April was dominated by the ‘Liberation Day’ tariff announcements, and their subsequent fall-out. Global stock markets and the US dollar reacted very negatively to the higher-than-expected US import tariffs, and the chaotic way in which they were announced. US government bond yieldsi also rose sharply forcing the US administration to change tack after a week, freezing all but the baseline 10% tariffs (except for China’s) for at least 90 days. This volte-face led to a strong recovery in stock markets in the second half of April. Sentiment was also alleviated by a falling oil price and better than expected inflation data.
Tariff aftermath
Though the ultimate resting place for US tariff policy still remains uncertain, the dust is beginning to settle, and the direction of travel is clearer. Since mid-April the tone of the US administration has become more conciliatory, with the implicit aim of containing the economic and bond market damage. Outline trade deals are now being worked on. It is likely that these deals will lead to lower tariff levels than the 2 April announcements, but still higher than consensual expectations at the start of the year. Talks between the US and China will be particularly important for sentiment, given the current economic impasse between the two nations.
Management teams would, on the whole, much prefer a world in which there are no tariffs. As we have discussed previously, Evenlode Income’s multinational holdings – though not completely immune – are well insulated from the direct effect of tariffs due to their pricing power, high gross marginsii and local-to-local manufacturing and supply chain footprints. A good number of companies have released first quarter updates over the last three weeks, and the below quotes give some colour on how companies that generate some of their revenue in the US (from sales of physical goods) are viewing the direct tariff impact.
Unilever: “The direct impact of tariffs on our profitability is expected to be limited and manageable.”
Smith & Nephew: “Our full year guidance for 2025 is unchanged as we target another year of strong revenue growth and a significant step-up in trading profit margin, notwithstanding the uncertainties around the imposition of tariffs. The tariff situation remains dynamic. Just over half our revenues are in the US and two thirds of the products we sell within the US are manufactured in-market. We are working to mitigate tariff impacts from products and raw materials imported into the US, including leveraging our global manufacturing network in terms of mix and supply routes. The unchanged outlook includes an expected net impact of around $15 to $20 million from tariffs in 2025, based on announced measures, and mitigations.”
Rotork: “Our three North American facilities, which together represent around a fifth of Group sales, are located in the US and have the capacity to supply the majority of local demand. Additionally, to cover incremental costs arising from higher tariffs, a surcharge increase has been implemented.”
Spectris: “We expect to be able to mitigate the direct impact of tariffs, supported by our strong, differentiated market positions, the importance of Spectris' products to our customers, and the Group's global operational footprint”.
For companies that do not have US operations, or only sell services in the US, the direct tariff impacts are less relevant.
Performance
So far this year the Evenlode Income fund has risen +0.7% compared to a rise of +3.6% for the IA UK All Companies sector and +5.2% for the FTSE All Share index. The UK market continues to outperform the US market this year, with the S&P 500 down -9.4% (in sterling terms) since the start of the year, and the Nasdaq Composite down -12.5% on the same basisiii.
As discussed in recent investment views, Evenlode Income’s year-to-date performance has lagged versus the UK market. There have been two main factors that have caused this. The first is the fund’s lack of exposure to defence companies and banks/insurers which explains over two thirds of underperformance. The second main factor is the underperformance of two larger holdings, Diageo and Bunzl, which are down approximately -13% and -25% year-to-date respectively; this more than explains the remaining underperformance. We have discussed Diageo in recent investment views. Bunzl shares fell in April after releasing a first quarter trading update that highlighted a decline in profit due to execution issues at their US business. The statement led to earnings downgrades of approximately 10%. This was a disappointing development, but we do view the issue as fixable, with management changed and the executional issues being reversed. With strong market positions and an excellent track record of earnings compounding, the shares look unusually attractive on a current price-to-earnings multipleiv of 12x and a dividend yieldv of over 3%.
A portfolio of market leaders
Looking ahead, we feel quietly positive on the outlook. The list of competitively advantaged businesses that make up the portfolio continue to generate very healthy levels of cash and are well placed to grow per share free cash flow growth over time.
There are some UK market leaders in the portfolio such as Howden Joinery, Integrafin, Auto Trader and Rightmove. Many of the portfolio’s holdings, though, are best described as global market leaders that have a heritage, headquarters and listing in the UK - approximately 80% of the portfolio’s revenue is generated internationally. The shares of these multinationals have been relatively unfashionable over recent months, within the context of the UK market. This has been due to tariff concerns, and also due to the significant weakness in the US dollar (which has fallen approximately -6% versus sterling year-to-datevi).
On a long-term view, we like this geographical diversification and would note that many of these holdings are trading at or near multi-year valuation lows.
Underlying progress
For the portfolio overall, underlying financial progress is expected to continue in 2025, with organic operating profit[vii] currently forecast to grow by +7.4% on average for the 2025 calendar yearviii.
To unpack this a bit, just under 90% of the portfolio is expected to grow, and approximately 60% of the portfolio is expected to grow at a high-single-digit or double-digit rate. The 21 companies falling into this latter category include a wide range of companies such as RELX, Integrafin, Smith and Nephew, Halma, Rotork, Games Workshop and Informa – amongst many others.
For companies expected to post low or negative profit growth, competitive positions generally remain strong – the issue has been weak end demand during the post-Covid period. Howden Joinery is a good example. The company’s trading update in late April saw relatively muted revenue growth of +1.4% in the UK (+3% including the international business). The UK performance compared well to continued softness in the overall UK’s kitchen and joinery market, so the company’s competitive position continues to steadily strengthen. When Howden’s end demand begins to normalise (current kitchen volumes in the UK are below 2009 levels), the company remains well placed to capture the recovery. The balance sheet also remains in a strong net cash position.
