Mark Dampier: Those who identify value will be standing tall after the storm

EdenTree Higher Income's Robin Hepworth favours companies that have temporarily fallen out of favour with investors, provided he feels the long-term prospects remain intact

EdenTree Higher Income (previously Ecclesiastical Higher Income) is one of the longest-standing funds of its kind. Robin Hepworth has been at the helm since its launch in 1994. Despite a very good long-term track record, the fund is still relatively small at around £300m.

As the name suggests, it pays an attractive income, which Mr Hepworth has grown over time; currently the fund yields 4.8 per cent. With half the fund invested in UK equities, 15 per cent in international equities, 5 per cent in property and infrastructure and 30 per cent in fixed interest, this is no mean feat. The portfolio is fairly defensive in its positioning and Mr Hepworth has maintained a 70:30 equity and bond exposure for a number of years.

While the fund has outperformed its peers since launch, 2015 was a tougher year. Exposure to Asian equities dragged down returns, as did the near 5 per cent invested in oil majors BP and Royal Dutch Shell. As a value investor, Mr Hepworth seeks companies whose stock price is lower than what he calculates the company is worth – and this value bias has proved its biggest challenge.

Growth companies, with stable earnings and steady cashflows, have outperformed their value counterparts since early 2008, but the divergence has become more pronounced over the past 18 months. Since September 2014, UK growth companies have on average delivered a return of 8.1 per cent while value stocks have fallen 18.2 per cent – the biggest differential I can recall.

This trend could be attributed to several factors. Amid economic turmoil, many investors have favoured the perceived safety of high-quality growth stocks. It is difficult to know when value shares will snap back but in the meantime investors have the compensation of a highly attractive yield.

I have often remarked how investors invariably fail to manage their asset allocation successfully. It is perhaps a sweeping generalisation but what I specifically mean is "tactical" allocation. Moving in and out of different asset classes is exceptionally difficult to time right and usually leads to poor results. Mr Hepworth tends to shift the allocation of the portfolio gradually rather than making large, wholesale changes. As one asset class becomes more expensive than another, he will take profits and reinvest the proceeds in the weaker area. Over the long term, this approach has worked well.

The fund's equity holdings tend to be in companies with an attractive, sustainable dividend. In line with his value bias, he particularly favours those that have temporarily fallen out of favour with investors, provided he feels the long-term prospects remain intact.

GlaxoSmithKline is one such holding. The share price fell amid investor concern over a corruption scandal in China and one of its key drugs falling out of patent. There is also concern over the sustainability of its dividend. However, the manager is positive in his outlook and believes investors' dividend concerns are unjustified as they overlook the long-term potential of the company's HIV and Shingles vaccines.

On the other side of the portfolio, Mr Hepworth favours high-yielding corporate bonds – and half the exposure here is in unrated bonds, including a large weighting in permanent interest-bearing shares (PIBS) from building societies. These performed significantly better than bank bonds in the financial crisis and the manager is confident of their continued strength. PIBS tend to be relatively illiquid (not easy to buy and sell), but the fund is too small for this to pose an issue at the moment; exposure to this area would most probably be reduced if the fund grew larger.

The fund remains an ideal core holding for those seeking both an above-average income and someone to do the asset allocation on their behalf. I think of it as a tortoise-type fund – and as the proverbial story goes, it was the tortoise that won in the end.