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Can this fund rival the likes of Neil Woodford and Francis Brooke?

24 July 2015

Evenlode Income has consistently outperformed and grown its dividend every year since its launch, so can it be viewed as one of the future greats in the UK equity income space?

By Alex Paget,

News Editor, FE Trustnet

Investors are blessed with a wealth of talented and highly-experienced managers in the UK equity income space, which is handy with the ongoing desire for a growing income thanks to an ageing population and rock bottom interest rates.

For example, the likes of Neil Woodford, Mark Barnett, Adrian Frost and Francis Brooke have all become household names in the fund management industry – and for good reason given their funds’ long track records of consistent outperformance relative to their peers and the wider UK equity market.

Performance of managers versus sector and index over 10yrs

 

Source: FE Analytics

This elite club of top-rated core equity income funds is a hard one to break into. While a number of portfolios have outperformed the likes of Invesco Perpetual High Income, Trojan Income and Artemis Income, most have done so with a mid and small cap bias (which have massively outperformed FTSE 100 stocks over recent years) so aren’t easily comparable.

These include lower-cap portfolios the Unicorns and Mitons of this world – but they are by no-means designed to play the same role as CF Woodford Equity Income within an investor’s portfolio.

One relatively unknown and nimble ‘core’ UK equity income fund which is gaining traction with the experts, however, is Hugh Yarrow (pictured) and Ben Peters’ five crown-rated Evenlode Income fund.

The £312m fund, which is run out of a converted barn in West Oxfordshire, has beaten flagship income funds run by Invesco Perpetual, Artemis, Trojan, Rathbones and Threadneedle since its launch in October 2009 and has done so via a mega-cap orientated portfolio.

Darius McDermott, managing director at Chelsea Financial, has been a long-term backer of the fund and says Yarrow should be viewed in a similar light as Woodford, Barnett, Brooke and co.

“Absolutely. We were one of the lucky ones as we were early supporters of the fund. It is doing really well and I think it will go from strength to strength,” McDermott said.

According to FE Analytics, Evenlode Income has been a top decile performer in the IA UK Equity Income sector since its launch with returns of 104.69 per cent, beating the FTSE All Share by close to 35 percentage points in the process.

Performance of fund versus sector and index since launch

 

Source: FE Analytics


Those returns have been very consistent as well. FE data shows the fund has outperformed both the sector and index in four out of the last five calendar years, the exception being the rising market of 2012 when it still returned 11.96 per cent which meant it underperformed the FTE All Share by 0.34 percentage points.

  

Source: FE Analytics

The consistent nature of those returns have also led to Evenlode Income’s decent capital preservation characteristics, as it sits firmly in the top quartile for downside risk, annualised volatility, maximum drawdown and risk-adjusted returns since launch.

What’s more, the portfolio (which is 70.2 per cent weighted to FTSE 100 stocks and is made up of just 36 stocks) has hardly changed over that time given the portfolio’s turnover rate of less than 20 per cent since inception.

The fund differs from many of its peers as Yarrow and Peters run a very disciplined investment strategy which means their investable universe comprises just 84 companies – as Yarrow explained to FE Trustnet.

“The basic philosophy, which basically everything else hinges on, is a very simple dividend growth approach,” Yarrow said.

“It does look very different to the market and it is clear that there are certain stocks or sectors that have characteristics that we are much more attracted to than others, so the relative performance of the fund will differ to the market over the short term as our active share is around 80 per cent.”

“On a risk profile, the types of companies we like tend to have more stable cash flows and tend to be less leveraged than the average. Again, because of that, over the longer term we would expect volatility to be lower and for the fund to perform better in poorer market conditions.”

This strict criteria means Yarrow, who had previously deputised on Carl Stick’s Rathbone Income fund, and his deputy completely avoid areas like banks, miners, telecoms, utilities, property companies and oil majors due to concerns over high capital expenditure, possible regulatory intervention and limited pricing power.

Instead, the fund is geared towards companies that 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.

This mean they currently 27 per cent of their portfolio in healthcare and technology stocks as well as 33 per cent in consumer goods, with the likes of Unilever, Diageo, Imperial Tobacco, Johnson & Johnson, Procter & Gamble and Reckitt Benckiser featuring in their top 20.

Of course, concerns have been raised about the future of those defensive companies as bond yields and interest rates rise – though Yarrow will defend his current positioning in a later article.

Whatever the future holds, this investment criteria and stringent screening has meant Evenlode Income has achieved its aim. Not only has the fund paid out £3,138.64 in income on an £10,000 investment made at launch, it has increased its dividend in every year over that time.

 

Source: FE Analytics/Evenlode Investments

The fund’s track record, its focus on dividend growth and robust strategy means it came onto FE Alpha Manager John Chatfeild-Robert’s radar last year and he now owns it across a variety of his Jupiter Merlin portfolios.

However, apart from that one large unitholder, Evenlode Income is still a relatively unknown entity within the industry.


 

McDermott says it isn’t surprising, but expects the £312m fund to become far more popular over time.

“I’m not surprised about its current size. I’m not just saying it because Yarrow did, as it’s true he wasn’t a star manager at Rathbones,” McDermott said.

“It has been running now for six years and it was very, very small and they are still building up a track record. They do have one big fund of funds investor which owns basically half of it – so it is still a relatively small fund.”

“We have held the fund for around four years now and we were in very early as we know Yarrow is an excellent fund manager in his own right. He and Peters have a very rigorous and well-defined process and I would expect it to gain further momentum and that it will continue to grow over the coming years.”

Tilney Bestinvest’s Jason Hollands is a fan of the fund, but says that given the highly-competitive nature of the UK equity income space Evenlode Income is likely to remain a hidden gem for some time to come.

“The numbers are good and it is clearly a very scalable process given the focus is predominately investment in large caps, so it certainly deserves more attention and may well start to do so now it has critical mass,” he said.

Hollands points out while it is a top-performer, it will need to build up a longer track record before it can join the likes of Woodford, Barnett, Brooke and Frost at the top of the tree.

“Am I surprised [about its size]? No, not at all,” Hollands said.

“The fund operates in an incredibly competitive sector dominated by some high profile, big beast managers, led of course by Neil Woodford who has hoovered up much of the flow into the sector over the last year on the back of an established fan base.”

“There are other impressive UK income managers, with strong numbers, including the Ardevora UK Income fund, which has blistering performance and a clear and distinctive process that have also largely been overlooked but in my view clearly deserve more investors.”

Evenlode Income yields 3.7 per cent and has an ongoing charges figure of 0.95 per cent.

 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.