EdenTree Higher Income - staying true to values

Jonathon Curtis | Tue 26 June 2018

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• Robin Hepworth invests in undervalued companies for the long term
• He’s found a lot of opportunities in the UK and has 46% invested here
• The fund yields 4.4% - variable and not an indication of future income

Our View

Sometimes, it’s best to tinker with your investments as little as possible. That’s a belief shared by many of the best fund managers, including Robin Hepworth. He’s managed EdenTree Higher Income since its launch in 1994.

Investing in out-of-favour companies and holding them for the long term has served him well. There’s no following the herd. There’s no chasing quick wins, even if it means missing short-term profits. That’s why we like the fund.

The manager’s long-term performance is excellent. But in recent years, focusing on undervalued businesses has been at odds with the vogue for investing in high-growth companies. As a result, the fund hasn’t kept up with the strong performance of the stock market.

However investment styles go in and out of fashion, and we believe the tide will turn back in Robin Hepworth’s favour again.

With a superb long-term track record, we believe this is an excellent income-focused fund worthy of its place on the Wealth 150+.

Outlook

Providing investors with a healthy income is important to Robin Hepworth. Around the financial crisis most of the fund’s investments were in bonds, as they offered an attractive income. Bond income has dwindled since then, and the manager has found better opportunities in the stock market.

In 2008 only 30% of the fund was invested in shares. Now the figure is around 70%. That’s the highest it’s ever been and he expects to increase it further.

Robin Hepworth sees a lot of opportunity in the UK. Other investors have shunned it, mainly over Brexit. He doesn’t see it as a long-term risk and so has invested more in the UK now valuations are lower. So much so that almost half of the fund is invested in UK shares.

Further afield, he likes the outlook for Europe and Asia, believing investments there are good value. His opinion of the US and bond markets isn’t so positive. While they’ve both risen considerably, he doesn’t believe future prospects justify the high valuations.

Financial companies dominate from a sector point of view. Firms such as HSBC, Legal & General and RSA Insurance Group make up over 40% of the fund’s shares. It’s the only sector Robin Hepworth has significantly added to over the past 12 months.

The manager believes financial companies can now deliver good returns for the first time in many years. And in line with the fund’s value approach, they’re attractively priced.

Ultimately though, companies are chosen on their individual merits.

Although he doesn’t think the US stock market as a whole looks attractive, one of the fund’s largest investments recently is US conglomerate General Electric. It fell out of favour with investors due to poor decisions made by previous management. Hepworth believes the new management will improve the company’s fortunes. When the shares fell 60% he saw it as an attractive opportunity to invest.

As a long-term investor, however, Robin Hepworth rarely buys and sells shares. Companies are only selected if the manager believes dividends can be paid now and into the future, and then they’re held for the long term.

They’re usually only sold when he feels the share price has become excessive. Technopro, for example, one of the largest staffing companies in Japan, was bought when it looked undervalued. Its share price later shot up and reached levels normally seen with high-growth stocks. At that stage the manager thought Technopro’s valuation was too high and sold the shares for a profit.

Performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2018.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2018.

Performance has been superb over the long-term. The fund has beaten its benchmark time and again. Yet this isn’t a guide to the future, and indeed recent gains have been subdued. Robin Hepworth is confident that over time attractively valued companies will deliver better returns than expensive, high-growth ones. We think the fund can deliver strong long-term performance and income for its investors.

Please note the fund charges can be taken from capital which increases the yield but reduces the potential for capital growth.

Please read the Key Features/ Key Investor Information in addition to the information above.

Find out more about this fund (inc. charges)