Hugh Yarrow, manager of Evenlode Income, gives Moneywise’s Helen Knapman the lowdown on his fund, which is a recent addition to Moneywise’s First 50 Funds for novice investors
What is the fund?
Evenlode Income is an old-fashioned income and growth fund. We invest in the shares of companies, and at least 80% of these will be listed in the UK.
The aim of the fund is to deliver a balance between an attractive dividend yield and the potential for sustainable real dividend growth in the medium to long term.
What companies do you look to invest in?
There are 80 companies that fit our criteria of quality companies and 37 of those are in our portfolio.
These companies share two key characteristics. The first is that they’re asset light, which means they tend to be able to grow at a good rate over time without needing to invest much capital back into the business, so the nice thing is they have free cash to pay out dividends.
The other feature is that they tend to generate a high return on invested capital, so what capital they do invest generates a good level of profit. And, again, this lays the foundation for dividend growth over the medium to long term.
We tend to find these companies have rich brands, strong customer reputations built up over time, intellectual property, entrenched distribution networks or digital assets. These characteristics form what [famous investor] Warren Buffett would call the “impenetrable moat” – so these firms have a competitive advantage, which enables them to generate high returns over time.
How does the fund deal with economic and political challenges?
Rather than trying to make big predictions about future economic developments, we look to insulate the portfolio from what could happen. Free cash flow is a crucial metric – we like the portfolio to be generating this to cover the dividend stream, and that provides a bit of a safety buffer for things such as currency fluctuations.
Many of the underlying companies we invest in have global cash flows even though they are UK-listed companies. This makes investors less exposed to political instability in the UK.
Which companies have you recently sold?
The last company we sold was RWS Holdings [a translator of pharmaceutical patents] in April this year. We bought it in 2015 and at the time the dividend was very attractive and the share price performed well, but the dividend yield has now gone down to less than 2% so we’ve gotten rid of it.
What companies have you recently bought?
This year we’ve bought Novartis, a healthcare company. The healthcare sector has been unfashionable because of US policy uncertainty, but it was paying more than a 3.5% dividend at the time we bought it.
Just after the EU referendum [23 June 2016], we bought recruitment firm PageGroup. People were uncertain about the UK and European economies and there was a sense that businesses would be hiring fewer people, which would have impacted the recruitment firm so we got it at a good price. But it has a strong balance sheet and strong growth potential.
In early 2016, we also bought Aveva, a software company that helps engineers to design and maintain big facilities such as nuclear power stations. The market was under some pressure because of low oil prices, so the company was undervalued but, again, it’s a good cash-generative business.
What’s your best investment decision?
In terms of performance attribution, it has been Unilever, which has been a holding since the fund launched. It has many characteristics of an Evenlode company.
What’s been your worst investment decision?
The most negative contributor to the fund’s performance has been Vivendi – a French media company. It had some media assets and economic characteristics that we liked, but it also had a telecoms business and the company had some issues with it. We exited at a loss in 2012, but we learnt some important lessons about investing in a portfolio business.
What’s your top tip for a beginner investor?
I have friends who ask me if they should invest in certain funds or in Evenlode, and I often ask them: “Is this money that is genuinely long-term that you know you won’t need in the short term?” If the answer is “yes”, then I think equities are a really good asset class. But share prices do wobble a lot in the short term, so if you invest in shares you should always do this with a long-term view of five years or more.
Evenlode Income Key Stats
Fund size: £1,446 million
Yield: 3.3% (based on B share class)
Ongoing charges (OCF): 0.95% (B share class) (i)
(i) From Evenlode Income cost disclosure. Source: Evenlode Income August factsheet, 31 July 2017.
The man behind the fund
Hugh Yarrow launched Evenlode Income in October 2009 and is the fund’s lead portfolio manager. Prior to this, Hugh managed several equity income funds at Rathbone Unit Trust Management. He graduated from the University of Edinburgh with a first-class degree in philosophy and mathematics. He’s also a fellow of the Chartered Institute for Securities and Investment and holds the Investment Management Certificate.
Ben Peters, a former investment analyst with a doctorate in physics, became Evenlode Income’s co-manager in December 2012.