We are at an interesting market juncture for our quality approach. Stuck between AI infrastructure plays on the one hand and banks and commodity stocks on the other, the shares of many asset-light, cash-compounding quality companies have become increasingly unfashionable.
Some have not been helped by post-Covid complications over the last three years (particularly for consumer-facing companies), while 2025’s tariff uncertainty and a weak dollar have further acted as a headwind to sentiment for holdings with US divisions. These drivers have created a confluence of short-term but unfavourable market dynamics for many high-quality names.
However, it has also produced a rare opportunity where investors can get access to high-return, market-leading businesses on an unusually attractive free cash flow yields (for example, the Evenlode Income fund’s cash flow yield currently stands at 5.6% and is forecast to be 6% next year).
Meanwhile, we are seeing fundamental revenue and profit growth continue at a good pace, while cash generation is resilient and long-term prospects look attractive. The shares of these companies also represent stakes in productive assets that sell services and products which their customers place a high value on over time. In other words, these assets should protect long-run investors from inflation and currency depreciation.
Quality (at-a-discount)
Enduring global franchises are particularly interesting. Repeat-purchase consumer brand companies account for around 18% of the portfolio, with Unilever, Diageo and Reckitt the three largest holdings in this category. Despite a challenging consumer environment over the past 18 months, these three holdings remain resilient businesses.
Unilever has faced a mixed backdrop in 2025 but continues to post solid revenue growth. It is outperforming in the US thanks to stepped-up investment levels, whereas conditions are softer in Latin America due to tariff concerns. The company delivered 3.4% organic sales growth in the first half and expects 3-5% growth for the full year, alongside margin expansion. Brand and marketing investment is running at multi-year highs, reflecting management’s focus on strengthening long-term brand equity.
This bodes well for future growth. Following the spin-off of its ice cream division, Unilever is targeting mid-single-digit revenue growth and improving margins. With its portfolio concentrated on 30 ‘power brands’, such as Dove and Vaseline (now over 75% of group sales) the company’s focus on high-growth beauty and personal care categories should underpin resilient cash-generative growth. At a forward PE of 16x and a 3.7% dividend yield, valuation is very appealing – back to levels last seen in the early 2010s.
Mission-critical holdings
The five information services companies held in the fund make up approximately 18% of the portfolio (RELX, Experian, Sage, LSEG and Wolters Kluwer). These are all distinct business models and operate in different verticals, enjoying strong competitive advantages and growing well. Their services are also mission-critical, highly embedded within customer workflows, represent a low proportion of customer’s overall spend and are largely subscription-based in nature – all characteristics that lead to resilient, predictable cash generation.
Having benefited from a positive glow around AI adoption through much of 2023 and into 2024, their share prices have fallen back over the summer, as the stock-market narrative has switched from the opportunities that generative AI and agentic AI are bringing to these businesses, to the possibility of disruption risk. Though not complacent, we think the economic moats of these businesses are wide and deep, and provided they invest properly to embed generative AI and agentic AI into their customers workflows, growth opportunities remain very good as the world continues to digitise.
Walled gardens
RELX is an illustrative example. The company grew organic revenue by 7% and earnings at 10% in the first half of 2025, and management expect growth to accelerate over coming years.
Under the bonnet in its electronic revenue segment there has been a significant shift from digital information to increasingly sophisticated data analytics, with RELX having been a leader in machine-learning and extractive AI for more than 15 years.
For RELX, the recent developments in generative AI and agentic AI are most pertinent for its legal services business, LexisNexis, which represents about 20% of group sales. LexisNexis is the world’s largest legal database, containing over 100 billion documents with millions more added every day.
As with the rest of the RELX group, LexisNexis has pursued a customer-led development strategy with a culture of continuous reinvestment over the years. Its data, and crucially the data analytics services it builds around and on top of this data, have become very embedded in customers workflows as a result. Taken together, we do not think it is realistic for an AI start-up to replicate RELX’s legal moat over the coming years.
Compounding capital
Across the portfolio, we continue to prioritise a diverse collection of high-quality businesses that – like Unilever and RELX – enjoy strong competitive advantages, healthy cash generation, and resilient long-term growth. These are qualities that have been underappreciated in recent months as polarised sector performance and a fear-of-missing-out psychology have prevailed in both UK and global markets. Over time though, thanks to the power of quiet compounding, these companies tend to be great friends to their shareholders.
As capital has increasingly flowed towards momentum and cyclicality, the opportunity in high-quality businesses has rarely been more striking.
Hugh Yarrow is manager of the Evenlode Income fund. The views expressed above should not be taken as investment advice.