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EdenTree Higher Income: March 2021 fund update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Chris Hiorns is a highly experienced fund manager and uses the same approach developed by co-manager Robin Hepworth
  • The fund combines shares, bonds and cash with the aim to deliver healthy levels of income alongside long-term growth
  • We think this fund could be a great option for income-generating portfolios
  • This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

EdenTree Higher Income aims to pay a higher income than many other funds. Shares form most of the fund and have the potential to generate an income and long-term growth. Some investments in bonds and cash provide diversification, and could reduce part of the volatility that normally comes with only investing in shares. We think the fund could work well in a portfolio focused on trying to achieve an income, alongside some capital growth. It could also provide some balance alongside equity funds in a more adventurous income-focused portfolio. The fund can invest in emerging markets which are higher risk.

Manager

Lead portfolio manager Chris Hiorns joined EdenTree in 1996 after gaining a Masters in Economics at University College London. He worked his way up through the business over a period of decades and now serves as Head of Multi Asset and Senior Fund Manager. Hiorns became lead manager of this fund on 1 November 2020, taking over from Robin Hepworth. Hepworth had managed the fund for over 25 years and we hold him in high regard, so we are pleased that he continues to act as co-manager alongside Hiorns, working three days a week.

We think Hiorns is very much on top of the portfolio and has the right credentials to take over this fund. He's worked with Hepworth for nearly 25 years and has plenty of fund management experience. Our analysis of a separate portfolio he's managed since 2008, which is invested similarly to the Higher Income fund, suggests he's added lots of value for investors, through investments in UK shares, overseas shares and fixed interest investments.

Hiorns and Hepworth share a similar investing philosophy, and we expect continuity in the way the fund is managed. This is why the fund retains its place on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential. We will let investors know if our view of the fund changes.

The managers are supported by EdenTree's wider Investment Team, which includes a range of equity and fixed interest specialists, as well as co-managers Thomas Fitzgerald and David Katimbo-Mugwanya.

Process

Hiorns invests in shares, bonds and cash. He invests more in shares when the outlook for companies to grow profits and dividends is good. When it's less certain he'll invest more in bonds. Bonds can offer an attractive income and their prices haven't tended to rise and fall as much as share prices. They can reduce volatility, but also hamper gains.

Hiorns changes the amount invested in each area over time, depending on where he sees the most opportunity. In recent years the amount invested in shares has increased to around 75%. While many companies faced dividend cuts last year, over the longer term shares have generally offered an attractive and growing income, while income from bonds and cash has dwindled. He usually focuses on UK companies, but also invests in America, Europe, and higher-risk Asian and emerging markets.

The amount invested in bonds has reduced in recent years. Hiorns and Hepworth agree that there's little value in fixed interest markets at the moment – particularly in government bonds – and prefer to invest in more niche areas that are still paying an attractive yield, such as preference shares and Permanent Interest Bearing Shares (similar to bonds but issued by building societies to raise funds). A portion of the fund’s shares investment is in infrastructure funds, a more defensive area which Hiorns thinks provide similar characteristics to bonds, with better yields than investment grade bonds.

Some corporate and higher-risk high-yield bonds are held as it's still possible to find some income here. They also help diversify the fund. We think the manager will increase bond investments again if yields become attractive, or the outlook for shares worsens. This is partly why we like the fund.

Hiorns typically invests in companies he thinks are of sound quality, but out-of-favour or overlooked. This could be because something has gone wrong, or the company is in an unfashionable area. Whatever the reason, the setback must be temporary. The manager won't invest unless he sees the potential for business improvement and share price recovery. This often takes time, so he invests for the long-term. Recently Hiorns trimmed positions in stronger performing companies, including TSMC and General Electric, and favours value, high yield sectors including pharmaceuticals, telecommunications and industrials.

The fund’s income was lower in 2020 than the prior year as the coronavirus pandemic caused many companies to cut dividends. Its yield remains competitive though, at 3.6%*, and Hiorns is focused on rebuilding the fund’s dividend income.

Culture

Responsible investment is in EdenTree's DNA. They've been investing this way for three decades and it's their heritage in this area that sets them apart. This fund doesn’t apply the same screening process as other EdenTree funds, but all EdenTree fund managers consider the Environmental, Social and Governance (ESG) risks of the companies they invest in and have access to an experienced and passionate Responsible Investment team.

Collaboration is an important part of EdenTree's culture. The investment team are encouraged to share investment thoughts and ideas, whilst also challenging others. They're independent thinkers and aren't afraid to take a view that's different from other investors.

While Hiorns has other funds to manage, they have a good similarity with this portfolio and we are happy with his level of focus on the Higher Income fund. As the largest fund under his management, Higher Income has the lion’s share of his attention. EdenTree’s incentive structure rewards fund managers for good long-term performance, and a portion of bonuses is deferred. We think this aligns well with the fund’s long-term objectives.

Cost

This fund has an ongoing annual charge of 0.78%, but we've secured HL clients an ongoing saving of 0.43%. This means you pay a net ongoing charge of 0.35%. We think this is an attractive price to access a fund we hold in high regard. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Please note the fund's charges can be taken from capital. This increases the yield, but reduces the potential for capital growth.

Performance

Producing a higher income is the fund’s priority, but it also focuses on capital growth, and preserving capital when the share market is falling. The fund has done an excellent job for investors since it launched in 1994. It's performed much better than the average fund in the sector.

Hiorns has also shown the ability to outperform, managing a similar portfolio since 2008. Sometimes his approach will go out of favour and performance won’t be as good. This is true of any fund manager and past performance isn’t a guide to the future.

We think Hiorns can successfully adjust the amount invested in different shares and bonds to generate an attractive income, over the long run.

The fund’s performance fell more than the average fund in the sector in the first three months of 2020, partly due to its higher weighting to the UK share market, and to higher dividend-paying and ‘value’ companies that did less well amid the pandemic. While performance is still behind the sector average over the past year, the fund has bounced back as share markets recovered, beating the sector average by more than 4% over the past six months. Positive vaccine news in November prompted a rotation into value and benefitted many of the income-generating companies Hiorns invests in.

We would normally expect Hiorns’s approach to offer some shelter when markets fall, but not perform quite as well when they rise strongly. Not losing as much in the tougher times means there’s less to make up in the good times. This can lead to excellent long-term performance, but there are no guarantees.

Annual percentage growth
Feb 16 -
Feb 17
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Feb 20 -
Feb 21
EdenTree Higher Income 19.70% 5.92% 1.59% -1.58% 6.65%
IA Mixed Investment 40-85% Shares 19.09% 5.42% -0.03% 5.15% 10.64%

Past performance is not a guide to the future. Source: *Lipper IM as of 28 February 2021.

Find out more about EdenTree Higher Income including charges

EdenTree Higher Income Key investor information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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