Hugh Yarrow: ‘We will only invest in asset-light businesses despite short-term drag’

Yarrow Hugh Evenlode 2014

Hugh Yarrow says the £1.2bn Evenlode Income fund has recently missed out on returns in the commodities and banking sectors, but stands by the fund’s bias towards asset-light businesses.

The Evenlode Income fund has outperformed its peers over the last year returning 17.8 per cent compared to 10.8 per cent in the sector; however, its performance in the last six months has seen it underperform.

In the last six months the fund returned 8.4 per cent compared to the sector’s 14.2 per cent and over the last three months it has lost 0.8 per cent compared to the sector’s 3.7 per cent return.

Yarrow, who co-manages the existing UK income fund with his brother-in-law Ben Peters, says almost a third of the fund is in consumer goods, 19.5 per cent is in technology, 12.9 per cent is in healthcare and 11.3 per cent is in support services.

“We focus solely on asset-light businesses that generate high returns on capital,” Yarrow says. “The amount of capital going back into the business is quite small compared to annual cash flow.”

The portfolio has missed out in the rally in oil and miners, Yarrow says, as well as financials following Donald Trump’s election in the US presidential election.

“If you look at last year as a whole the fund was up slightly more than the market, but there was an 8 per cent drag from mining and oil producers,” Yarrow says.

He adds that has been offset by mid-caps like engineering software business Aveva, polymer company Victrex and luxury goods company Burberry. Recruitment company Page Group, which the fund bought into following Brexit, has also contributed to performance.

“The underlying cash flows from the portfolio are quite diversified both by geography and by sector,” Yarrow says, regarding the fund’s exposure to Brexit.

Most management teams the managers meet with are reporting reasonable trading in the UK, Yarrow says, but are also cautioning the outlook is very unclear over the next couple of years.

“Brexit is not an event, it’s a process that will take several years,” says Yarrow.

In it for the long-haul

Although Yarrow admits the fund has grown “fairly significantly” over the last four or five years, with AUM now at £1.2bn, he says size hasn’t impacted investment process.

The smallest market capitalisation in the fund’s investible universe is about £600m, but most are over £1bn in size.

“We’ll always monitor capacity, but there’s no plan to soft close the fund. We remain very confident with our ability to continue with our investment process based on the current fund size.”

Yarrow says that he’d like the team to be managing the fund in 20 years or more.

Chris Elliott and Stephanie Pestell have joined the investment team over the last two years taking, taking the total staff count to eight, including four support staff.

“We very much like to emphasise the team-based approach. We’ve worked very hard on developing a process that all members of the team can contribute to and the decision-making process is very much collegiate,” Yarrow says.

“For me personally if I was an investor I would prefer to feel I was invested in a team that can endure over time rather than one individual.”

This month the firm confirmed it is considering the launch of a global income fund that would also invest in asset-light businesses with the ability to grow dividends over time.

Yarrow says: “We are considering the potential launch of a complementary income-focused strategy for UK investors that would seek to replicate the Evenlode process on a global remit.

“Since Evenlode’s launch, we have always focused on investing in sustainable, asset-light businesses with the ability to generate healthy, growing free cash flow and dividends over time. We feel applying this process to a wider global mandate could potentially be a natural evolution for the firm.”