In bear and bull markets, economic expansion or recession, income is rarely out of fashion with retail investors. Evenlode Income (BD0B7D5) has become one of the UK’s favourite fund options, a £3.34 billion actively managed fund that has outstripped its UK equity income category almost three-to-one over the past decade.

In a year of red-hot inflation and interest rates rising from historic lows, the Evenlode Income fund has been more robust in 2022 than its sister product, Evenlode Global Income (BF1QNC4), yet the opposite applies over a three-year basis. The predominantly UK-focused Evenlode Income has achieved 3.8% annualised total return versus 7.8% from Evenlode Global Income, according to Morningstar data.

That may surprise readers given that the UK has a reputation for being a market that pays much more generous dividends than many overseas regions such as the US.

In particular, the FTSE 100 is a popular hunting ground for equity income stocks given above-average yields. Insurer Abrdn (ABDN), housebuilder Persimmon (PSN) and mining giant Rio Tinto (RIO) are among the big names luring investors with income yields above 8%, yet neither Evenlode fund owns these stocks.

SHARED INVESTMENT IDEOLOGY

Both Evenlode funds share an investment ethos that focuses not on the biggest potential payouts, but on characteristics such as attractive structural growth opportunities; sustainable competitive advantages; and sustainable reinvestment that safeguards and extends their businesses.

A large part of the Evenlode process is focused on cash flow. ‘We spend a lot of time looking at whether a company has attractive economics so it can generate lots of cash flow, and whether it is getting high returns on its invested capital,’ says Ben Peters, Evenlode co-founder and fund manager. But there are more esoteric queries.

‘I’m also thinking about what the company does and why the capitalist system might allow it to have these attractions,’ he says. ‘Is the company competitive? What are its advantages? Where’s the value-add for the customer? We spend a lot of time thinking about this.’

It’s possible to see this rationale play out by spinning through both funds’ respective portfolios. Here you’ll find names like Microsoft (MSFT:NASDAQ), Relx (RELX), LVMH (MC:EPA), GSK (GSK) and PepsiCo (PEP:NASDAQ) – just some of the businesses many would comfortably predict will still be alive and paying dividends to shareholders 10 years from now.

Peters champions patience and a long-term investment horizon, but he is not above swooping on what he considers quality companies that may have tripped up. New holdings added to Evenlode Income this summer include credit checking agency Experian (EXPN) and distribution business Diploma (DPLM).

In March, Adidas (ADS:ETR) was added to the Evenlode Global Income fund for the first time after sliding nearly 20% during the first quarter, an opportunity to buy one of the world’s largest sportwear brands seemingly too good to resist. Testing firm SGS (SGSN:SWX), a Swiss rival to Intertek (INTK), was added in June.

TILTING THE STOCK SCALES

Fundamentally, while superficially a UK and global fund respectively, several stocks appear across both Evenlode portfolios, albeit in different weightings. For example, Microsoft is the Evenlode Global Income’s largest single stake, worth 5.7% of its £1.8 billion assets, whereas the software giant ranks 15th for Evenlode Income at 2.1% of assets.

This means every 1% move in Microsoft’s share price adds or subtracts about £1.3 million to/from the global fund’s net assets, with a rough £700,000 impact on Evenlode Income.

Evenlode Income aims to have at least 80% of its assets in UK stocks with the remainder free to be invested anywhere in the world.

KitKat maker Nestlé (NESN:SWX) features exclusively in Evenlode Global Income. It has significantly increased capital expenditure to secure supply chains to satisfy consumer demand, but this will pinch free cash flow.

RESILIENT COMPANIES

Peters accepts it has been a discouraging year for investors yet says he finds it reassuring that the bedrock of Evenlode Income and Evenlode Global Income’s cash generation is underpinned by repeat-purchase business models. The manager estimates about 78% of the former’s portfolio is invested in companies that ‘we categorise as having below average economic sensitivity’.

He is also supportive of portfolio companies across both funds using the flexibility of superior cash flows to invest in their long-term future even during the current difficulties.

Peters even sees plenty of investment opportunity, saying, ‘Several high-quality cash compounding companies that we follow have seen drawdowns of between 40% to 50% over the last few months without any change in our view on their long-term fundamentals.’

The fund manager says all his own long-term savings are invested in Evenlode funds. That’s encouraging as it suggests he won’t take excessive risks to drive rewards.

WHICH ONE TO BUY?

As for which fund investors should buy, while both are attraction propositions, on a long-term view we prefer the Evenlode Global Income fund for its ability to pick the very best opportunities in the world rather than be principally constrained to the UK market.

Its 2% yield is less than the 2.6% paid by Evenlode Income and may not be enough for someone who needs to use the dividends to pay their bills today, yet there is merit in owning the global fund if you’re still in the wealth accumulation phase of your life.

You get exposure to a portfolio of quality companies which should be growing dividends each year. Buy the accumulation version of the fund and enjoy the compounding benefits of the fund automatically reinvesting dividends.

DISCLAIMER: Editor Daniel Coatsworth owns units in Evenlode Global Fund

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