Hepworth expects up to 40% growth in fund size over next two years

One year in, Ecclesiastical Amity Corporate Bond fund is seeing modest monthly inflows of £500,000 a month and manager Robin Hepworth expects between 25% and 40% growth in year two.

He says despite the tough environment, its performance has helped it to prove its worth, having been top quartile each quarter since April 2008.

It is currently ranked seventh of 52 funds in the IMA £ Strategic Bond sector, according to data from Morningstar to 27 April.

With comfortable monthly inflows, according to Hepworth's estimations, he hopes the £12m fund will grow by at least £3m to £5m over the next 12 months, which seems more than viable if he continues with this track record.

His conservative investment strategy is to find good-quality, well-run companies and he spends a lot of time looking at balance sheet strength to help determine this, he says.

"Once we have made an investment it is very much a 'buy and hold' decision. We buy when stocks are looking cheap and hold them for the long term. This keeps costs down and it is one of the ways over the long term to produce good performance," says Hepworth.

This includes putting money into both rated and unrated bonds to give investors a better pick of the market than they may get in a larger fund.

"There are quite a few vehicles that can only buy rated bonds and, therefore, having access to a market only open to certain investors provides greater opportunities," he says.

Around 32% of his fund is invested in this category but Hepworth stresses this does not mean the companies are high risk.

"Unrated bonds do not mean they are not high quality. There are lots of companies who choose not to pay for the rating," he says.

"For instance, John Lewis, a big, well-respected retail operator and probably the best run of all retailing companies in the UK, does not."

The fund also invests in permanent interest bearing shares (Pibs), which are issued exclusively by building societies, such as Nationwide and Britannia, which, he says, tend to be fairly conservatively-run institutions.

"Again, it is a relatively small, less liquid market but for smaller funds like ourselves we are happy to take half a million worth of shares. And with 9%-10% yields, they are very attractive," says Hepworth.

The rest of the portfolio mostly focuses on the A- and BBB-rated categories where Hepworth says he finds the most value. He adds he is not as comfortable with AA bonds because although they carry a stronger rating, they are often given to banks.

"We do not like financials at the moment. I would not even be investing in the senior paper of banks," he says.

The only exposure the fund had to financials over the crisis has been through building societies, he says, which generally did not get caught up in the sub-prime issues the high street banks did.

Although Hepworth says he considered selling out of them late last year, after careful analysis he felt comfortable enough continuing to hold them.

Now he is deciding where to allocate inflows he is continues to see. Over the first quarter of this year, Hepworth says his focus has been on searching for opportunities while the inflows sit in cash. Currently 9%-10% of the fund is in cash, but Hepworth says he is looking to invest at least 5% of that relatively soon.

"We have an exposure of around 5% in index-linked gilts and index-linked corporate bonds but I am looking to increase that to 10%, given what is happening with quantitative easing," he adds.

Hepworth says he is not yet of the view the economy is ready to turn, so he is staying fairly defensive for the time being.

"Our views are the economy is going to deteriorate further. I see no evidence of an upturn and I am not quite sure why equity markets have bounced so strongly," he says.

As such, he believes corporate bond funds will continue to attract investors wanting to get a return on their money. Although these funds have not performed very well year to date (despite having the largest inflows of all the IMA sectors), Hepworth says with the right manager at the helm, good returns are plausible.

"I am sure it is the case most people who bought equity investments do not even open the reporting envelopes when they receive them right now, so if they are looking to find some stability and if they are getting such low yields on the money market the alternative option is corporate bonds," he says.

"If your stockpicking skills are good enough and you have avoided the big financials it allows investors to sleep soundly."

However, he does say the sector's image could be tarnished as it has seen the worst performance of the year, despite having the largest inflows.

"The performance has not been that great across the spectrum and you would expect inflows to suffer for certain funds that have performed particularly badly. That is the nature of the market.

"However, the big players, who might not have done so well, also have huge marketing budgets they can deploy to try and reduce those potential outflows."

For a smaller fund like Ecclesiastical's, the focus is on unearthing opportunities to make it a long-term success.

"I would say I am perfectly happy. You cannot get much better than having a top quartile performance for each of the first four quarters.

"I do not set targets of being the top every quarter. We try and look at long-term results. I do what I think is the right thing and that is where my focus is," he concludes.