EdenTree Responsible and Sustainable Managed Income: May 2022 fund update

• Chris Hiorns joined EdenTree in 1996 and took over as lead manager of the fund in November 2020
• Responsible investment screens were integrated into the fund’s investment process last year. The fund’s name changed from EdenTree Higher Income to EdenTree Responsible and Sustainable Managed Income to reflect the change.
• The fund continues to combine shares, infrastructure, REITs, bonds and cash to give it the potential to deliver healthy levels of income alongside long-term growth
• 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

The EdenTree Responsible and Sustainable Managed Income fund aims to pay a higher income than many other funds. It mainly invests in shares which offer the potential to generate an income and growth over the long term.

The rest of the fund is invested in infrastructure, REITs, bonds and cash. Some investments in bonds and cash provide diversification and could reduce part of the volatility that normally comes with only investing in shares. Exposure to infrastructure and REITs could help provide some shelter against increasing inflation, though there is no guarantee.

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.

Manager

Lead portfolio manager Chris Hiorns joined EdenTree in 1996 after gaining a Masters in Economics at University College London 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, working closely with Hiorns over most of this period. Hepworth initially remained co-manager but has now stepped back fully. We hold him in high regard, so feel it’s a big loss to the fund. He remains a part of EdenTree though, managing a number of mandates.

Hiorns is able to draw on additional support from EdenTree's wider Investment Team, which includes a range of equity and fixed interest specialists. More recently, Tommy Kristoffersen joined the team from Jupiter and supports Hiorns as an investment analyst.

Process

The fund currently invests around 82% in shares, 15% in bonds and 3% in cash. The amount invested in each area can change over time though, depending on where Hiorns sees the most opportunity. More will be invested in shares when the outlook for companies to grow profits and dividends is good. But when it's less certain, bonds will feature more. 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 typically invests in companies he thinks are of sound quality, but considered 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.

There have been a few changes over the last 12 months though. Two chemical companies, Elementis and Synthomer, and specialist engineering company James Fisher & Sons were added to the fund. The team thought each company was more attractively priced following the sharp sell off at the beginning of this year.

Some investments were also reduced because of higher valuations, including Smiths Group and Bristol-Myers Squibb. These companies performed well so the team took some profit and recycled it into other areas.

Hiorns looks for opportunities in overseas businesses too, including those in the US, Europe and higher-risk Asian and emerging markets. Roughly 30% is invested in overseas shares, but this can fluctuate between 25-35% depending on the team’s outlook.

Within the overseas portion of the portfolio, Taiwan Semiconductor was sold. Hiorns rotated these profits into another Taiwanese company Simplo, a manufacturer of batteries. It could be set to benefit from the transition to electric vehicles and offered a strong yield and dividend growth potential, in the manager’s view.

On the bond front, activity has been more muted. The only recent addition was a Retail Charity Bond, as it offered an attractive yield, alongside strong credit fundamentals. We think the manager will increase bond investments again if yields become attractive, or the outlook for shares worsens.

Culture

Collaboration is an important part of EdenTree's culture. Based in their City of London office, the investment team all work around the same desk and 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 manages several funds, we’re encouraged that they share a similar philosophy and investment process, and there’s a high degree of coverage overlap. As the largest fund under his management, Responsible & Sustainable Managed Income has the lion’s share of his attention. EdenTree’s incentive structure rewards fund managers for good long-term performance, and we think this aligns fund managers’ interests with those of investors.

ESG Integration

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. 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.

Historically, this fund didn’t apply the same screening process as other EdenTree funds, but this changed in November last year.

The investment process now includes both negative and positive screens. The negative screen excludes companies the fund managers believe cause harm like weapon producers, gambling providers or companies that create explicit materials, to name a few. The positive screens identify companies with strong responsible and sustainable corporate practices.

To reflect the change, the fund’s name changed from the EdenTree Higher Income fund to the EdenTree Responsible and Sustainable Managed Income Fund.

Companies that didn’t fit these screens were removed last year, including oil & gas companies such as BP, Royal Dutch Shell and Petrobras. The fund does still have exposure to companies that can benefit from higher energy prices though, including companies in the infrastructure and renewables sectors.

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%. This 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. Since Hiorns took over as lead manager in November 2020 the fund’s performed better than the average fund in the sector.

Over the past 12 months the fund has also outpaced the average return of funds in the IA Mixed Investment 40-85% Shares sector, by 4.09%*. Though, past performance isn’t a guide to future performance.

The fund delivered good dividend growth over the course of 2021, up roughly 33% compared to 2020. This reflected the rebound in companies like banks and insurers who were able to reinstate and increase their dividend payments. Hiorns expects dividends to grow again this year. Remember though, yields and income aren’t guaranteed and can change over time.

The fixed-interest portion held up reasonably well, despite rising interest rates and yields. And a selection of bonds, including some Permanent Interest Baring Shares, continued to deliver good levels of income. But the team remain cautious on fixed interest investments overall. Hiorns feels some bonds remain expensive and continue to be vulnerable to higher inflation and rising bond yields. Instead, Hiorns prefers some of the more cyclical, higher yielding sectors like industrials or pharmaceuticals.

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 could lead to excellent long-term performance, but there are no guarantees.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2022. Income has been reinvested in the above figures.

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