Mark Dampier: He moved into bonds before the crisis. Now he's backing China

 

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Fund management is awash with star names, but a closer look reveals unsung heroes who deserve the same recognition and are just as capable of outperformance. Robin Hepworth, of Ecclesiastical Investment Management, is a prime example.

Mr Hepworth joined Ecclesiastical 26 years ago and has been lead manager of the Ecclesiastical Higher Income fund since its launch in 1994. In a recent meeting with the manager, he explained his investment approach and philosophy succinctly, without unnecessary jargon and without the need for me to go into a dark room afterwards to try and understand it all.

I find those who are articulate in explaining what they do in the first few minutes of a meeting often make the best fund managers.

As a multi-asset portfolio, the Higher Income fund typically holds about 70 per cent in shares and 30 per cent in bonds and cash. The manager is, however, prepared to be flexible with this positioning: leading up to the 2008 financial crisis, the bond and cash weighting was increased significantly to almost 70 per cent of the portfolio, which provided some shelter against the worst of the stock market falls.

Here and now, Mr Hepworth generally expects to maintain a higher weighting in shares, especially as he currently finds greater value in equities than he does in bonds.

Mr Hepworth is a truly active manager and he buys stocks with conviction, with a view to holding on to positions regardless of fluctuations in the business cycle. This means portfolio turnover tends to be very low. The fund provides broad diversification at a stock and bond level and it now comprises around 130 holdings.

The manager employs a value-based approach, favouring companies trading on attractive valuations with strong balance sheets. In terms of shares, he has a preference for those paying good dividends. This approach naturally leads him to focus on out-of-favour companies whose share prices have fallen, but which he expects will recuperate against the expectations of other investors.

The equity portion of the portfolio is biased towards UK companies that provide a rich source of dividend income, though the fund also offers geographic diversification. He believes Asia is a bright spot. The region continues to generate far greater growth than the West, while Asia's dividend culture continues to mature. The manager is one of the few I have met who is not entirely negative in his outlook for China. The country's shares look exceptionally good value against the broader global market, and while economic growth in China is slowing, it should be more sustainable over the long term.

Mr Hepworth's contrarian thinking has also led him to increase the fund's exposure to unloved areas such as Europe. He currently favours exporters, which could benefit from both the lower oil price and the weakening euro.

Unusually for a global fund, exposure to the US is limited; according to Mr Hepworth, companies in the US will begin increasing capital expenditure at some stage, which will inevitably reduce short-term profits. Furthermore, after a good run for its stock markets, many companies appear to be offering less value compared with the rest of the world.

Within the fixed-interest element, Mr Hepworth holds a relatively high proportion of preference shares, setting the fund apart from many peers. Around 9 per cent of the fund is allocated here, with many of these positions yielding about 6 per cent. He also invests in a number of permanent interest-bearing shares issued by building societies including Nationwide and Coventry.

In conclusion, this fund offers exposure to a highly experienced fund manager who has the confidence to take a genuinely contrarian and active approach. These qualities are proclaimed by many managers but, in practice, they can be hard to fulfil.

In my view, the fund could provide the core to almost any portfolio. It currently yields 4.2 per cent, making it one of the highest-yielding funds in its sector. For those who do not require the income immediately, it can be reinvested to boost the potential for capital growth over the long term.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk

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