Artemis: Welcome to the fixed income café where lunch can be free

Investment view from Grace Le, Fund manager 

Related funds | Artemis Corporate Bond Fund

It’s an old adage that there’s no such thing as a free lunch – somewhere down the line there’s a payment to be made. Except perhaps in the world of fixed income.  

The challenge is to spot the fixed income free lunches available for everyone plus those which not just anyone can snaffle – unless they are active, nimble and focused investors. 

It is the inherently inefficient nature of bond markets that we think potentially provides the most attractive free lunches, which we as bond managers find so appetizing.  

So, where do we find them? 

1. The new issue market 

An example of a free lunch everyone can swallow comes from the new issue market. Companies typically issue new bonds at a discount to outstanding debt to entice investors. Fund managers can buy them and very quickly make a very small profit. 

2. Currency differences 

The vast majority of corporate bond trading is done over the counter - you can’t just push a button and execute a bond trade. As a result, bonds don’t always behave rationally. 

Large corporations often issue multiple bonds in different currencies and with varying levels of seniority and maturity, so the bond market is much more fragmented than the equity market. Bonds issued by the same company – that should theoretically trade at similar levels because they have similar risks – sometimes diverge.  

These opportunities appear frequently but to really take advantage of them there are a few ingredients that you need: a tight, focused portfolio, an efficient investment process and a nimble team. 

3. The small print 

A less exciting but often just as rewarding free lunch can come from reading the terms and conditions (T&Cs) of a bond issue carefully. Many bond prospectuses have slightly different T&Cs within them, which render some more attractive than others and this is not always reflected in the market.  

An example is L&G, which had several Tier 2 bonds with varying T&Cs. In one, the 2064 Tier 2 bond, the prospectus contained a specific clause stipulating that if regulatory changes meant it was no longer eligible for Tier 2 capital, L&G could call it back at par. In 2022 as part of a broad fixed income sell-off, this bond fell from a cash price of £130 to £70, leading to meaningful upside as the aforementioned regulatory changes were announced and the bond steadily climbed back to £100. L&G recently tendered for this bond at £100.  

4. When takeovers impact bond ratings 

Another free lunch occurs when a high-quality company buys a lower rated company. When the merger is complete, the weaker company should get a rating upgrade.  

Japanese insurer Nippon Life acquiring Resolution Life is a case in point. We bought Resolution Life bonds on the expectation that they would converge with Nippon Life’s bonds and that is exactly what we have seen, resulting in strong outperformance. 

Whilst ‘free lunches’ are plentiful in fixed income, they are not unlimited. Our efficient investment process means we can take advantage of these opportunities more quickly than some of our larger peers. Having a relatively concentrated portfolio also means these bottom-up opportunities make a meaningful contribution to our performance, so we do not have to rely on taking duration risk or other big macro calls. We prefer to take advantage of idiosyncratic free lunches instead.  

FOR PROFESSIONAL INVESTORS AND/OR QUALIFIED INVESTORS AND/OR FINANCIAL INTERMEDIARIES ONLY. NOT FOR USE WITH OR BY PRIVATE INVESTORS.

CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.

Risks specific to Artemis Corporate Bond Fund

• Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
• Currency risk The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
• Bond liquidity risk The fund holds bonds which could prove difficult to sell. As a result, the fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities.
• Credit risk Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund.
• Derivatives risk The fund may invest in derivatives with the aim of profiting from falling (‘shorting’) as well as rising prices. Should the asset’s value vary in an unexpected way, the fund value will reduce.
• Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
• Emerging markets risk Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
• Income risk The payment of income and its level is not guaranteed.

Investment in a fund/trust concerns the acquisition of shares in the trust and not in the underlying assets of the fund/trust.

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

For information about Artemis’ fund structures and registration status, visit our fund structures page

For changes made to the Artemis Funds (Lux) range of Luxembourg-registered funds since launch, visit our fund changes page

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Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.

We recommend that you get independent financial advice before making any investment decisions.

Important information

The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.