While Neil Woodford is without doubt the highest profile fund manager in the UK, Evenlode manager Hugh Yarrow is by comparison relatively unknown.However, Chatfeild-Roberts told investors that the major reason why they had bought the fund was due to Yarrow’s experience working with Carl Stick at Rathbones, and his strong income bias.
“Quite specifically, what we focus on is long-term dividend growth. We think that will very much be the driver of our long-term returns,” Yarrow (pictured) said.
According to FE Analytics, Yarrow’s Evenlode Income fund has been the ninth best performing portfolio in the IMA UK Equity Income sector since its launch in October 2009 with returns of 82.58 per cent.
Performance of fund vs sector since Oct 2009
Source: FE Analytics
Like Woodford, Yarrow and his deputy manager Ben Peters have a distinct approach to investing in the UK’s dividend paying market.
“We are trying to assemble a portfolio that yields higher than the market and can deliver long-term dividend growth. To do that, we want to be invested in companies that can grow without needing to re-invest back into their businesses,” he explained.
Yarrow says that to meet their strict investment guidelines, the stocks he holds must be able to generate high returns on capital, have pricing power within their respective industries and have intangible assets – i.e. good management, big brands and intellectual property.
As each company in the Evenlode Income fund must be able to grow self-sufficiently, so as not to impact future dividend payments, it means that there are several popular sectors that Yarrow and his team will not invest in.
For example, the likes of banks, miners, telecoms, utilities, property companies and oil majors don’t feature in the fund due to concerns over high capital expenditure, possible regulatory intervention and limited pricing power.
Yarrows strict guidelines means he has an investable universe of only 80 stocks or so, and his portfolio currently comprises of just 31 holdings.
“The sectors we like are consumer branded goods, healthcare, specialised engineering companies and media stocks,” Yarrow explained.
“I’m not saying you can’t make money from banks or the major oil companies, but our approach is very disciplined and long-term orientated.”
“Ben and I would very much like to think that we will still be running this fund in 20 years’ time.”
From an income perspective, this strategy has worked so far. According to FE Analytics, investors who bought £1,000 worth of units in Evenlode Income would have earned £239.24 in dividends since its launch in October 2009 – significantly more than the average fund in the sector.
Yarrow has also increased his net distribution in each of the last three calendar years. The fund’s yield is 3.55 per cent.
That income boost has helped the fund’s total return performance, with Yarrow’s fund outperforming the sector in all but one year [2012] since its launch in 2009.
It beat the sector in last year’s bull market and, unlike the large majority of UK equity income funds that outperformed in 2013, Evenlode Income is currently top decile in 2014 with returns of 3.08 per cent.
Performance of fund vs sector in 2014
Source: FE Analytics
Yarrow attributes this year’s outperformance to his portfolio positioning.
He moved early at the end of last year to reduce his exposure to domestically facing mid and small-cap companies and currently has the highest weighting to FTSE 100 stocks in the history of the fund.
The portfolio looks very similar FE Alpha Manager Nick Train's CF Lindsell Train UK Equity fund and Finsbury Income & Growth Investment Trust, with Yarrow also allocating a high weighting to multi-national blue-chip stocks.
His top-10 holdings includes the likes of Unilever, Diageo, Reckitt Benckiser, Imperial Tobacco, Reed Elsevier and GlaxoSmithKline.
Several leading UK managers said they were avoiding these types of companies at the start of the year due to their dependence on overseas earnings, which was likely to be impacted by a strong pound.
However, Yarrow says he is glad has has stuck with them in his fund.
“Despite the concerns about slowing growth in emerging markets, we felt they looked attractive on a valuation basis,” Yarrow said.
“Growth in emerging markets is never going to be in a straight line. We have had this period of very strong sterling strength, and it’s hard to imagine that it will continue at its current rate over the long-term.”
Yarrow adds that he currently has a preference for multinational companies because he has concerns about the state of the domestic facing market. While he doesn’t necessarily foresee a significant correction – like a number of his peers who have upped their cash weighting to protect their investors recently – Yarrow says the environment is now more challenging than it has been in the past.
“We tend to be fully invested because of our income mandate. If we were to hold too much cash, we would only be able to hold the highest yielding stocks, which adds to the risk of the portfolio,” Yarrow said.
“Our cash weighting is around 3 per cent or so. I’m not trying to predict short-term market movements, but I would certainly say there are more headwinds than there has been because valuations have increased.”
“Your starting position is a lot less attractive than it was four or five years ago and that does mean I’m holding what some may say are boring or less exciting companies, while we wait for more opportunities to come back in small and mid-caps,” he added.
Capital preservation is something that Yarrow has excelled at during his tenure as manager.
Since launch, his Evenlode Income fund has been top quartile in the sector for its annualised volatility and top decile for its maximum drawdown, downside risk and sharpe ratio.
Performance of fund vs sector in 2011
Source: FE Analytics
The ability to defend capital was shown during a eurozone crisis-hit 2011, when the fund returned 2 per cent.
Yarrow has a similar risk/return profile to Woodford, who also tends to outperform during down markets and prioritises dividend growth. Holding both funds could therefore be seen as a way of cutting down on manager risk, though the size of Evenlode Income means that Yarrow has greater flexibility to increase his exposure to small and mid-caps if he thinks the time is right.
Evenlode Income’s ongoing charges figure (OCF) is 1.12 per cent.
