You wait ages for the next Neil Woodford, then two come along at the same time. Evenlode Income is managed by a youthful duo, Hugh Yarrow and Ben Peters, both in their mid-30s, and in recent months the fund management community has woken up to just how good the fund is.
I first interviewed Yarrow in 2011 when Evenlode was a £7m minnow with a short, though interesting, track record. Today it has powered through £500m, and £150m of that has come through the doors in the past few months alone.
It’s not difficult to see why. It is top decile over one, three and five years, and has also outperformed the UK Equity Income sector over every one-year discrete period in the past five years. It has also kept its promises on income, with the yield consistently running between 3.5 per cent and 4 per cent, and currently at 3.7 per cent. Most buyers hold income rather than accumulation units, so the yield is vitally important.
However, the yield is not enough to keep the fund in the Investment Association’s Equity Income sector, having been booted out last month after missing the yield limit of 3.8 per cent. Yarrow says the move will not impact how the fund is run.
In style, it bears similarity to Woodford, or perhaps a more UK-focused version of Terry Smith’s Fundsmith Equity. In 2011, Yarrow told me how much he favoured Unilever, Glaxo, Diageo, Microsoft and Johnson & Johnson. He had picked stocks with high return on equity, low debt and enough excess cashflow to be able to self-fund reinvestment. As this is an income fund, crucially the stocks had to be able to pay a decent, and rising, dividend.
Today, five out of the top six stocks in the fund are Unilever, Glaxo, Diageo, Microsoft and Johnson & Johnson. Turnover has been exceptionally low, and performance exceptionally strong.
It looks like buy-and-hold with bells on. Is the secret to outperformance to sit on your hands? “We certainly are long-term investors. Turnover has been less than 20 per cent and of our top 10 holdings, eight are the same ones I started with in 2009,” says Yarrow.
His approach to running money has remained constant across the period, buying a concentrated portfolio of high-quality companies with consistent cashflow. It has never had more than 40 stocks, or fewer than 28. Currently they (Peters became co-manager in December 2012) have 38.
Evidently, this is a large-cap portfolio, although the duo insist it doesn’t have to be, and has moved up and down the scale in recent years. It got as high as 85 per cent in large caps, but is now closer to 70 per cent. However, the stock moves are all about bottom-up fundamentals – overlayed with a crucial focus on dividend generation – rather than macro decisions.
One of the more significant changes in recent years has been the reduction in their position in Reckitt Benckiser. “It was 6.5 to 7 per cent of the portfolio two years ago. Now it is just 1 per cent. We reduced it because of valuation concerns. We still think it is a fantastic company. But when we first bought it, it was yielding 4 per cent and now it is yielding just 2 per cent.”
So as Yarrow and Peters have cut their large cap holdings, where have they gone? They currently see a lot of value in some mid-cap software and engineering stocks. Last September they started building a position in Fidessa, which provides trading systems in the financial sector, mostly to investment banks. “They have extremely high renewals on subscriptions, effectively 100 per cent,” says Peters.
The poor profit figures coming out of the investment banks might put other investors off Fidessa, but not Yarrow and Peters. They used a warning issued by the company last summer to buy in. After the warning, the price dropped sharply from £24 a share to £20. But since then they have climbed back to hit a recent high of just over £25. Were it not for Fidessa’s investments in a new derivatives trading platform, they estimate the stock would have 40 per cent better cashflow, not that they are complaining. One of the hallmarks of Evenlode’s holdings is that most stocks finance growth organically, not from taking on lots of debt.
Another recent buy is Aveva, which provides engineering software used in the design and maintenance of nuclear power stations and oil rigs.
That word “oil” has put off other investors, but not Yarrow and Peters. “It is very highly cash generative, and operates on no debt. It has never borrowed money, the dividend yield is 3 per cent and we think it is a great opportunity,” says Yarrow.
Given this is an 80 per cent UK-focused portfolio (that’s the minimum for inclusion in the UK equity income sector) inevitably I must ask them about Brexit. What impact, if any, has it had on their stocks?
Very little, is the answer. Like others, they predicted a fall in sterling would greet the exit vote, but they are pretty relaxed about the actual impact. “Only 20 per cent of the revenue from the stocks in the fund actually comes from the UK,” says Peters.
The absence of banks and oils in the portfolio is notable, and it’s likely to stay that way, with neither of the managers keen on asset-intensive businesses and those with very low return on those assets.
Their tip-top performance might make them the envy of other groups lacking sparkle in this key sector. Are they likely to be nabbed by another group, leaving their investors in the wrong fund? It’s highly unlikely, they say. Evenlode is part of Wise Investments, which is owned by its staff.
“We are both equal partners in the business, we have our rewards aligned to the long-term performance of the business and we value our independence,” says Peters. “We tell people if you want to make money over the short term, don’t necessarily come to us. But hold it for 20 years and you will do very well. Valuations may not be as good as they were, but I think high single-digit growth is a reasonable outlook for investors.”