Keiron Root interviews Chris Evans, lead manager of the Charles Stanley Regular High Income Fund.

In the current market turbulence, caution is a sensible strategy. As Chris Evans, manager of the Charles Stanley Regular High Income Fund, observes, ‘We remain very cautious for the immediate future. Security is now more important than ever when seeking the highest practicable income for our holders.’

He explains that ‘The Charles Stanley Regular High Income Fund looks at what is likely to be a good investment rather than offering a fund that may sell well, but isn’t in the best interests of the client. We would say that what we are offering is an old-fashioned broking approach wrapped up in an investment fund.’

A strong track record
Indeed, the origins of the fund are based squarely on the needs of the clients of Charles Stanley, a long-established firm of stockbrokers, of a secure and stable level of income. Evans recalls that ‘The fund has always been intended for Charles Stanley clients, although it is also generally available to other investors. Initially, we launched the fund when personal equity plans (PEPs) came in in 1987. In 1990, we introduced our own  discretionary managed PEP, holding up to 20 stocks. We developed our own in-house systems to manage it and later, when fixed-interest stocks  were allowed into PEPs we adapted the system to make provision for these as well.’

As the investment scope of PEPs, and their successors, individual savings accounts (ISAs), broadened, so did the service offered by Charles Stanley. Chris Evans adds, ‘The fund was converted into an Open-Ended Investment Company (OEIC) in March 2006 to allow corporate bonds into the portfolio. Since then, the fund has doubled in size, from £13 million to £26 million. We started with 50 clients invested in the fund and now have around 900.’

Evans says that ‘The fund is there to provide a high income with stability. Capital growth is a secondary consideration, but all the time from 1996, from before it was an OEIC, we have made money each year.’

He adds, ‘There is no specific target or benchmark yield. When the fund was launched it was yielding six per cent and now it is yielding 6.71 per cent. I wouldn’t want the yield to fall below six per cent, although if it did we would just have to bite the bullet and accept the market conditions.’

A diversified fund
Evans admits that part of the reason for this impressive track record is that, as a relatively small fund, it has a high degree of flexibility. But the fact that it has a well-diversified, multi-asset portfolio has also been a significant benefit in volatile times.

Chris Evans points out that ‘As the fund has distribution status, this means that it can pay gross interest to investors so long as I keep it at least 60 per cent in bonds. In addition, there is an advantage to ISA investors of receiving bond income. There is no distinct investment ‘style’. It depends on the state of the market, and at the moment the state of the market means that we are solidly defensive.’

This means an even heavier than usual weighting towards bonds, with fixed-interest securities currently accounting for over three-quarters of the portfolio (see chart below). Chris Evans reports that ‘Whenever new money has come into the portfolio over the past six months, either through subscription or redemption of existing holdings, we have tended to aim the reinvestment principally at the government bond market, more for security than income.’

He adds, ‘This is not to say that we have avoided the sector, and over the year we have made new investments in the bonds of companies like Scottish Power, Scottish and Southern Energy, Network Rail, Cadbury Schweppes, BAT and National Grid. I have a nominal fulcrum point of 2015 and divide the bond portfolio into pre-2015 maturities and post-2015. So, for example, I have got two Scottish & Southern bond holdings, one in each group, and two Barclays and so on. In the current portfolio, those 91 holdings actually represent 63 individual companies and issuers, but 14 of those are gilts, so only around 50 names actually need watching.’

Watching the portfolio
And keeping an eye on the investments in the fund’s portfolio is a key element in maintaining its long-term stability. Chris Evans points out that ‘If you were to describe the typical investor who buys this fund, it would probably be a 77-year-old lady whose husband has just died, who doesn’t know much about shares and who wants a secure income. By and large, I have to invest in things that I can easily look into and which I can understand and then explain to an elderly client. We try hard to stick to who we know, what we know and what we can find out about very easily.’

This also explains why the fund’s portfolio is rigidly focused on the home market. Evans argues that ‘Overseas currency plays are not my remit. There is definitely a UK focus to the portfolio. It is alright to have a little flirtation with, for example, foreign currency investments, but sooner or later you are going to have to hedge that risk, and “hedge” equals speculation.’

And speculation is very definitely not on the agenda. He adds, ‘The philosophy behind the fund is to invest for the long term, although if a short-term opportunity to take profits pops up, then I will take it. Having said that, it is certainly true that I have been less inclined to take profits in recent months. In fact, there were a couple of months last year when I didn’t trade at all.’

Evans explains, ‘I always have the base cost of any investment as a back-stop. So for example, in the gilt portfolio recently, although there have been short-term trading opportunities, in order to sell out of any holdings, there would have had to have been something very attractive to move into, otherwise trading out simply means that you will be losing part of your income. Such opportunities really haven’t been much in evidence.’

Containing the risks
Evans reports that ‘Having sold many of our underperforming equity holdings in 2008, we have just begun to re-enter the market in a very modest way through purchases of ordinary shares in Scottish & Southern Energy, BP and Northumbrian Water. Our equity positions only account for four per cent of the fund at present and we shall need to see something more substantial than “green shoots of recovery” to persuade us to commit more heavily in this asset class, no matter how much they may appear to yield.

‘You start with the yield, but then you quickly cancel a lot of potential investments out, be they equities or bonds, because they are not of sufficient quality. You might like the look of something but you have to be sure that you can get out. For example, utilities look as if they are on attractive yields right now and we do hold some in the portfolio, but I would be wary of buying too many because of marketability.’

Evans feels that ‘The wonderful thing about running a portfolio that is largely made up of fixed-interest investments is that it is difficult to become too attached to a stock. I mean, who is going to fall in love with a government bond? I have a lot more holdings than usual at the moment – 91 in total – but seven of our top ten holdings are gilts.’

Regular income
The success of this approach is borne out by the fact that a growing number of investors are being attracted by the regular stream of income the fund provides. Chris Evans notes that ‘The fund pays out quarterly, but for Charles Stanley clients who are in the firm’s dedicated ISA wrapper we can also smooth the income through monthly payments. We also charge the fund management fee to capital, so that we can distribute the maximum amount of income generated.’

He points out that ‘There are a number of people who have been with us for a period of time and know that we have done reasonably well for them, who are now retiring and are happy to stay with us. People were taking for granted the fact that their building society account was paying them 5.5 or six per cent. Now it is not, and they are looking around for a replacement. Some of that money is coming to us and we would like to hang on to that as rates recover.’

Chris Evans, MSI can be contacted on 020 7739 8200, www.charles-stanley.co.uk

The information in this article does not constitute advice or a personal recommendation or take into account individual investment objectives or financial circumstances. Charles Stanley & Co. Ltd is a member of the London Stock Exchange. Authorised and regulated by the Financial Services Authority. Member of the London International Financial Futures and Options Exchange. Member of the International Capital Market Association.