Fund Spotlight: mixed assets paying a 4% yield monthly

The first quarter of 2025 has been a challenging time for investors globally. Many themes and growth areas which have performed well in recent years have suffered a pullback. This has left investors with much to consider. Will equities recover and climb higher? Can fixed income offer a cushion to portfolios if further declines continue in equity markets?

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One option for navigating this uncertainty is to look at funds within the IA Mixed Investment sector, which blends asset classes in various ratios, depending on your attitude to risk. The Artemis Monthly Distribution fund is a straightforward portfolio combining bonds and global equities, with the simple objective of providing a regular monthly income along with capital growth over a five-year period.

The fund is managed by four experienced specialists. Jacob de Tusch-Lec and James Davidson are responsible for managing the equity sleeve of the portfolio, co-ordinating with Jack Holmes and David Ennett who manage the fixed-income sleeve.

What does the fund invest in?

The fund is a simple equity and bond fund with a broadly static asset allocation of 60% and 40% respectively. Management has a global remit and can invest in a relatively unconstrained fashion, with income generation in mind. Security selection is the primary focus for both the equity and bond managers, but the latter adjust their part of the portfolio to take account of biases emerging from the equities sleeve. The managers communicate regularly to coordinate the overall portfolio and manage risks at the overall strategy level.

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Across equities, the team focuses on companies which exhibit strong levels of free cash-flow generation (cash that is left over after a company pays for its operating and capital expenditures which can be returned to investors through dividends and share buybacks) relative to other companies in the market, dividend distribution and dividend growth.

The underlying equities fall into one of three buckets: core (income generating), growth (income growth) and risk (capital growth). Companies which make up the “core” bucket tend to trade on a lower valuation premium and pay a higher yield. In aggregate, the “core” bucket trades on 11 times forward price-to-earnings (p/e) ratio and a 4.5% dividend yield that is more than twice covered by free cash flow. The allocation to this category has increased in recent weeks, accounting for 36% of the fund (up from 20% in late 2024). Defensive names including pharma giants AstraZeneca (LSE:AZN) and AbbVie Inc (NYSE:ABBV) have performed well this year as concerns around the health of the US economy have grown.

The fixed income part of the fund focuses mainly on high-yield and investment grade bonds. In 2019 this allocation was broadened to a global opportunity set including the US, which adds a new dimension to this strategy. When investing in corporate bonds, the manager seeks to invest in profitable and resilient companies with a robust business model offering an attractive risk-reward profile.

In recent weeks, the team have increased duration by buying longer-dated treasuries and reducing the allocation to shorter-dated instruments. This area of fixed income tends to rally in times of market stress brought about by economic growth concerns, as this often leads to lower interest rates.

Within high yield, single B exposure has been reduced in favour of BB, which is more highly rates by credit agencies. Both fall into the higher-quality end of high yield, but this move has skewed the portfolio even further towards the highest-quality segment of the high-yield market. The spread differential between B and BB has compressed considerably, meaning that there is a reduced difference between yields of BB bonds versus lower-quality B issuances. Therefore, the single B exposure no longer offers sufficient compensation for the extra risk taken on in the eyes of the team. In contrast with the allocation to government bonds, management believes the richest opportunities in high yield lie at the short end of the curve (where high single-digit yields are on offer with minimal interest rate risk), and as such the duration exposure largely derives from government bonds.

How has the fund performed?

The strategy has a strong track record, ranking in the top quartile of the IA Mixed Investment 20-60% Shares peer group since inception. Income has also been consistent over time, with a yield of at least 4% since inception to 2020, where it understandably dropped but has since re-established at pre-2020 levels, currently 4.1%.

In recent times, the fund has outperformed its IA sector benchmark in four of the last five calendar years and can boast the title of best-performing fund within the IA sector in 2024. Throughout 2024, its equity exposure had the greatest influence in terms of overall returns. However, various bond holdings also benefited from interest rate cuts, which cause bond prices to rise and yields to fall.

Source: Morningstar Total Returns (GBP) to 31/03/2025. Past performance is not a guide to future performance.

Why do we recommend this fund?

This fund benefits from experienced equity and fixed-income managers who bring together their respective investment processes to meet the fund’s income objectives. As a result, it has a longstanding track record of outperforming its peers.

Investors should be aware, the focus on income leads to above average allocations to riskier fixed-income assets, such as high yield. Although the focus is on the higher-quality end of high yield, this approach leaves the fund scoring below average credit quality relative to its IA sector peers. This may result in greater drawdowns during periods of economic weakness, but performance remains impressive even when adjusted for higher than average risk.

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However, the credit risk taken on here contributes to a strong yield versus many peers in the sector and managers have confidence in the interest coverage and low leverage of issuers. The fixed-income managers have a specialism in high yield, running additional strategies at Artemis.

With a competitive ongoing charge of 0.85%, it represents a compelling option for investors seeking an attractive monthly dividend from a portfolio of bonds and equities and is available as a mixed-asset option on interactive investor’s Super 60 list of investment ideas.

Please find the latest factsheet here.