EdenTree Higher Income - building up infrastructure, knocking down bonds
Jonathon Curtis | Mon 15 July 2019
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- Robin Hepworth has now managed the fund for 25 years
- Long-term performance has been excellent although it’s struggled recently
- The managers have invested more in infrastructure at the expense of bonds
If fund management had the same milestones as marriage, Robin Hepworth would be celebrating his silver anniversary this year. He’s managed EdenTree Higher Income for an impressive 25 years. Along with co-managers David Katimbo-Mugwanya and Thomas Fitzgerald, he aims to provide investors with healthy levels of income and long-term growth.
The managers invest in shares of unloved companies they think could return to favour, plus some bonds to potentially provide some stability to returns. Over half of the companies are based in the UK, but there’s a sizeable chunk of the portfolio invested in companies from developed countries such as the US, France and Hong Kong. The managers can also invest in higher-risk emerging markets.
We like Hepworth’s long and strong career track record. We also admire his steadfast commitment to the fund’s investment approach, even when times have been tough. It’s important a manager plays to their strengths and isn’t swayed by other styles doing better over short-term periods. The fund’s delivered on both income and growth fronts over the long-term, and we expect Hepworth and the team to keep up the good work, although nothing’s guaranteed. You’ll find EdenTree Higher Income on the Wealth 50 list of our favourite funds.
How’s the fund performed?
The fund’s long-term performance has been excellent. It’s grown 714.7%* since Hepworth started running it in 1994. The IA Mixed 40-85% Shares peer group grew 335.2% over the same period. Remember past performance doesn’t guarantee or indicate future performance. Our analysis suggests this strong performance is mainly down to the manager shifting the portfolio into different areas that’ve gone on to perform well.
The fund has normally done better than the benchmark when markets have been falling, but it’s also usually fallen behind when markets have risen. That’s what’s happened recently as the fund hasn’t kept up with market gains. Over the longer term though we expect the fund to do well, although there are no guarantees.
The fund yields a healthy 4.8% as I write, although that’s not a reliable guide to the income you’ll receive in future and it will vary.
Fund performance during Robin Hepworth's tenure
Past performance is not a guide to the future. Source: Lipper IM *to 30/06/2019
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| Jun 14 -
Jun 15 |
Jun 15 -
Jun 16 |
Jun 16 -
Jun 17 |
Jun 17 -
Jun 18 |
Jun 18 -
Jun 19 |
|
| EdenTree Higher Income | 2.7% | 1.2% | 15.8% | 5.5% | 0.6% |
| IA Mixed Investment 40-85% Shares | 6.4% | 2.1% | 16.6% | 4.9% | 3.5% |
Past performance is not a guide to the future. Source: Lipper IM to 30/06/2019
How’s the fund changed?
American technology giant Intel was recently sold. It had been a part of the portfolio for around seven years and in that time its share price doubled. But the managers thought it had made some missteps, including missing out on the smartphone market and allowing competitors to catch up.
They decided to invest instead in Taiwan Semiconductor Manufacturing Company. It’s the market leader in making semiconductors, and is six times larger than its nearest competitor. That means it should be able to offer faster technology at a lower cost than its rivals, and has more resources to invest in innovation.
The managers have invested more in infrastructure and reduced investments in bonds. Hepworth thinks bonds aren’t performing as differently to shares as they used to, so they’re not providing as much diversification. He’s also not keen on their current yields. He likes infrastructure’s different performance to the stock market, higher yields than many bonds currently and potentially stable, inflation-protected income and growth.
Investments in infrastructure such as HICL Infrastructure currently make up around 7% of the fund and Hepworth expects that amount to increase in the future. Around 18% of the fund is currently invested in bonds. That’s the lowest level it’s ever been.
Outlook
The managers remain confident that unloved companies can deliver strong long-term returns. Their investment approach has been out-of-favour for several years, which has led to some disappointing periods in the short-term. But they haven’t changed how they invest. And the longer their style remains out-of-favour the stronger their belief that it could make a comeback.
Please note the fund charges can be taken from capital which increases the yield but reduces the potential for capital growth.