We will, as usual, use this January investment view to discuss the year just finished, and share some thoughts on the current outlook.
Overview – 2024
Geopolitical factors loomed large in 2024, and market volatility was high - a characteristic that investors have become more accustomed to over the last five years. The war in Ukraine, tensions in the Middle East, volatile energy prices, US/China relations, and both European and US elections all played their part. Closer to home, investors initially welcomed the change of government in July, but then UK investor sentiment faded towards the end of the year. The impact of business tax increases showed up in weaker economic data; UK gilt yields rose, and the pound fell back.
On the economic front, inflation rates continued to come down in most parts of the world – following a sharp reduction in 2023. Towards the end of the year though, expectations for the speed of interest rate cuts in the US and UK were reined in, not helped by the potential for US tariffs. More generally, the global economic backcloth was very mixed. The Chinese economy was in a very difficult place all year, and many European nations such as Germany and France also struggled. Though the US economy continued to grow at a healthy rate overall, things were not straightforward, with middle- and low-income consumers under pressure as Covid stimulus faded and borrowing costs remained elevated. Sector-by-sector demand was varied, with investment in Generative AI driving strong investment in the hyperscale server supply chain, whilst other areas including many consumer, industrial and life science categories were still experiencing a post-Covid recession.
In the end, UK and global stock markets posted positive returns for the year, but leadership was very narrow. For the second year in a row, the shares of a few very big technology companies in the US market drove the bulk of global returns.
Performance
Evenlode Income’s net asset value increased +4.1% over the year (+3.5% on a swing-price basis). This compared to a rise of +7.5% for the IA UK All Companies sector and +9.5% for the FTSE All-Share Indexi.
Since launch in October 2009, to the end of December, the fund rose +328% compared to +170% for the IA UK All Companies and +182% for the FTSE All-Share.
Total return, bid to bid, GBP terms. Past performance is not a guide to future returns.
We call Evenlode Income’s steady compounding process a ‘get rich slowly’ approach, but unit price progress was slower than we would have liked in 2024. This has left valuations looking very compelling, a point I will return to in the outlook section below.
Performance drivers
During the year, a variety of companies which the fund does not have exposure to performed well, including banks, tobacco and defence companies. In terms of individual holdings, the most negative contributors over the year were Spectris, Diageo and PageGroup.
Spectris is a global leader in precision measurement instruments and controls. Following a period of very strong post-Covid growth, the business faced more challenging end markets in 2024, particularly in life sciences and advanced battery materials. Though it was a disappointing year for the company, sequential sales trends improved towards the end of the year and the company has had a positive trading statement since the year end. Looking further ahead, the company remains well aligned to appealing structural growth themes - including electrification, industrial automation and life sciences.
Diageo has faced a very challenging industry backdrop over the last eighteen months, and the shares fell -8.5% in 2024. Our view is that, though we believe the US spirits market will grow a little slower over the next decade compared to the last, the sector’s recent downturn is predominately a cyclical issue. Diageo remains a well-invested global market leader with a strong portfolio of brands, a global footprint, and a valuation that hasn’t looked this good for a decade.
PageGroup is a market-leading specialist recruiter with a global footprint. After a strong post-Covid period in 2021 and 2022, the last two years have been challenging with macro and geopolitical uncertainties, pay awards falling to more normal levels, and low churn levels as companies and candidates adopt a wait-and-see approach. PageGroup has weathered the downturn in good shape, with a net cash position of £95m at the end of December and is well placed for the eventual upturn in the recruitment markets.
The most positive contributors to fund return in 2024 were Hargreaves Lansdown, Unilever and RELX. Hargreaves Lansdown’s share price performed strongly following its takeover approach by a consortium of private equity firms. At Unilever, the new management team is taking a more focused approach and accelerating investments in innovation and marketing. This has resulted in healthy operational performance, with revenue and profit growth of 4% and 17% respectively during the first half, and third quarter organic growth of +4.5%. RELX continues to produce healthy, predictable cash generative growth, as it sees steady growth in demand for its software and data analytics services from loyal, embedded and diverse customer base.
Portfolio changes
In terms of portfolio changes, it was a relatively quiet year. The main result of the changes was that the number of holdings reduced slightly (from 37 to 35), and the position size in several UK-listed quality cash compounders was increased.
We reduced P&G and PepsiCo during the year and then took the decision to exit both holdings in October. Both had been long-term holdings in the fund – added in 2012 and 2016 respectively. We chose to exit both for valuation reasons, and in the case of PepsiCo we also have some doubts on the longer-term potential for category growth. Some of the capital from the reductions in P&G and PepsiCo was recycled into CME Group, which we added to the fund in June. CME is a US-listed futures exchange and clearing house, with global leadership positions in interest rates, commodities, currencies and equity indices, and powerful network effects driving significant cost efficiencies for customers. The underperformance of its share price in the first half of the year left it offering an attractive free cash flow yieldii of 5% at entry. This was the only new addition during the year. We also exited Hargreaves Lansdown in October, following shareholder approval of its takeover. In terms of existing positions, we increased/topped up exposure to a variety of holdings such as Compass, LSEG, Experian, Spirax Group and LVMH. We trimmed back some other holdings including RELX, Wolters Kluwer and SGS.
