Manager focus: Rob Hepworth

Ecclesiastical’s Rob Hepworth is considering moving back into Chinese equities after switching out of the asset class towards the end of 2007.

The manager of the group’s £42m Higher Income fund moved assets out of many of his global equity holdings and Chinese H-shares (mainland companies listed in Hong Kong) in the third quarter of 2007, reinvesting them in fixed income.

Although Hepworth remains confident in the yield-generating potential of his corporate bond holdings, he is reducing his gilts positions. About 12% of the fund was invested in gilts, which Hepworth says have only been yielding on average 2.25%.

He generates most of the fund’s income from its corporate bonds, including BBB-rated issues from Marks & Spencer and BT, which are yielding between 8% and 10%. The dividends paid out by British companies look set to increase over the coming year, he adds.

Hepworth is holding the assets from the sale of his gilts in cash until he thinks the time is right to buy back into British equities.

In the meantime, he is buying into China in the view that its strongest companies are well placed to survive the global downturn. “China remains attractive. The financial health of Asia, and in particular China, will hold it in good stead at the government level, the corporate level, and the individual level,” Hepworth says.

He points to the culture of saving rather than borrowing that pervades Chinese households, and adds that many companies have net cash on their balance sheets and often own their premises and equipment outright. Despite recent figures from China’s customs bureau reporting a 25% drop in demand for exports from the previous year, Hepworth remains optimistic about the prospects for producers in the region.

“All demand is falling off a cliff – [China’s] export markets are drying up but then everyone’s are drying up – Japan’s exports fell 45% in January. But those companies with the lowest costs will pull through,” he says.

Hepworth is also considering making a small indirect investment in Vietnam in the expectation that it will follow a growth trajectory similar to China’s. “Vietnam to me looks like the China of 10 years ago. It has good natural resources, a good agriculture base, oil reserves, and it has had a massive correction,” he says.

“It is a risky market, but if you take a five-year view and buy companies that are trading on a discount to net asset value, there is a good case for putting a bit of money into Vietnam at these levels,” he adds.