EdenTree Higher Income (previously Ecclesiastical Higher Income) is one of the longest-standing funds of its kind, with manager Robin Hepworth at the helm since its launch in 1994. Despite a very good long-term track record the fund is still relatively small at around £300m.
As the name suggests it pays an attractive income, which Hepworth has successfully grown over time. The fund currently yields 4.8 per cent. With 50 per cent invested in UK equities, 15 per cent in international equities, 5 per cent in property and infrastructure and 30 per cent in fixed interest, this is no mean feat. The portfolio is fairly defensive in its positioning and Hepworth has maintained a 70 per cent equity and 30 per cent bond exposure for a number of years.
While the fund has outperformed its peers since launch, 2015 was a tougher year. Exposure to Asian equities dragged on returns, as did almost 5 per cent invested in oil majors BP and Royal Dutch Shell. As a value investor, Hepworth seeks companies whose stock price is lower than what he calculates the company is worth, and this value bias has proven its biggest headwind.
Growth companies, with stable earnings and steady cashflows, have outperformed their value counterparts since early 2008 but the divergence has become more pronounced over the past 18 months. Since September 2014, UK growth companies have delivered a return of 8.1 per cent on average, while value stocks have fallen by 18.2 per cent – the biggest differential I can remember.
This trend could be attributed to several factors. Amid economic turmoil, many investors have favoured the perceived safety of high quality growth stocks. Although the income offered from growth stocks is generally lower than that available from value, investors earning little interest from cash deposits have favoured regular and reliable dividends over a higher potential income. It is difficult to know when value stocks will snap back but in the meantime investors are compensated by a highly attractive yield.
An experienced asset allocator, Hepworth tends to shift the allocation of the portfolio gradually. As one asset class becomes more expensive, he will take profits and reinvest the proceeds into the weaker area. Over the long term, this approach has worked well.
The fund’s equity holdings are focused on companies with an attractive, sustainable dividend, which the manager expects to grow over time. In line with his value bias, he particularly favours those which have temporarily fallen out of favour with investors, provided he feels the long-term prospects for the company remain intact. GlaxoSmithKline is a current example.
The share price fell on investors’ concern over the company’s corruption scandal in China and one of its key drugs falling out of patent. There is also concern over the sustainability of its dividend. However, the manager is positive in his outlook and believes investors’ dividend concerns are unjustified as they overlook the long-term potential of the company’s HIV and shingles vaccines.
For the bond exposure, Hepworth favours high-yielding corporate bonds. Around half the bond exposure is in unrated bonds, which currently includes a large weighting to building society permanent interest bearing shares.
These performed significantly better than bank bonds during the financial crisis and Hepworth is confident of their continued strength. Building society Pibs tend to be relatively illiquid. The fund is too small for this to pose an issue at present but exposure to this area would most likely reduce if it grew larger.
The fund remains an ideal core holding for those in search of an above-average income and for someone to do the important asset allocation on their behalf. I think of it as a tortoise-type fund – and as the story goes, it was the tortoise that won in the end.
Mark Dampier is head of research at Hargreaves Lansdown