Best known for its UK and global income funds, asset manager Evenlode is to launch a growth-themed global equity fund after its research unearthed many strong investment ideas which don’t pay much in the way of dividends and therefore wouldn’t feature in its other funds.

TB Evenlode Global Equity (BMFX289) will invest in companies with attractive structural growth opportunities, sustainable competitive advantages, and sustainable reinvestment that safeguards and extends their businesses.

It will follow the same principles of other Evenlode funds in looking for stocks with high return on capital and strong free cash flow and will aim to have low portfolio turnover with long-term holding periods.

That puts it in direct competition for investors’ money with Fundsmith Equity (B4MR8G8) which follows a similar investment approach.

PORTFOLIO NAMES

According to the March factsheet, Evenlode’s new portfolio includes US tech firms Accenture, Microsoft and Google owner Alphabet, as well as payment giants Visa and Mastercard, UK names including Relx (REL) and Unilever (ULVR), and others like Heineken,
Nestlé, Booking Holdings, L’Oreal and LVMH.

Now might be a good time to launch a fund aimed at quality and growth stocks, with the market rotation into value and small caps creating a buying opportunity for bigger names that have seen their share price weaken in the past few months. It means Evenlode can pick up certain stocks potentially at a discount to their historical average.

But co-manager Chris Elliott says that didn’t come into the team’s thinking in launching the fund, rather that after testing the portfolio for over nine months they now feel ready to open it up to external investors.

Elliott tells Shares: ‘We found many companies we like but that don’t pay much in the way of yield. So, we asked ourselves, is there room for another product? We tested that for half a year or so, and now we are at this point where we can [launch the fund].’

However, Elliott highlights that he and fellow co-manager James Knoedler are valuation-aware, and that recent share price volatility in quality and growth stocks ‘continues to provide us with opportunities to redeploy capital at a better risk-adjusted rate of return’.

PATIENT APPROACH

The new Evenlode fund will be available to retail investors from 4 May and will have an ongoing annual charge of 0.85% a year. The managers concede it won’t be ‘the most exciting fund in the world’ but that it will suit a patient investor looking for growth and will aim to have less drawdown than the wider market.

Like a lot of global funds, it includes a significant amount of North American stocks, which make up almost half of the 35 holdings at the end of March, but the managers insist it’s not a case of looking to get involved in US tech or following its MSCI World benchmark, which has a 66.4% weighting to the US.

Knoedler explains: ‘We take a bottom-up approach and look at individual stocks rather than any sectors or geographies. We simply follow where our research leads us and that’s to companies that have sustainable competitive advantages and can compound their businesses over time.’

He adds that the fund may be biased towards developed markets like the US, UK and Europe when it comes to where the stocks are listed, but that when looking at the underlying revenues they have much more exposure to emerging markets.

Knoedler highlights Unilever as an example, with 60% of its revenues coming from emerging markets and Asia in particular. The Evenlode managers believe it has a sustainable competitive advantage with its brands, structural market growth with the premiumisation of consumer products in emerging markets, and it’s ‘reinvesting for success’ with its advertising and promotion campaigns.

It’s also one of several names starting to look more reasonably valued as the market rotates away from quality defensive stocks like consumer staples.

VALUATION APPROACH

The managers say they don’t value stocks on a price to earnings or price to book ratio, but rather using a discounted cash flow model and on a redemption yield basis.

Knoedler says: ‘We don’t try to value stocks on a one year out multiple, because you’ll find companies with the same multiple, but which have very different profiles in terms of their competitive advantages and structural growth.’

That said, the managers are keen not to pay over the odds for a stock and pick out the example of American tech conglomerate Cisco, whose shares soared in the late 1990s as the internet took off and all things computer-related were very much in demand.

At the height of the tech bubble, it was valued at over $500 billion as unchecked optimism about the growth of the internet prompted the company to ramp up production, with market expectations rising to rather unreasonable levels. When the bubble burst, its shares went from an all-time high of $77 to under $15 and have failed to reach those heights ever since.

Elliott explains: ‘We’re not saying Cisco wasn’t and isn’t a great company, but you have to be aware that even the greatest growth company can be a bad investment at the wrong price.’

DISCLAIMER: Editor Daniel Coatsworth has a personal investment in Evenlode Income, Evenlode Global Income and Fundsmith Equity referenced in this article

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