Investors need to remain disciplined following the return of volatility this year and the higher valuations on offer in some global markets, according to Evenlode Investments’ Ben Peters, although interesting investment opportunities remain.
Peters, lead portfolio manager of the £104m TB Evenlode Global Income fund, said since launching the fund in November last year he has had to navigate the changing market environment to build a global portfolio of quality companies.
Having launched the fund during the benign conditions of 2017 when markets continued to climb higher, this year has presented a completely different proposition as central banks have begun to tighten policy.
As a result, there has been a return of volatility to markets which was largely absent last year, fuelled by weaker economic data. However, Peters said the previous two-year period of low volatility had been an “unusual” time for markets.
“Volatility is more normal for equity markets,” he added. “If you’re long-term investors then that gives you the opportunity to snap things up at [cheaper] valuations that you can hold over a long period.”
Yet, valuations are something that Peters is keeping an eye on, particularly given the long bull-run in markets since the global financial crisis.
Rolling 1yr volatility of index over 12mths
Source: FE Analytics
“The overall market environment is one where valuations are stretched but I don’t think we are in a bubble or anything like that – but they have gone up,” said Peters.
“Corporate fundamentals have improved over the past eight or nine years since the global financial crisis, but valuations have increased.”
Indeed, Peters said he and co-manager Chris Elliott have had to learn to be more considerate about investing on a valuation and quality basis.
Another source of concern for the manager is the amount of leverage in markets, which has risen significantly since the financial crisis. Peters said that the managers aim to identify companies with leverage levels below the market average.
Like its larger sister fund – the £2.4bn, five FE Crown-rated TB Evenlode Income fund which Peters manages alongside FE Alpha Manager Hugh Yarrow – TB Evenlode Global Income has an emphasis on sustainable real dividend growth with a focus on companies with high returns on capital and strong free cash flow.
As such, the fund has a large weighting towards consumer goods stocks – representing 32.6 per cent of the portfolio – which Peters highlighted for their cash-generative features.
“It’s a sector that we like and is very stable,” said Peters. “There are some woes stalking that sector and specifically worries in the market about the rise of digital distribution channels and the ’Amazon effect’.”
As the below chart shows, the FTSE World Consumer Goods index has significantly underperformed the broader index over the past year, in US dollar terms.
Performance of indices over 1yr
Source: FE Analytics
However, the Evenlode manager said good companies with strong brands should be able to ride out some of the tougher market conditions.
The fund’s top holding is Pepsico at 6.2 per cent and it is joined by other well-known consumer goods companies including Nestle, Unilever, Diageo, and Anheuser-Busch InBev.
However, the manager decided not to maintain TB Evenlode Global Income’s holding in DrPepper Snapple due to its low yield and level of leverage.
Another favourite area for Peters and Elliott is the technology sector, which represents 16.3 per cent of the portfolio. Companies found within the portfolio’s top holdings include Microsoft, Cisco Systems and IBM.
“These are companies that provide high quality data services to professional business,” explained Elliott.
“For every company we invest we think about that the customers get out of using this companies digital goods,” added Peters. “But where you’ve got more up-front risk of disruption from some of the technology names in the portfolio you’ve also got the start-up culture where you get a sense of what’s down the line, whether in terms of disruption or opportunities.”
The new fund’s global mandate has given it a far wider remit than the UK-focused TB Evenlode Income fund and allowed it to access different income stocks around the world.
Although UK exposure for TB Evenlode Global Income stands at 18.6 per cent, close to the maximum 20 per cent permitted under the Investment Association’s criteria for inclusion in the IA Global Equity Income sector, the remainder has been put to use in different regions around the world.
However, most of the fund’s holdings from North America, which represents 44.9 per cent of the portfolio, according to the latest factsheet.
Other geographical allocations include a 28.8 per cent exposure to European equities and 3 per cent in Asian stocks.
“The US is the biggest market, there are some great opportunities and really high-quality companies in technology,” he said. “But it’s not just the US there are some fantastic opportunities globally.”
Indeed, Peters said there are a number of interesting companies to be found in sectors that are poorly represented in the UK market.
In Europe, the manager has identified healthcare companies – in which the fund has a 17.9 per cent of its portfolio invested – such as top-10 holdings French firm Sanofi and Swiss company Roche. Although it also holds US-listed firms such as Medtronic and Procter & Gamble as well as Australian company Sonic Healthcare and the UK’s GlaxoSmithKline.
Another significant sector holding is media – representing 16.1 per cent of the portfolio – where again the focus is on reliable revenue streams and is represented by a number of UK firms such as Informa, Wolters Kluwer and Relx. It also holds Canadian firm Thomson Reuters.
Peters and Elliott’s portfolio is relatively concentrated portfolio at around 40 holdings, but one thing they all have in common is that they are strong enough to survive different market conditions.
He explained: “All the names in the portfolio are very stable companies that should make the most of the opportunities in the current economic environment should it continue to be benign, but also if the opposite happens – there’s always risks out there – we think they’ll still be able to continue to thrive through any negative environment.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in November TB Evenlode Global Income has delivered a total return of 6.94 per cent, compared with an 8.50 per cent gain for the benchmark MSCI World index and a 3.54 per cent return for the average IA Global Equity Income fund.
The fund has a yield of 1.00 per cent and an ongoing charges figure (OCF) of 0.90 per cent.