Where Morningstar's 2025 bond manager of the year sees the best opportunities right now

Artisan Partners' Brian Krug, a Morningstar award-winning fixed income portfolio manager, implements a concentrated high-yield strategy by investing in fundamentally sound but temporarily distressed businesses, notably providing financing to cruise lines during the pandemic which are now on a path to investment grade. His 5-star rated Artisan High Income Fund (ARTFX), yielding 6.73% as of June 30, holds significant exposure to B- and CCC-rated assets. Krug currently sees opportunities in insurance brokerages, continued value in upgrading cruise lines, and inefficiencies within the loan market, emphasizing that market dislocations and economic downturns create prime buying opportunities for alpha generation.

Analysis

Artisan Partners' portfolio manager Brian Krug has garnered a Morningstar award for a high-conviction credit strategy centered on investing in fundamentally sound but out-of-favor businesses. His Artisan High Income Fund (ARTFX), which is five-star rated, exemplifies this approach with a concentrated portfolio heavily weighted towards lower-grade credit, including 44% in B-rated and 20.3% in CCC-rated and below assets. This allocation reflects his view that such assets are inefficiently priced due to investor risk aversion. The fund's 6.73% SEC yield as of June 30 underscores its high-yield nature. A prime example of this strategy's success was providing crucial financing to cruise lines like Carnival (CCL) and Norwegian (NCLH) during the 2020 pandemic shutdowns; these assets are now on a recovery path toward investment grade. Currently, Krug identifies opportunities in insurance brokerages, citing their predictable revenues and high margins, with Ardonagh Group being the fund's top holding at 4.5%. He also sees continued, albeit more modest, value in cruise lines as credit upgrades attract new buyers, and points to inefficiencies in the broadly syndicated loan market where downgrades create buying opportunities. Krug's outlook is notably counter-cyclical, viewing potential economic downturns not as a risk but as a prime opportunity to leverage market panic for alpha generation through selective security purchases.

Key Decisions for Investors

• Investors should consider that significant opportunities exist in fundamentally strong companies within distressed or unpopular sectors, as validated by the fund's successful contrarian plays in post-pandemic cruise lines.
• Monitor the credit of insurance brokerages for stable, high-margin opportunities and watch for spread compression in recovering cruise line debt as they approach investment-grade ratings, which could trigger a new wave of buying.
• Adopt a counter-cyclical mindset by preparing to deploy capital during periods of market dislocation or economic downturns, as these events can create attractive entry points for high-yield assets at depressed prices.
• Acknowledge that a strategy heavily weighted in lower-grade credit requires a high risk tolerance and a focus on deep, bottom-up research to mitigate idiosyncratic risks associated with individual company performance.