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Evenlode pursues global income following UK success

Ben Peters explains how Evenlode is applying its UK income techniques globally
February 22, 2018

TB Evenlode Income (GB00BD0B7D55) has been running for less than 10 years but its stong performance has already gained it a reputation as one of the best UK equity income funds. However, not satisfied with only a UK fund, in November last year Evenlode launched TB Evenlode Global Income Fund (GB00BF1QNC48), which it hopes will replicate TB Evenlode Income's success. 

"Our UK fund has been quite multinational and now we get to buy that multinational theme more aggressively in the global portfolio," says Ben Peters, lead manager of TB Evenlode Global Income. "We've always used the 20 per cent allowance UK Equity Income fund can have in non-UK equities, so we had the kernel of an investible universe. And over the last few years we've built that up to a size we felt we could manage [as a separate fund]."

Mr Peters and co-manager Chris Elliott had been running a hypothetical portfolio of global stocks for a year before TB Evenlode Global Income's launch, and Evenlode increased its staff to be able to cope with the wider universe of stocks the new fund invests in. TB Evenlode Global Income has around £68m assets under management invested in 37 stocks and cash worth about 3 per cent of assets.

Mr Peters and Mr Elliott are applying the same investment process they honed on the UK fund. This involves finding asset light, 'economic moat' type companies that operate in areas with high barriers to entry and have strong competitive positions, meaning they can better withstand macroeconomic pressures. They also favour companies with sustainable dividend growth, such as those generating high returns on capital and strong free cash flow. They aim to buy and hold investments, only selling out of a company if they see better value elsewhere or there has been a substantive change to the investment case.

Because TB Evenlode Global Income draws income from a wider pool of companies its cash flows should be more diversified in terms of geography and currency exposure.

"The good thing about [a global approach] is that we can access some sectors that are under represented in the UK such as technology, and also lesser known areas like global logistics," explains Mr Peters. "And there's lots of scope for getting yield globally. However, growing yield into the future is as important to our investment process."

TB Evenlode Global Income aims to deliver an attractive yield as well as sustainable real dividend growth over time. Mr Peters estimates the global fund's yield will be about 3 per cent, which he admits won't be the highest in the global equity income sector. But he prefers the yield to be sustainable rather than the highest, which should be possible as the companies the fund invests in are generating free cash flow of about 5.5 per cent.

The balance between yield and growth is something Evenlode has taken a stand on previously. Two years ago TB Evenlode Income was ousted from the Investment Association UK Equity Income sector, after falling short of the yield requirement, but its managers preferred to leave the sector rather than change their process and chase a higher yield.

And a key concern for them is whether companies take the same long-term approach to growth as they do to with their funds' dividends. 

"At a company level, firms are less able to sustain top-line growth at pre-crisis rates which is resulting in an increasing focus on cutting costs, potentially at the expense of more expansive reinvestment," says Mr Peters. "Companies becoming more efficient is a positive generally but they need to be careful that they don't cut too far into their operating and capital budgets, and risk not reinvesting in themselves."

He is also concerned on equity valuations.

"US and European markets look fully valued," he says. "There are fewer opportunities in Europe where there are some really great, high-quality businesses that we'd love to own, for example  L'Oreal (OR:PAR). But they are being recognised for that and more by the market so they have the price tag to match."

However, they are finding value in the healthcare sector which has been out of favour but accounts for nearly 20 per cent of TB Evenlode Global Income's assets. Holdings include Sonic Healthcare (SHL:ASX), an Australian company that provides laboratory, pathology and radiology services.

They are also finding value in consumer goods companies, which account for nearly 40 per cent of assets, despite his area having had a strong run. Holdings include PepsiCo (US:PEP) which Mr Peters says is somewhat misnamed as it only generates 12 per cent of its sales from Pepsi. PepsiCo owns several food and drink brands including Tropicana, Doritos, Quaker Oats and Cheetos, and 22 of its brands generate more than $1bn (£0.71bn) of sales annually.

Consumer services account for a fifth of the fund's assets and technology 17 per cent. Holdings include Cisco (US:CSCO), an American multinational conglomerate which is a leader in the technologies that underpin the internet. Mr Peters and Mr Elliott like that it has a strong balance sheet with $35m net cash and free cash flow which twice covers the company's 3.4 per cent yield.

North America is TB Evenlode Global Income's largest regional exposure, with just over 40 per cent of its underlying revenues coming from there. And 20 per cent comes from each of Europe excluding the UK and Asia Pacific. But although about 13 per cent of underlying revenues are from Africa, the Middle East and south America, it has no direct holdings in emerging markets.

"It's not a case of disliking emerging markets," explains Mr Peters. "If you look at where the world's growth is going to come from, the emergence of the middle-class consumer is a trend that will have many years to run. But we feel that we can get that exposure through businesses that happen to be listed in, say, the US and UK, and have revenue exposure to [emerging markets] while also benefiting from the good governance you get in developed markets."

 

Performance of TB Evenlode Income
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
TB Evenlode Income 6.133.276.8
IA UK All Companies sector average4.920.548.9
FTSE All-Share index4.019.542.0
Source: Morningstar as at 15/02/18