Investment Week award winner avoids risk assets to drive returns for Ecclesisatical
Robin Hepworth was named Global Equity Manager of the Year for his ethical investment fund Ecclesiastical Amity International at Investment Week’s 2010 Fund Manager of the Year Awards earlier this month, the first time the group has taken an accolade at these awards.
Hepworth’s heavily defensive stance, high cash weighting and overseas exposure in recent years has helped drive performance on his portfolios through turbulent markets.
He has managed Ecclesiastical Amity International since its launch in 1999, consistently delivering top-quartile returns. According to Morningstar, the £78m fund is ranked second out of 134 vehicles in the IMA Global Growth sector over five years, up 74.3% compared to a sector average of 22.2%.
It is ranked second over three years, up 13% compared to a sector average fall of 10.6%. Over one year it is up 22.9%.
Hepworth has also managed the £75m Ecclesiastical Higher Income fund since its November 1994 launch. The fund is the top performer out of 19 vehicles in the IMA UK Equity & Bond Income sector over five years to 5 July, up 42.1% compared to a sector average of 11%.
It is the top performer over three years with a return of 7.7% against an average decline of 12.8%. Over one year it is ranked fifth, up 17.8% compared to an average sector increase of 14.6%.
What are the reasons for the Ecclesiastical Amity International fund’s outperformance?
The difference between the two funds is how much they can invest in overseas markets. Amity International is 100% international; Higher Income can only invest 20% of its funds in the international scene. But those 20% in the Higher Income fund are concentrated in Asia.
Amity International has had little in property and little in Western banks. We are happy with Asian banks as they have come through the global recession very strongly. So where we have bank exposure it is leaning towards Asia. We have exposure to HSBC and Standard Chartered but of course they are more Asian than they are Western.
We have had some good individual stock performances but we are a very highly diversified fund. We do not tend to run positions which have more than about 3% in any one stock. We have had a particularly strong showing in the last year from a company called China Shineway, which makes herbal products. These shares are up six-fold over the last 18 months. The company has got very strong balance sheets.
Where we do have UK exposure we have tried to concentrate it in areas which are benefitting from overseas exposure and sterling’s decline. So we are particularly happy with pharmaceuticals because they are big overseas earners, and the telecoms sector. We like Vodafone which has big overseas earnings, and we have particularly high weightings to mobile operators generally, which have done well over the last year. What we like about the telecoms sector is not only are their revenues fairly defensive – people tend not to cut down on their mobile phone usage generally when there is a recession on – but there is also a capacity crunch developing in mobile telephony. We have been positioning ourselves for this for some time.
Why has the Ecclesiastical Higher Income fund outperformed?
We have been very defensive. For the past three or four years we have had high levels of cash. In Higher Income’s case we have tended to have 70% equities and 30% bonds allocation.
This flipped in 2007 so we had 30% equities and 70% bonds. We also went higher in the defensive sectors which would suffer a lot less in the downturn, such as healthcare and telecoms. We did this because we thought equities were looking overvalued.
We were very nervous about residential property, particularly in the US and UK and parts of Europe. We did not have any exposure at all to anything which was property-related, whether it was housebuilders or Western banks because of their indirect exposure to property through mortgages.
These defensive positions have certainly helped us over the past three years, although over the past 12 months they have probably not helped. Most of the underperformance from banks came back last year. We have got back into Asia after the big falls. Asia fell in 2008 after we had sold out. We started putting money back into the region at the end of 2008 and into 2009, and it is beginning to perform particularly strongly.
We are very comfortable to have high weightings in Asia within both the Higher Income and Amity International funds. We see the financial strength of Asia putting it in particular good stead for the future, not only at government level.
This is not to say strong economic growth is always translated into strong stockmarket returns. It is not. Asian markets are more volatile than they are in the West. We have to be nimble at times and be prepared to take significant regional decisions, as we did in 2007 when we came out of Asia.
What significant changes have you made to the two portfolios in recent months?
The main one has been Japan. We had nothing there until the end of 2009. Japan’s problem has been a particularly long, tortuous one of negative growth and deflation for many, many years. We were fundamentally put off because we could not find value.
The valuations in the Japanese stock market always appeared to us quite extreme, but in 2009 when the rest of the world markets were storming up, Japan fell again. Japan has been very badly hit by the global recession. It is a big exporting nation and its currency has also gone through the ceiling so its exports are less competitive.
As a result, its corporate earnings have fallen and therefore the valuations, the P/Es on the market, went through the roof. So Japan does not look cheap on P/E, but if you are prepared to look through the recession and say ‘what is the fundamental intrinsic value of some of these companies?’, I would argue they are very strong indeed.
Japan has got some very strong companies in machine tools and automobile parts. We have built the Japan position in Amity International up to around 4%. As and when we can find good ethical SRI stocks which to us are cheap, that figure will go up to around 6% or possibly 8% across both funds.