New holdings
The high level of volatility in the first half of April led us to make some changes, and the result has been a broadening out of the portfolio. The catalyst was the strong share price outperformance of several of the fund’s largest holdings in the initial sell-off, which led us to manage their position sizes by reducing the number of shares held to manage – a good example being Unilever. We recycled the cash raised from these trims into five new (or reinitiated) holdings: Rightmove, InterContinental Hotels Group (IHG), L’Oréal, Auto Trader and Astrazeneca. These are high quality, cash generative companies that add interesting diversification and growth potential to the portfolio. They have all been in our investable universe for some time, and in the case of IHG and Astrazeneca we are returning to companies that have previously been long-term holdings within the portfolio. Elsewhere, we have made some small tweaks within the economically sensitive portion of the portfolio to turn the dial up even further on balance sheet strength.
For the sake of brevity, we will discuss one of these new holdings – IHG – to conclude this investment view. We will cover the other four as part of next month’s investment view.
IHG – Checking in
The initiation of a position in IHG followed a share price decline of more than -30% in early April, driven mainly by concerns about the global economic outlook. IHG is an old friend – the fund held a position in the 2010s and we have tracked it closely since, including during the disruptive Covid period and subsequent recovery. IHG is a leader in the global lodging industry, with a portfolio of 19 brands including iconic brands such as Holiday Inn, which has a leading position in the midscale segment, and Intercontinental Hotels in the luxury market. These brands are the bedrock of its asset-light franchise model which generates highly attractive economics.
For travellers, branded hotels offer consistent standards, peace of mind, and good value for money. For hotel owners, they typically generate higher revenue and profitability than comparable independent hotels, thanks to greater brand recognition, loyalty programs, procurement scale, advanced revenue management systems, and global marketing efforts which drive pricing power, repeat business and reduce costs. These advantages have driven steady market share gains for years and this looks set to continue - IHG’s share of the global pipeline of hotels in planning or under construction is more than twice its share of current room supply. There is also a significant growth opportunity in emerging markets, with IHG holding leading positions in China and India. For the group as a whole, management expects to deliver high-single-digit revenue growth and double-digit earnings growth over the medium-term.
The hospitality industry is cyclical, reflecting the discretionary nature of both business and leisure travel, which each account for roughly half of IHG’s revenue. However, the franchise model is more resilient than the ownership model. The majority of IHG’s revenue is generated from franchise fees which are assessed based on a fixed percentage of a hotel’s revenue rather than profit, shielding its fee revenue from hotel operating leverage[ix]. It is also asset light, with capital expenditure typically representing only 3-4% of revenue, and generates strong operating margins of nearly 50%. The Global Financial Crisis was particularly severe for the lodging industry with IHG’s revenue and profit falling 19% and 34% respectively in 2009, but the resilience of the franchise model was also evident - it still generated a very healthy profit margin and cash flow which allowed it to maintain its dividend and reduce debt, and it grew profits strongly in subsequent years.
IHG released an encouraging first quarter trading update this week, with the shares reacting positively as it maintained guidance for double-digit profit growth in 2025. Revenue per average room (RevPAR), which measures revenue generated from hotels in IHG’s franchise system, grew +3.3% and net system size, which measures the number of franchised or managed hotels, grew +4.3%. Encouragingly, while management noted some negative impact on US RevPAR following Trump’s Liberation Day tariff announcements in early April, global bookings for Q2 are higher than for the same period last year.
The recent decline in IHG’s share price left the valuation looking more compelling, with the Price-to-earnings ratioiv falling from 28x to 19x following Trump’s tariff announcements. We viewed this as an attractive starting point given IHG’s strong market position, global scale and growth prospects. Given current political and economic uncertainty, we would not be surprised if there is more share price volatility in the coming months. We have built a small initial position of 1%, with scope to add further if-and-when we think it makes sense.
Hugh, Chris M., Ben P., Charlotte, Leon and the Evenlode team
9 May 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 9 May 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.
iBond yields represent the return an investor earns from holding a bond. In simple terms, it's the income received from a bond (usually through interest payments), shown as a percentage of the bond's price. A rise in bond yields can be a reflection of higher risk perception as investors demand more return for higher perceived risk levels.
iiGross margin is a measure of how much money a company keeps from sales after covering the cost of making its products or services.
iiiSource: Evenlode, Financial Express, total return, bid-to-bid, GBP terms. Performance from 31 December 2024 to 9 May 2025.
ivPrice/Earnings ratio - a measure of a company’s current market valuation compared to its earning potential, calculated by dividing a company’s share price by its Earnings per share (EPS - A measure of company profitability, calculated by dividing a company’s profit by the number of shares in issue).
vA dividend yield is calculated by dividing the dividend per share by the current share price.
viSource: Financial Express. 31 December 2024 to 9 May 2025.
viiOrganic growth excludes growth attributable to mergers and acquisitions and foreign exchange.
viiiSource: Visible Alpha, S&P Capital IQ, Evenlode Calculations. Revenue and organic operating profit figures do not include FX or M&A impact. Calendar year numbers for all holdings (adjustments are made for companies whose financial year end is not December). Actual data to 2 May 2025. 7.4% average is based on median. Weighted average mean growth is 5.8%.
ixOperating leverage is the degree to which a company uses fixed costs (like rent, salaries, equipment) instead of variable costs (like materials or hourly wages).