EdenTree Higher Income: May 2020 fund update

Dominic Rowles | Tue 19 May 2020

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  • Robin Hepworth is one of the UK's most experienced fund managers
  • He and his team have a good track record of combining shares, bonds and cash to deliver healthy levels of income alongside long-term growth
  • We think this fund could be a great option for income-generating portfolios

How it fits in a portfolio

This fund aims to pay a higher income than many other funds. Shares form most of the fund and have the potential to generate an income and long-term growth. Some investments in bonds and cash provide diversification, and could reduce part of the volatility that normally comes with only investing in shares. We think the fund could work well in a portfolio focused on trying to achieve an income, alongside some capital growth. It could also provide some balance alongside equity funds in a more adventurous income-focused portfolio.

Manager

Robin Hepworth is one of the UK's most experienced fund managers and has been lead manager of this fund since launch in 1994. He joined EdenTree in 1988 as an investment analyst and rose through the ranks to become a fund manager in 1990 and the firm's Chief Investment Officer (CIO) in 2011.

Hepworth needs to balance his fund management responsibilities with his CIO duties, but it's a balance he's struck successfully for a number of years and we think he can continue to do so. We're also encouraged he's stepped aside on some other funds in recent years to concentrate his efforts on this one.

He benefits from the support of co-managers David Katimbo-Mugwanya and Thomas Fitzgerald, but our conviction lies with Hepworth.

Process

Robin Hepworth and his team invest in companies that other investors ignore – possibly because something's gone wrong, or the company's in an unfashionable area. Whatever the reason, the setback must be temporary. They won't invest unless there is clear potential for the business to improve and its share price to recover. A share price recovery can take time, so the managers invest for the long term. In the meantime they collect any dividends paid, which are shared with investors.

The team invests more in shares when their outlook for company profit and dividend growth is positive. When it's less certain they invest more in bonds. Bonds haven't tended to be as volatile as shares over the long run, but they may not grow as much.

Hepworth and his team think a long-term outlook is essential. Especially now, when coronavirus is creating uncertainty across the globe. The short-term outcome is unpredictable, but coronavirus will pass. The team remains optimistic that markets will recover over time, and 78% of the portfolio remains invested in shares (between 40-85% can be invested in shares), with the rest in bonds and cash. They usually focus on UK companies, but also invest in America, Europe, Asia and higher-risk emerging markets.

Income from many bonds has dwindled in recent years and the managers have been forced to look further afield for opportunities. UK preference shares form 8% of the fund. Preference shareholders are at the front of the queue for dividend payments – companies can't pay dividends to ordinary shareholders until they've paid preference shareholders. Unlike ordinary shares though, the dividends they pay are fixed at a certain level and won't increase if the company has a particularly good year. The team thinks preference shares are an overlooked area of the market with attractive yields.

They also invest in permanent interest bearing securities (PIBS), an investment similar to a bond, issued by UK building societies. These investments offer diversification and can help smooth the fund's returns.

Culture

Responsible investment is in EdenTree's DNA. While responsible investing has become popular in recent years, to them it's far more than a fad or a fashion. They've been investing this way for three decades and it's their heritage in this area that sets them apart. All EdenTree fund managers consider the Environmental, Social and Governance (ESG) risks of the companies they invest in and have access to an experienced and passionate Responsible Investment team.

Collaboration is an important part of EdenTree's culture. Based in their City of London office, the investment team all work around the same desk and are encouraged to share investment thoughts and ideas, whilst also challenging others. They're independent thinkers and aren't afraid to take a view that's different from other investors.

EdenTree is a smaller operation than some of its competitors, but we think the investment team is sufficiently resourced. We also like that fund managers are incentivised in a way that aligns their interests with long-term investors.

Cost

This fund usually has an ongoing annual charge of 0.78%, but we've secured HL clients an ongoing saving of 0.43%. This means you pay a net ongoing charge of 0.35%. We think this is an attractive price to access a team we hold in high regard. Please note the fund's charges can be taken from capital. This increases the yield, but reduces the potential for capital growth.

The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Hepworth and his team have done an excellent job for investors since launch in 1994. The fund's performed much better than its peers in the IA Mixed Investment 40-85% Shares sector. They've also successfully changed the amount invested in different shares and bonds to generate an attractive income.

The fund didn’t hold up quite as well as its peers during the recent coronavirus crisis though. Its focus on unloved companies whose share prices don’t reflect their true value held back performance. It's a style that's been out-of-favour in recent years because investors preferred the perceived consistency of companies with a history of growing their earnings year after year. The fund's focus on UK companies, which performed poorly compared to their overseas peers, also held back returns.

Overall, we continue to believe Robin Hepworth and his team are capable of delivering strong performance over the long term, but there are no guarantees.

Annual percentage growth
Apr 15 -
Apr 16
Apr 16 -
Apr 17
Apr 17 -
Apr 18
Apr 18 -
Apr 19
Apr 19 -
Apr 20
EdenTree Higher Income -3.0% 15.4% 8.5% 0.8% -12.0%
IA Mixed Investment 40-85% Shares -2.7% 17.2% 4.9% 3.9% -4.2%

Past performance is not a guide to the future. Source: Lipper IM to 30/04/2020.

Find out more about EdenTree Higher Income including charges

EdenTree Higher Income Key investor information

Important information

Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice.

No news or research item is a personal recommendation to deal.

Hargreaves Lansdown Asset Management is authorised and regulated by the Financial Conduct Authority.

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