Top seven

There has been a barrage of news for investors to digest since the start of the year. The full year results season has been in full swing, but Trump has stolen the headlines, with tariffs and Ukraine the topics of most significance for global stock markets. The proximate result of the introduction of tariffs on China, Mexico and Canada has been a deterioration in leading indicators for the US economy and a fall in the US stock market. Meanwhile, the US’s reluctance to provide a security guarantee to Ukraine catalysed European countries to make rapid plans for increased defence and infrastructure spending. Germany’s election winner Friedrich Merz announced plans for a huge ‘bazooka’ spending package, which hinted at the first signs of animal spirits in the European economy for some time.

With a highly uncertain US policy environment, the ‘US exceptionalism’ trade of the last two years has lost some of its lustre. Year-to-date the FTSE All-Share rose +6.9% to the end of February compared to a rise of +0.7% for the S&P 500 and a fall of -1.0% for the Nasdaq 100ⁱ. Evenlode Income rose +3.9% and the IA UK All Companies by +3.6% over the same periodⁱ. The fund and sector’s underperformance versus the FTSE All-Share has mainly been driven by narrow market leadership, with banking and defence stocks driving a large proportion of index returns in January and February.

Tariffs

In our October 2024 investment view (The US Election: A Bottom Up Perspective) we discussed various factors that provide portfolio holdings with reassuring insulation from tariff risk. Some companies are not directly affected by the US tariffs because they are service providers, or because they don’t generate revenue in the US. Others are insulated by their local-to-local manufacturing and sourcing footprints, high gross margins, pricing power and repeat-purchase business models.

With all that said though, US tariffs are presenting a clear risk to the US and global economy, particularly due to the haphazard nature of their implementation so far. Trump, last week, delayed a large chunk of the Mexican and Canadian tariffs – presumably partly in response to this deterioration in economic indicators.

Results

Uncertainty is high, and over the last few weeks, stock markets have been erratic. In such an environment, it is worth remembering Peter Lynch’s aphorism that ‘a share is not a lottery ticket, it's part ownership of a business’. Notwithstanding the current tariff uncertainty, recent results and discussions with management teams have been a helpful reminder of the quiet progress being made under the bonnet of the portfolio, the strength of cash generation, and the repeat-purchase business models of many holdings. Full-year results season has been in full swing, and we have now heard from over 90% of the portfolio since the start of the year.

Top seven

In the rest of this month’s view, we will briefly run through the fund’s seven largest holdings. The free cash flow yield figures quoted highlight the surplus annual cash flow left over for shareholders, expressed as a percentage of the share price. The metric is quoted after operating costs, working capital and capital expenditures, as well as interest and tax costsⁱⁱ.

Unilever

In the context of a difficult backdrop for global consumers, Unilever delivered solid results in 2024 - with organic revenue up +4% and operating profit +15%. We met with new CEO, Fernando Fernandez, last week. His aim is to continue to accelerate the strategy of his predecessor - to drive volume and revenue growth through the business, whilst delivering profitable growth and strong cash conversion. Unilever has made good progress at raising investment levels and competitiveness ratios have stabilised. The company’s advertising-to-sales ratio now compares well to peers (at over 15% versus c.13% two years ago) and the research-and-development to sales ratio has also stepped up. Following this year’s exit of the ice cream business, the aspiration is to grow organic revenue at a mid-single-digit rate, with investment focused behind the 30 power brands and 24 countries that make up the vast bulk of Unilever’s revenue and profit. Our recent discussions with Fernandez suggest that he will place particular emphasis on increasing this focus, speeding up decision-making, improving volume growth and improving execution in Unilever’s key emerging market geographies – not least India, where the company’s market position is strong and long-term growth potential looks very attractive.

RELX

RELX is a very repeat-purchase business model, with electronic revenues now 83% of the overall group. These software and data analytics revenues have a high degree of recurrence. For 2024, the company grew organic revenue +7% and operating profit +10%, with demand driven by the ongoing shift in business mix towards higher value analytics and decision tools. We have trimmed the RELX holding a little over recent months following strong share price performance, but we continue to find the long-term opportunity compelling, as the business continues to deliver value for its loyal, embedded customers.

Diageo

Diageo has had a problematic two years. The spirits industry – of which Diageo is the global market leader – has been experiencing a demand slowdown since 2022, after two very strong years following Covid. This has been exacerbated by the bull-whip effect of inventory destocking. As a result of this disappointing performance, investors have become worried about potential structural risks to the industry from three key areas: GLP-1 usage, cannabis legalisation, and increased consumer aversion to alcohol.

We have recently written a longer piece on Diageo, available on request, which includes a discussion on these structural questions, tariff risk and the longer-term opportunity. In short, our analysis does not discount these trends but suggests that the bulk of recent underperformance is cyclical rather than structural. Diageo is a well invested company, owns a high-quality portfolio of global brands, and has been taking market share in this downturn. Though operating conditions have been unusually volatile over the last five years, it still remains a repeat-purchase and highly cash generative business model, and the shares are trading on their most attractive valuation for a decade. The company recently reported interim results, with organic revenue +1% and operating profit -1%. When we sat down with management after the interim results, CEO Debra Crew and the new CFO Nik Jhangiani had a compelling vision of balancing best-in-class organic growth with a renewed spending discipline.

