Generate income in a different way with Evenlode

IC TIP RATING

Tip style: INCOME

Risk rating: HIGH

Timescale: LONG TERM

Some investors go up the risk scale to achieve this, and add smaller companies and overseas equity income to their portfolios. But if you do not have the risk appetite to do this, or have already allocated to these areas, a good mainstream option with a difference could be Evenlode Income Fund (GB00B40Y5R17). This aims to yield more than the FTSE All-Share and invest in companies which can grow their dividends faster than the market. Its managers invest in companies which deliver sustainable growth with limited need for capital reinvestment, enabling them to pay dividends.

"This does sound rather simplistic however there are a surprisingly low number of funds that actually follow this philosophy so closely as this strategy," comment analysts at Square Mile Investment Consulting and Research. "A consequence of the approach is that the portfolio will be biased toward specific areas and can be completely absent from others. However, by avoiding the more cyclically sensitive areas of the market, for example commodities-related stocks and certain financials, which can be subject to more variable dividend payments as company profits fluctuate with the economic cycle, the managers believe that the stocks they hold can provide a more reliable dividend stream."

And to date this approach seems to be paying off. The fund is among the top 10 best performers out of more than 70 in the Investment Association (IA) UK Equity Income sector over one and five years, and is among the top 25 per cent over three years. It has also outperformed the FTSE All Share Index by a great deal over these periods, and offers an attractive yield of 4 per cent.

"Since launch the fund has delivered a consistent set of returns while steadily growing its dividend distributions," says John Monaghan, senior investment research analyst at Square Mile.

The fund's managers report that its full year dividend of 6.27p is an increase of about 12 per cent, and say dividend growth remains a key focus for the fund over the long-term.

Evenlode Income focuses on companies with high returns on capital and strong free cash flow. It also has low portfolio turnover meaning trading costs are lower and eat less into returns. It can invest in companies of all sizes, and at present a quarter of its assets are in mid-cap companies.

However, while the fund's holdings should be better insulated from a sharp market downturn, it is unlikely to outperform in a strong rising market. For example, during February it lagged when mining and oil producers drove UK market returns, rising 1.8 per cent compared to 2.6 per cent for the IA UK Equity Income Sector and 3.7 per cent rise for the UK market. Evenlode Income is also relatively concentrated, with the top ten holdings accounting for half of assets, which makes it theoretically higher risk.

But the fund has delivered very strong returns to date, so for investors with a medium to long term investment horizon, looking for strong returns with an attractive income from a mainstream fund, Evenlode Income remains a good option. Buy.

Source: Morningstar & *Spring Capital Partners

Performance

Source: Morningstar, as at 6 April 2015

Top 10 holdings, as at 28 February 2015 (%)

Sector breakdown (%)