Since the year end, we have finished exiting the fund’s small remaining position in Microsoft. It remains a great business, and we will retain it in our investable universe, but there are other UK-listed holdings that are also offering strong prospects for growth, but with more attractive free cash flow and dividend yields. Microsoft has been a fruitful investment for the fund. It was introduced in January 2011 and was a top ten position for many years (on entry it was trading on a dividend yield of more than 3%, covered by a free cash flow yield of approximately 10%!).
Fundamentals and valuation
Fundamental progress has been reasonable during 2024, with current forecasts for the underlying companies suggesting mid-single-digit growth in organic revenue and high-single-digit growth in organic operating profitiii. This is broadly in-line with expectations at the start of the year. With end markets mixed, there has been a higher company-by-company dispersion than normal in these results. Approximately 80% of the portfolio grew organic operating profit - in many cases at a very good rate. All of the following UK-listed businesses, for instance, are expected to grow by +9% or more on this measure, for the 2024 calendar year: Savills, Sage, Informa, Compass, Unilever, Games Workshop, Rotork, Diploma, Intertek, RELX, Halma, LSEG, Experian and Smiths Group. On the other hand, about 20% of the portfolio are expected to report a fall in organic operating profit. The bulk of this 20% is accounted for by the spirits and luxury sector (Diageo, Burberry, LVMH), the specialist recruiters (PageGroup and Hays), and engineering and industrial holdings Spectris and Victrex. We think these positions offer very interesting valuation appeal and recovery potential. Recent trading updates from some (including Spectris, Burberry and Victrex) have suggested end market conditions are finally beginning to improve.
Outlook for 2025
On the outlook, the global economic and geopolitical backdrop remains volatile and erratic.
With that said, though, the portfolio is a diverse list of market-leading companies with cash generative business models and strong aggregate growth potential both for 2025 and beyond. Just under 20% of underlying revenues are generated in the UK, about 40% in North America, and the rest from a wide range of nations. Balance sheets are healthy, and with interest rates having reset to more normal levels over the last three years, we think sensibly run market-leading companies with self-funding business models and strong balance sheets are well placed to strengthen their competitive positions. Valuations are also unusually attractive. The fund’s free cash flow yield stood at 5.8% at the start of the year - about as high as we have seen since the early days of the fund (i.e. the 2009-2011 period)iv.
So far, the year has started quite well for equity markets. Better than expected inflation data in the UK and US has helped, as has the sense that the new Trump administration may take a more measured approach to tariffs than initially expected. Interest rates are set to fall meaningfully in Europe and the UK, and the possibility of a ceasefire in Ukraine over coming months is real. Over the last few weeks, there has been a broadening out of market returns, with UK and European markets performing positively. For the first four weeks of the year, Evenlode Income has returned +5.7% compared to +2.7% for the IA UK All Companies sector and +3.8% for the FTSE All-Sharev.
We wish you all the best for 2025 and look forward to updating you regularly as the year progresses. Please do get in touch if you have any questions.
Hugh, Chris M., Ben P., Charlotte, Leon and the Evenlode team
28 January 2025
Evenlode has developed a Glossary to assist investors to better understand commonly used terms.
Please note, these views represent the opinions of the Evenlode Team as of 28 January 2025 and do not constitute investment advice. Where opinions are expressed, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is not intended as a recommendation to invest in any particular asset class, security, or strategy. The information provided is for illustrative purposes only and should not be relied upon as a recommendation to buy or sell securities. For full information on fund risks and costs and charges, please refer to the Key Investor Information Documents, Annual & Interim Reports and the Prospectus, which are available on the Evenlode Investment Management website (https://evenlodeinvestment.com). Recent performance information is also shown on factsheets, also available on the website. Past performance is not a guide to future returns. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Fund performance figures are shown inclusive of reinvested income and net of the ongoing charges and portfolio transaction costs unless otherwise stated. The figures do not reflect any entry charge paid by individual investors. Current forecasts provided for transparency purposes, are subject to change and are not guaranteed. Source: Evenlode Investment Management Limited, authorised and regulated by the Financial Conduct Authority, No. 767844.
Market data is from S&P CapIQ, Bloomberg and FE Analytics unless otherwise stated.
iIFSL Evenlode Income B Acc (GBP). Source: Evenlode, Financial Express, total return, bid-to-bid, GBP terms. Performance to 31 December 2024. IFSL Evenlode Income launch date: 19 October 2009.
iiFree Cash Flow Yield (FCF) - A measure of how much cash a company can generate over and above normal operating expenses and capital expenditure. The more FCF a company has, the more it can allocate to dividend payments and growth opportunities.
iiiSource: Evenlode, Visible Alpha. Organic growth excludes growth attributable to merges and acquisitions and foreign exchange.
ivSource: Evenlode. Free cash flow yield as at 31 December 2024, based on CAPIQ estimates for the current year.
vSource: Evenlode, Financial Express, total return, bid-to-bid, GBP terms. Performance to 28 January 2025.