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20 Years On The High Road

Neil Martin Talks To Robin Hepworth, Manager of the Ecclesiastical Investment Management Higher Income Fund


 

For an award-winning fund which has outperformed most of its peers, the Higher Income Fund fRob Hepworth Ecclesiasticalrom Ecclesiastical had a less
than auspicious start. Even Robin Hepworth, its manager since inception, agrees that the launch back in November 1994 wasn’t without a few hiccups.

“We didn’t get too much money in at first,” Hepworth recalled. “About £250,000, and quite a lot of that was seed money from Ecclesiastical. And then, within a couple of months of launching the fund, Barings went bust. I had quite a big holding [in Barings], it was a newly launched fund, and I was placing around 2% at that time into each holding, so that was quite a big hit to take as soon as the fund was launched.”

Long Term Value Approach

Thankfully things soon improved and the fund gathered momentum: from its initial £250,000 it has now swelled to £250 million. But Hepworth, who is Chief Investment Officer and Senior Fund Manager at Ecclesiastical, has steered the fund through many turbulent economic periods during those two decade; he puts its success down to a certain style of investment.

“We’re long term investors, with very low levels of turnover in our portfolios. Certainly, below 20% is very normal. We follow a value based stock picking approach, finding those stocks that have fallen out of favour, but which we still think are intrinsically strong. We like stocks with low P/Es, with well covered dividends with good cash flows, and we also look for those companies which will prosper throughout the economic cycle.”

“We think it’s important to find companies with a very strong balance sheet, so that we don’t want to have to look to sell a company because we think there’s an economic slowdown on the way. We like to buy those companies which are likely to survive and prosper throughout the economic cycle, so the balance sheet is vital to us.”

“I also try to be contrarian. It might seem slightly paradoxical – why am I doing things when everyone else is doing the opposite? – but it’s mainly down to the fact that there is so much herd mentality in the City. I think if you can get away from that mentality and buy those stocks which have fallen out of favour, but which are still intrinsically strong, then that for me is one of the bedrocks of my investment philosophy.”

“An important part of our philosophy is that we don’t benchmark ourselves,” Hepworth added. “I think one of the main reasons why o many fund managers fail to outperform, fail to match the index, is that they are too benchmark-driven.”

The Higher Income Fund invests in a mix of equities, fixed interest securities and other suitable investments. The objective is to provide an above average and growing level of income together with capital growth over the longer term. Throughout the 20 years it has maintained a balance of around 60/70% in equities, with the remainder in fixed interest. The only change in this approach came in 2007 and 2008, when it almost flipped to 70% fixed interest and 30% equities.

Long-Term Outperformance

The Fund has enjoyed consistent performance, achieving an above-average and growing level of income, with capital growth over the long term. It has outperformed the IMA Mixed Investment 40-85% sector by 46.5% over a decade and delivered an average historic yield of 4.20%. And it won the Lipper Fund Award 2014 for Best Fund over five and ten years (mixed asset GBP balanced category). This is the seventh year in succession that the Fund has won the award over ten years.

“There are only 19 funds in the sector that have a track record over 20 years, says Hepworth, “and we’re actually the first of those funds over that period. We’ve returned about 470%, which compares to the sector average of about 260%; and the All-Share, for comparison, is about 350%.”

A Vote for Europe

Asked for his view on the current state of play of the economy, Hepworth says he is wary of too much optimism: “I think the whole western world has significant problems. There’s been a bit of recovery in the US, and the UK, but I’m pretty cautious on that.”

“Yes we’re seeing a recovery in the UK, but the UK fell further and faster than everyone else, and we still haven’t recovered our pre GDP per capita levels. I know our GDP is back to where it was, but on a capita basis it’s not, because our population’s been rising.”

“The main problem for me – and it’s not a short term thing, and it’s something which has not widely been discussed – is the levels of debt. Despite years of austerity, our debt levels are still as high as they were in 2007. Yes they’ve shifted a little bit away from consumer debt, there’s a little bit more Government debt, but they are still very elevated – as they are in the US, although less so in Europe.

This makes me a little bit more optimistic about Europe, which has front-loaded its austerity measures. It has got its austerity over with. It’s cut its Government deficits, which the US and the UK haven’t to a larger extent. This is one reason I like European valuations, which look pretty compelling.”

Hepworth is enthusiastic about Asia “This is the big overweight for me,” he says, “although it hasn’t done me any favours in the last three years. Asia has been an underperformer compared to the US. But for me the fundamentals look strong.”

US ’Under-Investing’

Hepworth’s other main concern is profit margins: “These are a big factor. In the US they are at freakishly elevated levels at the moment, as high as they have been since the second world war.

“The reasons for that are clear. Real wages are negative, so that has boosted company profit margins> It’s also partly down to very low interest rates, which have lowered company’s borrowing costs and boosted their profit margins.”

“But a lot of it is down to what company executives are doing, and what remuneration committees are allowing senior executives to do. They have been cutting back on capital expenditure, back on IT, back on plant and machinery – and, rather than investing for the future, they’ve been buying back their shares so as to boost their earnings per share.

“It’s a relatively low risk way of boosting their EPS compared to plant and machinery for example, which is a higher risk and less pay back, but it means they get a guaranteed pay-out.”

Sticking To The Higher Ground

Executive remuneration is a concern for Hepworth. “We run ethical funds,” he says. “The organisation is very socially responsible, and we vote against a huge number of executive remuneration packages. The problem is, a lot of fund managers are in a similar boat to some of these CEOs – they get paid very high numbers, and companies stuff those remuneration committees with people who are going to be sympathetic.”

After an early start in the property sector (helping the Church Commissioners find uses for redundant churches), Hepworth became a General Investment Analyst at Ecclesiastical in 1988. He was appointed manager of the Pension Fund in 1990 and was made manager of the new Higher Income Fund in 1994. He has also managed the Amity International Fund since its launch in 1999, and he co-manages the Amity Sterling Bond Fund with Chris Hiorns.

Hepworth spends hismountains spare time fell walking and is currently tackling a route, in stages, which is known as the GR10. It runs along the Pyrenean mountain range, from the Atlantic coast to the Mediterranean coast. He walks it with a group of friends and admits that by the time they have finished – they are now as far as the Col du Tourmalet – the group will all be in their sixties.

It’s a hard slog says Hepworth, with him and his friends walking sometimes up to ten hours a day. But, he says the views are more than worth the effort. Just the thing for maintaining the long-distance vision Hepworth needs for The Higher Income Fund.

 

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