EdenTree’s Chris Hiorns has gone overweight banks for the first time in his career, saying that they will continue to look attractive even if interest rates aren’t increased from their current rock-bottom levels.
Hiorns manages the EdenTree Responsible & Sustainable Managed Income fund, formerly the EdenTree Higher Income fund, which has just changed its name after putting a vote to investors.
Upon confirmation of the vote, manager Hiorns immediately dumped oil & gas holdings BP and Shell.
The manager said that although he didn’t sell these stocks for performance reasons – the lack of investment in this area over the past few years means that the price of oil is likely to remain high for some time yet – there are plenty of other opportunities in income-paying stocks.
“It's an oddity of the market that even though we're seeing equities hitting new highs, there are lots of high-yielding companies trading on attractive multiples,” he said.
“Although we had a recovery in the value and high yield areas of the market since the vaccines came out, that didn't do anything in terms of ratings because they saw their earnings expectations go up in parallel to that shift in performance.
“And actually, as we went into Covid, a lot of these companies were on very attractive valuations anyway.”
One area Hiorns (pictured) has increased his exposure to is financials, going overweight the banks last year – he holds Lloyds in his top-10, with a smaller position in HSBC.
“That was for the first time in my career managing equities for getting on 14 to 15 years now,” he said. “They still look attractive. They haven't yet had the benefit of higher interest rates and bond yields and I think that is still to come. But even disregarding that, they are improving their profitability.”
Performance of indices over 20yrs
Source: FE Analytics
For example, the manager pointed out that Covid-related losses have been less than the provisions set aside by the banks, while they also cut costs during the pandemic. This represented a continuation of a trend that has been going on since the financial crisis: according to data from the British Bankers Association, the number of bank and building society branches in the UK fell by 34% between 2012 and 2021, as customers embraced online banking and digital payment methods.
“There's also been a lot of retrenchment,” Hiorns added. “We've seen that in quite a few markets, overseas players may have entered, but then pulled back.
“So on the whole, despite the challenger banks, it's probably a less competitive space than it has been historically.”
It could be argued that there is little point in selling out of polluters such as BP and Shell if you are just going to buy the banks which lend money to fossil fuel companies instead.
In response, Hiorns said EdenTree’s in-house responsible investment team scrutinises all potential holdings and will have the final say on any additions in this area.
“The banks we consider for investment will need to be aware of the risks related to potentially stranded assets on the balance sheets of their debtors and will need to demonstrate that they have a considered sustainability strategy in place,” he explained.
"Our biggest bank holding at the moment is Lloyds, which aims to reduce the emissions it finances by more than 50% by 2030 and is a founding member of the Net Zero Banking Alliance.”
Hiorns also has exposure to insurance companies, with Legal & General his second largest holding at the end of October. This is an area that other value managers have highlighted as benefiting from strong tailwinds, with Fidelity Special Situations manager Alex Wright citing “strong demand for bulk annuities and pension de-risking” earlier this year.
Hiorns added: “You can pick up some very attractive yields there, from 7.5 to 8%. They are on relatively cheap valuations as well, on big discounts in terms of price to book, and p/e [price/earnings] ratios of under 10.
“Given where we are with bond yields and interest rates, these companies are looking very attractive. You know, this isn't rocket science.”
Data from FE Analytics shows EdenTree Responsible & Sustainable Managed Income has made 104.8% over the past 10 years, compared with gains of 121.2% from the FTSE All Share and 119.7% from the IA Mixed Investment 40-85% Shares sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £436m fund has ongoing charges of 0.78% and is yielding 3.3%.