Ecclesiastical's Hepworth swaps low-yield gilts for high-yield prefs

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A preference for more risk

Robin Hepworth, manager of Ecclesiastical Higher Income , has moved the fund up the risk scale by selling positions in short-dated government gilts and buying into higher yielding preference shares and utility stocks instead.

At the end of April, Hepworth's first and third biggest positions were 2013 and 2012 dated gilts, but he has replaced these with higher yielding preference shares in insurers Aviva, RSA and Standard Chartered bank.

He has also bought some shares and bonds at more attractive levels to take advantage of the FTSE 100's 7.5% fall in May.

Preference shares are a half-way house between corporate bonds and ordinary shares. Like bonds they pay a fixed coupon, although they are riskier than normal bonds as, like dividends on shares, the coupon can be suspended (although with the commitment of repaying the missing income when business improves). In the event of a company failure preference shareholders stand behind bondholders in the queue of creditors, but ahead of ordinary shareholders.

Hepworth's fund is currently split 60/40 in favour of equities over bonds, down from its normal 70/30 split. This reflects the manager's relatively cautious stance, although he felt the gilts offered little reward against a slightly improved backdrop.

He told Citywire: 'We have been selling gilts on 0.25% yields and buying high quality preference bonds yielding between 7 and 8%. Even if they struggle, they have to pay this dividend ahead of any ordinary dividends so we see this as a very safe way to hold fixed income.'

'I see these as good companies with solid balance sheets and attractive yields. If there was a nightmare scenario in terms of the economic situation, we should still get paid.'

Adding European utilities

Hepworth has also added preference shares in Electrical Supply Board of Ireland yielding 9% as well as buying Finnish electricity firm Fortum and French energy supplier Suez.

He moved after the sector endured a huge derating due to the eurozone's sovereign debt woes and believes that virtually all the bad news is now in the price.

'They have had a terrible time, falling 60% since the 2008 highs. They tend to be highly leveraged plays on the individual domestic economies and are regarded as such so power prices have been very weak.They are also seen as easy targets for governments to raise extra revenues.'

He believes many investors are overlooking the fact that they have significant growth profiles outside of debt-blighted Europe, such as Fortum's high exposure to Russia, which has a higher growth profile than much of Western Europe.