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Edentree CIO: We’re in regulation overload and it’s ineffective

EdenTree’s chief investment officer Rob Hepworth on regulation woes, not following a benchmark approach and competition in the fund management space

EdenTree Higher Income fund manager and chief investment officer Rob Hepworth says fund management is all about taking a long-term view on investing, something he has perfected during his two-and-a-half decades of managing funds.

EdenTree, which rebranded from Ecclesiastical in 2015, is known for its ethical and screened funds, but Hepworth’s £474.8m Higher Income fund is one of its two non-screened funds (alongside the UK Equity Growth fund). Having always been non-screened, he says there are no plans to make it a screened fund at any stage.

Hepworth says: “We are happy with how it works. We have had 25 years of sales and people have been buying the fund as it is. To suddenly turn around and tell however many clients that we are changing is not fair. It has been talked about that we would try and think about some screened version of the Higher Income fund, but there’s nothing on the cards yet.”

The Higher Income fund is a multi-asset fund, which sits in the Investment Association’s Mixed 40-85 per cent Shares sector. It has 48 per cent in UK equities, 32 per cent in international equities and the rest is allocated to fixed income, according to FE data as of the end of 2018.

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The fund does not track a benchmark, something Hepworth believes is a big issue for many fund managers.

“One of the reasons so many fund managers fail to match the index is that they are following some form of benchmark approach. When the stock rises in value, the index rises in value and then the fund’s weighting to the index rises.

“Following a benchmark approach, you are already looking to buy things that have risen in value and then looking to sell things that have fallen in value.

“I think that style of thinking is the downfall of so many fund managers.”

EdenTree has no strict investment policy and funds are not constrained by house views. Hepworth says he looks to invest in well-run companies that will “grow our capital and income for our fund”. “It’s all pretty straightforward,” he adds.

The Higher Income fund currently has an average minimum seven years holding period for each stock held – and at times has been well above seven years.

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Hepworth says the fund tries to be contrarian and go against the herd. “Putting money into the UK stockmarket is an example of being contrarian. If you’re a global investor, it’s very easy to avoid the UK. The UK is the most unpopular market, according to Merrill Lynch. That’s the sort of thing that gets us interested.”

“If everyone else thinks it’s an unattractive market, then we’ll be more likely to be looking at it as an attractive market,” he adds.

Silver year
This year marks Hepworth’s silver anniversary of managing the fund and he is currently the sector’s fourth-longest running manager, according to FE. He ranks behind EdenTree’s Sue Round, Schroders’ Andy Brough and Dean Newman of Invesco.

The biggest change in his time – “for the worse,” he says – is regulation. “The amount of regulation that’s around now is a completely different ballgame to 25 years ago. I think there’s too much of it.”

Hepworth believes the current amount of regulation is “ineffective” at protecting the ultimate customer.

“There is no way we are going to avoid booms and busts. They have always been part of life, always will be. To think we will get financial stability is a pipe dream. There’s too much regulation and it should be based on a principles approach to protect the small investor.”

He says the regulator should have a supervisory role to remove “unfit” managers, but everything else should be a matter of judgement and caveat emptor for professional investors.

Technology has unquestionably been one of the biggest changes in the past two decades. He says it has been a change for the better but would “prefer” more competition in the technology space regarding how fund managers get their information.

“The Bloomberg Terminal is ridiculously expensive. I don’t like a lot of the things that Bloomberg is doing – it is taking over so many aspects of financial information. It has undoubtedly made our jobs easier, having all the information in one place. It’s a fabulous piece of equipment but having so much power in one company is troubling.”

Competition can also be a concern for many fund managers, particularly when the industry has been seeing outflows over the past year, especially from equity funds.

Hepworth notes that there has certainly been an increase in the amount of ethical funds launched recently.

“What has happened is where we were one of the few socially responsible houses, now everybody seems to be joining the bandwagon. Everyone has recognised the importance of these factors, but it does mean we’re up against some far bigger institutions with bigger marketing budgets to push their approaches.”

He adds: “We are slow and steady and will continue to do what we believe is the right thing.

“Inflows are positive, but we would like to see more. But on balance we’re doing the right thing and we’re at least not losing funds under management.”



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