn’t make that last flight out of Scotland.
We began with A Morning with Artemis. High quality Investment Grade bond managers Stephen Snow-den (I did warn you) and Grace Le offered that despite the risk rally we’ve seen in fixed income bonds over the past year, they still see the pain trade as lower spreads, remaining exposed to credit risk in their portfolios. Fishing in the less discerning, but arguably more interesting area of the market, High Yield fund managers, David Ennett and Jack Holmes, concurred on the value still on offer. They feel the return on offer taking into account the price and the coupon (known as the yield-to-maturity) of the portfolio may well surprise even higher than the current valuation, as bonds are bought back earlier than their maturity date by company finance directors.
Our final meeting with Artemis was over with a sandwich lunch with Ed Legget, manager of Artemis UK Select fund, who expressed how he has never seen such value in the market, in particular in his portfolio, at any time in his career. The UK Bank sector, for instance, now trades at an astonishing price-to-earnings multiple of 6.5x, its lowest ever outside of an economic crisis. Yet the companies are well capitalised and return large amounts of cash to shareholders through a combination of share buybacks and dividends. Ed commented that one bank he holds is buying back so many of its own shares; somewhat in jest Ed suggested that perhaps he will be the only shareholder remaining in five years time! Who knows when the frost will lift from UK equities.
A brisk and breezy walk across town took us to the shared office space of Chelverton’s European equities team – boutiques are increasingly looking start up-like! 2023 was a tough period of performance for the fund but the managers’ stringent focus on free cash flow generation within the businesses they own give them comfort on the durability of their portfolio to weather future storms. Co-managers Dale Robertson and Gareth Rudd revealed how the latter had recently spent time in Sweden to understand the culture of one their holdings, after a recent de-rating of the stock, and how, as a result the trip, it has given them confidence for it become the largest holding within the fund.
The final leg of our whistle stop tour of the city was to Aegon Asset Management (formerly Kames Capital) for a reintroduction to their high yield and strategic bond strategies. Thomas Hanson and Mark Benbow have done an impressive job on the high yield desk in weathering both strong and weak markets since 2019. Making hay whilst the sun shines, they are now de-risking their portfolio from higher beta areas of the market. Within strategic bond, Colin Finlayson and Alex Pelteshki, suggested dark clouds are on the horizon for the global economy and how they are starting to see meaningful payback in their longer duration positioning within government bonds.
Chewing over the day’s meetings, whilst savouring an Edinburgh airport made burrito, the forecast felt much like the rest of our fixed income review. Perhaps the investment gains in Q4 2023 have sucked some of the sunshine from 2024. An environment of falling inflation and weakening growth is usually favourable for bonds, but with much of the excess return made already, will lightning strike twice? Or perhaps our bullish view of fixed income assets may now need a rain check.
