The political and economic uncertainty surrounding the UK’s withdrawal from the European Union has weighed heavily on sterling. Earlier this month the pound hit a 14-month low against the dollar. But a weaker pound can boost the revenues of UK companies that generate earnings overseas – and 70 per cent of FTSE 100 company revenue comes from abroad.
Consistent good performance
Strong management team
Good yield
Good risk/reward profile
Potential volatility
Current unpopularity means the UK is looking cheaper on a price/earnings (PE) ratio basis than other developed markets. The FTSE All-Share, for example, is trading on a PE ratio of 13.2 per cent and yielding 3.69 per cent, compared with a PE of 20.6 per cent and yield of 1.83 per cent for the S&P 500. So investing in UK-listed companies can provide a good source of dividends at relatively cheaper valuations.
IC Top 100 Fund TB Evenlode Income (GB00BD0B7D55) offers investors exposure to UK companies that pay dividends and rely on overseas earnings.
Around 20 per cent of the fund is invested in companies listed overseas, and even among its UK-listed portfolio the fund is heavily weighted towards internationally focused businesses. Only around 20 per cent of the underlying revenues from the fund’s portfolio come from the UK economy.
The fund’s high global exposure is partly a result of its managers', Hugh Yarrow and Ben Peters, investment strategy. They seek out asset-light businesses that have high returns on capital and strong free cash flow. This means they tend to have more exposure to multinational consumer goods, healthcare and media companies and little in asset-heavy or highly leveraged sectors such as oil and gas, utilities and financials.
The managers run a concentrated portfolio of under 40 stocks and aim to buy and hold investments for the long term, meaning trading costs eat less into returns. They like companies that have the capacity to grow dividends over time rather than those with the highest yields today. As a result, two years ago the fund fell out of the Investment Association (IA) UK Equity Income sector for not meeting the minimum yield requirement of 10 per cent more than the FTSE All-Share index. It now sits in the IA UK All Companies sector because Mr Yarrow and Mr Peters did not want to change their investment process to chase a higher yield. However, the fund yields a decent 3.1 per cent and has grown its dividend over the past five years.
Over five years, Evenlode Income has delivered a return of 83.1 per cent, beating the FTSE-All Share, which made 45.6 per cent, and the IA UK All Companies sector average, which returned 47.5 per cent. It has also beaten its benchmark and the sector over one and three years. The fund is among the top quartile of UK All Companies funds over one, three and five years.
Evenlode Income has a very attractive risk/reward profile with a three-year Sharpe ratio of 1.50. The Sharpe ratio measures how much return a fund generates for the amount of risk it takes, and any figure above one is a good score.
However, the fund’s concentrated style means that it may be more volatile than other funds. And should the pound rally, its portfolio of overseas earners will see revenues fall, which could affect both dividends and share price. Also, in March the fund closed the door to investors from new platforms to manage capacity, however investors are still able to invest via platforms that held the fund prior to this.
The fund’s focus on sustainable dividends should make its income more defensively positioned over the long term, and it has demonstrated consistent long-term performance suggesting its managers generally make the right call.
So, if you want to diversify your dividend income, Evenlode’s international focus, good risk/reward profile and consistent performance make it a strong contender. Buy. EA
| TB Evenlode Income (GB00BD0B7D55) | |||
| PRICE | 226.4p | MEAN RETURN | 13.85% |
| IA SECTOR | UK All Companies | SHARPE RATIO | 1.50 |
| FUND TYPE | Open-ended investment company | STANDARD DEVIATION | 8.45% |
| FUND SIZE | £2.4bn | ONGOING CHARGE | 0.90% |
| No OF HOLDINGS | 38* | YIELD | 3.10%* |
| SET UP DATE | 19/10/2009 | MORE DETAILS | evenlodeinvestment.com |
| MANAGER START DATE | Hugh Yarrow: 19/10/2009, Ben Peters: 01/12/2012 |
Source: Morningstar as at 21/08/18 *Evenlode Investments as at 31/07/18
Performance
| Fund / benchmark | 1 year total return (%) | 3 year cumulative total return (%) | 5 year cumulative total return (%) |
| TB Evenlode Income | 13.9 | 54.5 | 83.1 |
| IA UK All Companies sector average | 7.4 | 29.0 | 47.5 |
| FTSE All Share index | 7.8 | 33.6 | 45.6 |
Source: FE Analytics as at 20/08/18
Top 10 holdings as at 31/07/18 (%)
| Unilever | 8.5 |
| Diageo | 7.5 |
| RELX | 5.4 |
| Compass | 5.1 |
| Sage | 4.2 |
| GlaxoSmithKline | 3.9 |
| Smiths | 3.8 |
| Reckitt Benckiser | 3.7 |
| AstraZeneca | 3.1 |
| Smith & Nephew | 3.1 |
Source: Evenlode Investments
Sector breakdown as at 31/07/18 (%)
| Consumer Goods | 31.1 |
| Media | 15.3 |
| Technology | 13.7 |
| Healthcare | 13.0 |
| Engineering | 8.9 |
| Support Services | 8.7 |
| Financials | 3.8 |
| Speciality Plastics | 2.2 |
| Retailers | 1.3 |
| Cash | 2.1 |
Source: Evenlode Investments