With that being said, it is our job to learn from experience. Most of what happened to the company in the last few years was out of its control – Covid lockdowns, the reopening surge, then the inflationary spike. But in retrospect the last management team left too much debt on the balance sheet and set unnecessarily high medium-term revenue growth targets. While we had our concerns about both, we were not forceful enough in exercising our position as long-term shareholders to encourage the company to be more moderate. We have taken this lesson on board and, following the interim results, we made it clear to the company we welcomed their sensible decision to walk away from the old targets and to commit to more conservative ones in future.

Experian

Experian is the global market leader in the credit data and analytics industry, and like RELX is benefiting from strong demand from its software and analytics services. Its software solutions help clients manage risk, increase efficiency, and improve their products. With interest rates having risen over the last few years, the lending markets that its clients operate in have been difficult, but Experian is still growing at a good rate. At Experian’s recent first quarter trading statement, the company reported organic revenue growth of +8%. We met the company this week, and they remain confident in delivering high-single-digit revenue organic growth over the medium-term. With the company’s multi-year transition to the cloud now nearing completion, management are also optimistic on cash generation and profit margin development, thanks to the lower capital expenditure and more efficient platform that this transition is creating.

Though not entirely immune to current US economic complexities, recurring revenue makes up nearly half of group sales. Much of the rest of Experian’s revenue, though transactional, is supported by minimum volume contracts from clients.

Reckitt

Reckitt, as with Diageo, has had some challenges over the last few years – not least from the ill-advised acquisition of Mead Johnson in 2017, the infant nutrition business which was the source of the litigation issues that emerged last year. Reckitt released full year results last week, reporting +1.4% growth in organic revenue and +8.6% in operating profit.

Reckitt is in a period of transition – it is in the process of selling its lower growth hygiene brands and also plans to exit infant nutrition. This will leave the business as a focused and attractive portfolio of health and hygiene brands, with the following brands accounting for more than three quarters of revenue: Mucinex, Strepsils, Gaviscon, Nurofen, Lysol, Dettol, Harpic, Finish, Vanish, Durex and Veet. These brands have grown at a mid-single-digit rate over the long-term, and their prospects look similarly attractive.

As with Diageo, recent operational difficulties have left the company trading on a very interesting valuation. Reckitt also remains a repeat-purchase and highly cash generative business model.

Compass

Compass is the global leader in the provision of outsourced food catering to a range of sectors – from business to healthcare, to sports and leisure events. In its latest quarter, organic revenue growth was +9%, with a strong level of net new business wins accounting for about half of this growth. Retention rates are high and have improved over the last few years, thanks in part to better technology providing helpful analytics on how to ensure client services levels are as high as possible. Retention rates for the overall group are 96%. New business is being helped by both market share gains and the trend to first time outsourcing, as organisations realise that Compass can remove the hassle-factor and provide better food at lower cost, thanks to their experience and procurement scale.

We met the company this week. They remain very confident in the outlook for new business wins and their ability to navigate the current complexities in the global economy. Management expects mid-to-high-single digit revenue growth over the medium-term.

Bunzl

Bunzl is the global market-leading distributor of not-for-resale consumables, providing cleaning items, packaging, protective equipment etc., to a variety of sectors from health care to food services. The company has a strong record of capital allocation and long-term value creation, which has helped drive 32 years of consecutive dividend growth and +9% compound earnings growth over the last twenty years. This performance has been underpinned by the company’s strong competitive position, its close and embedded relationship with customers, and its consistent strategy to invest both organically and via bolt-on acquisitions.

We met with management last week after final results. Tariffs may create some inflation within the products range that Bunzl distributes, but the company sources 85-90% of its range from US suppliers, and has a good track record of passing prices through – as demonstrated during the post-Covid input-cost inflation of 2022. Free cash flow generation remains strong, and this led management to announce – on top of its investment and acquisition plans – a share buy-back of £250m last year, and another £200m buy-back at February’s final results. In aggregate these share repurchases represent approximately 4.5% of the company’s valuation. This is a theme we have seen across other holdings - with cash generation strong, many companies have been ‘eating themselves’ over recent months, by buying back shares. For the long-term shareholder, without doing anything, these repurchases quietly increase the economic ownership of each share in a company.

Next month, we will discuss themes from results across other holdings in the portfolio. In the meantime, we wish you all the best.

Hugh, Chris M., Ben P., Charlotte, Leon and the Evenlode team
10 March 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 10 March 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.

ⁱSource: Evenlode, Financial Express, total return, bid-to-bid, GBP terms. Performance from 31 December 2024 to 28 February 2025.

ⁱⁱSource: Evenlode. Free cash flow yield and dividend yields as at March 2025 based on CAPIQ estimates for the current year. Free 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. Dividend Yield - A measure of income paid by a company to its shareholders over a period of time. A dividend yield is calculated by dividing the dividend per share by the current share price.