Flows into boutique UK equity income fund Evenlode have exploded in the past year.
From £50m at the year’s beginning, the five-year-old fund run by school friends Hugh Yarrow and Ben Peters has now surpassed £230m.
The Jupiter Merlin team added the fund in July.
Focusing on asset-light businesses with strong brands and intellectual property such as drug manufacturer AstraZeneca, consumer brand mammoth Unilever and accounting software company Sage Group.
Those businesses tend to be more profitable than the more capital dependent, with less volatile dividends as well, Yarrow explains.
“Low levels of capital intensity means companies can grow without having to put as much cash back into the business each year. That means profits convert mostly into cash.”
The smaller reinvestment usually has a greater pound for pound impact than in other businesses, he adds.
“It’s the singular focus on that sort of company that that sets us apart from a lot of other funds in our sector. This approach leads us to focus on certain types of businesses and avoid some income stalwarts.”
Oil majors and miners – with their massive fixed investments – are avoided as are utilities and telcos.
The fund has a high bias to large cap companies, as many of the largest brand collectors are conglomerations, such as Procter & Gamble.
Consumer branded companies make up a full third of the fund, compared with the 11.7 per cent weighting in the average UK Equity Income fund, according to FE Analytics.
Software businesses with subscription models and sticky customers as well as media companies selling to businesses are also a weighty segment of the portfolio.
The company is also keen on relationship businesses and has bought into down-trodden emerging market specialist Ashmore Group, Peters says.
Its revenues have been savaged by capital flight from the developing markets, but its balance sheet is “very strong” and cash generation is robust, he says.
“It’s been a pretty tough time and the shares have sold off heavily, which is what we used to create a 1 per cent position. We’re not sure how long the dip will last, but the long term opportunities for that asset class are great.”
Unencumbered balance sheets are a feature of the fund’s holdings, with the companies generally carrying much less debt. That should lessen the impact of rising interest rates on the businesses’ bottom line.
The fund has made 93.1 per cent since its October 2009 launch, compared with the 68 per cent return of its peers.
Its 8.4 per cent volatility over the three years to 1 December is top quartile, as is its risk –adjusted return, with a Sharpe ratio of 1.56.