Regular readers of this column will know I like funds with a half decent yield. Generally speaking, dividends are far more stable than capital returns, which means investors who rely on the income from their investments are in a more secure position than those who draw off the capital value.
There are plenty of good funds with an attractive income to choose from. One is Edentree Higher Income, successfully managed by Robin Hepworth since its launch in 1994. The mixed assets fund currently yields 4.28 per cent, which, given the lacklustre outlook for interest rates, is highly appealing.
However, I do not envy Hepworth the asset allocation decision at present. The political and economic environment has shifted dramatically and the rise of protectionist policies, coupled with a shift from monetary to fiscal policy, makes for an uncertain outlook. A long period of central bank manipulation and record low interest rates has also caused many financial assets, particularly bonds, to rise strongly.
As a result, Hepworth has flipped the fund’s positioning. In the months following the 2008 financial crisis, 70 per cent of the portfolio was exposed to bonds and cash, with the remaining 30 per cent invested in equities. This compares with a 70 per cent weighting to equites today.
Indeed, at 27 per cent, the fund now has the lowest exposure to bonds it has ever had. While government bonds such as gilts are very expensive, Hepworth feels there are niche areas that still offer good value. Preference shares, for example, are an overlooked area of the market with attractive yields. Bonds rated BB and below are also of interest as they fall outside the remit of many other investors, so offer a slight yield advantage. Exposure to this area has grown over the past few years, driven largely by a position in a BB-rated Tesco bond, which has performed well.
Playing the patient game
One of the fund’s largest equity positions is an investment in Shell. While innovations such as the electric car leave Hepworth cautious on the long-term prospects for the oil price, he believes we are at least 10 years away from these factors having a material impact on demand. Gas now accounts for a much larger portion of Shell than it has in the past and the company also benefits from a strong downstream business. This means the health of the company’s balance sheet is now less influenced by the price of oil.
Unlike many of his peers, Hepworth is positive in his outlook for the UK stockmarket and has increased the fund’s exposure. Over recent months, the UK has underperformed most global stockmarkets, mainly due to Brexit uncertainty. The manager is confident this is a temporary issue and expects the UK to recover as overseas investors take advantage of weaker sterling and the uncertainty wanes.
He is also positive on Asia and Japan, where he expects GDP per capita to quickly catch up with the developed world to the benefit of companies there. Elsewhere, he feels the US is highly valued but is reluctant to avoid it completely as it accounts for such a large portion of the global market. He favours healthcare and telecoms companies in this area, which he feels are fairly valued compared with their European counterparts.
What Hepworth shares with many good fund managers is a very low turnover approach. He has added only eight new positions to the portfolio over the past year. Patience is a key element of his strategy and he believes “doing nothing” is often the best course of action. This is not complacency – it is an appreciation that the more decisions you make, the more you tend to get wrong. A sentiment I agree with wholeheartedly. With the experienced and proven Hepworth at the helm, I believe the Edentree Higher Income fund to be an excellent investment choice.
Mark Dampier is head of research at Hargreaves Lansdown