The region has seen an outflow of funds over the past few months as investors have returned to US assets following hints that quantitative easing would begin to come to an end. This meant stocks suffered, and Hepworth (pictured) admits his fund was hit by this trend. However, the manager says he is sticking to his guns and retaining his high weighting to the area.
"Asia is looking particularly good value for the first time in 25 years," he said. "The Hong Kong market is trading on 10 times earnings, which is very good value."
Hepworth says that the seeds of an Asian recovery are contained within it: rising wages are forcing a shift in economic structure.
"Asia has been difficult for two and a half years now and that’s partly down to the fact margins have been under pressure in Asia and we have got down to the lowest levels for a number of years," he said.
"This is down to wage pressure. We have seen minimum wage levels go up 15 to 20 per cent in China, so that has had an impact on margins, and commodity prices have been very weak."
"The wage rises we have seen will hit corporate profits in the short-term, but over the long-term it is quite good news – more consumer spending."
"I am very much sticking with my Asia weighting."
The £222m Ecclesiastical Higher Income fund has produced top-quartile returns in the IMA Mixed Investment 40%-85% Shares sector in five out of the last six years, with the only exception being second-quartile returns in 2009.
Over five years it has made 82.4 per cent while the average fund in the sector has made 62.74 per cent. It is yielding 4.24 per cent, more than all but two of the 125 funds in the sector.
Performance of fund vs sector over 5yrs
Source: FE Analytics
However, its great run has come to an end in 2013, and it now sits in the fourth quartile year-to-date.
Hepworth says that his conviction in Asia was one of the main causes of the underperformance, with another being his holding in Co-op bank bonds.
"Our exposure to Asia has been one of the reasons we have found it more challenging year-to-date," he said.
"We are down 3 per cent compared with our peer group year-to-date, in broad terms half down to our holdings in Co-op bonds and half down to our overweight in Asia – Hong Kong and Singapore being our two main markets."
Co-op has run into funding trouble over its debts and is currently going through the process of restructuring, with bondholders slated to make losses whichever strategy is implemented.
A plan to offer bondholders a swap for equity has been attacked by small-scale investors who want to preserve their income streams and avoid possible capital losses, while the company is to announce its own plan by the end of the month.
"Co-op we are continuing to hold in the short-term," Hepworth said. "We want to wait and see what the company comes up with."
"There has been a lot of selling pressure as bonds are not rated. But they deliver a good income, and I think the Co-op will come up with a better proposal than the market has expected."
"Singapore has been one of our long-term overweights and that has been a good area for us, but there has been some profit-taking in the market and it has suffered from the REITs [that are listed there]."
"We have been quite badly hit by rising yields and talk of tapering, which has hit the high yield sectors in Asia. Outside of those two areas we have been doing OK."
Hepworth has run Ecclesiastical Higher Income since it was launched in 1994, meaning that he is one of the longest-serving fund managers in the UK.
He has significantly outperformed the sector and the FTSE All Share over his tenure, with the total return on his fund at 436 per cent compared with the 324 per cent of the FTSE and the 192 per cent of the sector.
Performance of fund vs sector since launch
Source: FE Analytics
This amounts to annualised returns of 9.54 per cent; the FTSE has made 7.83 per cent in this time.
The manager says that he is continuing to cut his holdings in bonds. At the start of the year he had 35 per cent in fixed interest, whereas now he only has 27 per cent.
"We had invested in corporate bonds over the last couple of years but that area we are beginning to reduce," he said.
"Yields on corporate bonds are as low as we have seen. The pick-up over gilts is pretty close to low levels, so we think there is better value to be found in equities."
"We have started to take money out of fixed interest markets and are adding it to high-yielding equities. We think that will continue in the short-term."
Many managers have been adding to shorter duration bonds this year to limit the effect a rate rise would have on their funds. Hepworth thinks there is a better way, however.
"Shorter-dated bonds look expensive," he said. "We think it’s already in the price. We have been cutting duration by selling fixed interest and buying equities."
The manager has been adding to some niche areas of fixed interest such as preference shares – equity that pays a fixed dividend like a bond – and permanent interest bearing schemes [PIBS].
These are fixed interest notes issued by building societies, which are not listed, and that pay yields of 7 to 8 per cent. Most fixed income managers overlook them.
"They are not very liquid, which is probably why they aren’t well known," Hepworth said.
"The issues are around 100 to 200 million, which isn’t big enough for some larger funds. They don’t have quoted equity so they are under-researched and we think they are under-priced because of that."
"They were hit by the Co-op fiasco too because they are unquoted and they are similar, but they have recovered pretty much all of those losses since then."
The manager says he remains uninterested in the sovereign bond market – which he regards as "rigged" – and in the banking sector, one of the market favourites this year.
He holds HSBC and Standard Chartered for their exposure to Asia, and insurance names which are solvent and pay good yields, but says he is not interested in developed world banking.
"It’s the banking sector we need to be wary of," he said. "Why are banks trading on discounts to book value? A lot of investors don’t believe there aren’t underperforming loans in there. The banks are 'extending and pretending'."
"Extending and pretending" refers to the practice of refinancing – extending – loans that are unlikely to be repaid to avoid booking them as a loss.
"The other factor is that banks are under-capitalised," Hepworth said. "The leverage ratio in Europe is very high – 30 to 40 per cent."
"Regulation will increase the amount of capital these banks are required to hold, which will dilute earnings."
Ecclesiastical Higher Income has ongoing charges of 1.33 per cent and requires a minimum investment of just £200.
