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Evenlode Global Investment View - September 2017

Casting the net wider - Global Income

At Evenlode we believe that equity investing is about owning stakes in real life businesses. It has been a privilege to put that philosophy into practice on behalf of our clients during the eight years since we launched the Evenlode Income fund. Over that time we have grown the number of businesses that we have examined, the team that searches for high quality investment opportunities in the market, and the talented support staff at Evenlode. We have enhanced our analytical tools and our interactions with companies under our stewardship agenda.

We are committed to managing our clients’ savings for the long haul, and our evolution has led us to a position where we feel we are able to expand our offering to our co-investors. We have been applying the Evenlode investment process to an increasingly global pool of potential investments over the last few years. With a broad investable universe of great businesses at our disposal, we have decided to launch the Evenlode Global Income fund.

What are we looking for?

The Evenlode approach is to look for businesses that have sustainable competitive advantages, producing goods or services that people will need, want or desire over the long term. The sources of competitive advantage are many and varied, and getting to know these in diverse industries is one of the fun parts of being a fund manager. It might be trusted consumer brands in the case of Pepsi or P&G, R&D expertise for Novartis or Sanofi, or network effects in play at Euronext or C H Robinson. The benefits to customers and society lie in providing tasty foods, cleanliness and wellbeing, lifesaving therapies, and efficient distribution of goods, to name but a few. If companies can deliver these benefits then they will be rewarded in kind by receiving attractive returns on the capital employed in their businesses.

With good returns on capital, the business concerned can reinvest some of the profits in further developing their services. That might be organic investment in facilities or capabilities, or buying other firms to infill those capabilities and expand operations. The rest can be returned to the shareholder, in the form of dividends or share buybacks. The steady stream of cash flow to the investor provides some payback today, and is a basis for capital appreciation tomorrow. The ultimate aim of our approach is to provide a good starting yield, and real dividend growth in the long run.

At Evenlode we believe that a multi-faceted approach to identifying the best quality businesses gives the best chance of seeing that cash flow stream develop positively over time. We identify quantitative signals of quality in the financial statements, and complement those with a qualitative assessment of why there should be sustainable performance into the future. Will people need and value nappies and razors in twenty years’ time? Despite the current Western male penchant for facial hair they probably will, and that’s a big plus for P&G.

We also believe that we should let the companies get on with the job, with appropriate ongoing analysis with feedback on occasion, and that superior corporate performance develops over many years, not in days or months. In the Evenlode Income fund our average holding period has been about 6 years to date. The market sometimes provides opportunities to adjust a portfolio in order to manage risk and provide a better prospective return. We are wary, however, of trading for trading’s sake; it’s investing that matters in the long run. 

Global Evolution

At Evenlode, the above philosophy has historically been applied to a universe of largely UK-listed businesses. The broad nature of the UK market, and our expertise and resources when we started Evenlode, meant that this was the natural place to begin. Many of these businesses are, though, global in nature. Just take Unilever, whose products are used by 2.5 billion people around the world. We have naturally found ourselves examining global competitors and similar companies as part of our analysis. Some of those companies are also worthy of investment, and so an increasing subset of our investable universe coverage became international.

Over the last two years we have been building out that segment of our research and it has reached a scale where our global investable universe (those businesses we have found that tick our investment boxes) rivals the UK universe in number. The Evenlode Income fund has many fine businesses within it and will carry on with its multi-cap approach, combining the great large businesses with smaller UK-based ‘hidden champions’. The Evenlode Global Income fund will take a similar approach, but its champions large & small will largely reside overseas. They will tend to be a bit bigger than the UK firms, as is the way particularly in America, but they will always have the qualities that we seek.

Some of the businesses within our global universe will be familiar. Microsoft, P&G and Johnson & Johnson need little in the way of introduction, although there is always a lot going on under the bonnet at these global market leaders as they innovate their products and services. Some however might not be as immediately recognisable, perhaps doing things behind the scenes to help the cogs of the global economy turn smoothly:

Wolters Kluwer (The Netherlands): Business-to-business media is a sector we like at Evenlode, having a high degree of intellectual property through content, data, analytics, and increasingly recurring cash flows from subscription revenues. Wolters Kluwer is a diversified media, analytics and digital services company with operations in Healthcare, Tax & Accounting, Governance, Risk, Compliance, and Law. Its software and content helps medical practitioners make decisions, accountancy firms to manage their practices, and businesses to comply with their regulatory obligations, amongst many other applications.

C H Robinson Worldwide (United States): Big in the world of third party logistics, particularly in North America, C H Robinson acts as a platform between people shipping goods and firms with modes of transportation. Its asset light business model is exemplified by its North American Surface Transport division, which has network effects on both the shipper (sender of goods) and carrier (truck owner) sides of getting stuff from A to B. If you’re a truck owner, C H Robinson helps you to fill the truck and make the most of your asset. If you’re a shipper, you have confidence that your goods will arrive intact and on time.

Kone (Finland): Perhaps not a mystery to anyone who’s ever used an escalator or lift, Kone is one of the global market leaders in moving people up and down. The business has a mixture of sales to new buildings and retrofitting and upgrading old ones (particularly in Europe), in addition to attractive and growing after-sale services. Kone has a long-term family ownership structure, aligning with our own investment philosophy.

These businesses and others in our investable universe tend to be global in nature, having come to dominate some kind of niche. Multinational revenues are attractive, diversifying cash flows and insulating from geographically-specific risks.

Risk – Business First

We approach risk from a business-first point of view. Diverse multinational revenue streams are one mitigator of risk, be they to do with foreign exchange swings, the business cycle, or some unexpected macroeconomic hiccup in a particular region. Another safety buffer comes from the nature of the businesses we seek out. Strong, reliable cash flows, significantly in excess of the investment requirements of the company, enable a business to see through tough times whilst continuing to nourish its operations. Kone, noted above, is undeniably in a cyclical business, but the fact that it only needs 10% of its operating cash flow for capital investments provides a strong degree of comfort in a downturn. It also has net cash on its balance sheet. That means that should a particularly nasty turn of events unfold, shareholders need not fear the long term future of the company passing on to creditors.

Currencies have been in the headlines of late, particularly in post-referendum Britain. Sterling depreciation has had a noticeable effect on asset prices. But looking longer-term, the tailwind to sterling prices that depreciation affords is muted, and for equities at home and abroad the underlying performance of the company is much more important in the total return equation.

We believe that asset prices and returns to shareholders are ultimately driven by superior corporate performance. It thus makes sense to focus our analytical endeavours and risk analysis on business models, financial performance and competitive position, and look to insulate our portfolio from the macro. Whilst we participate in the market on behalf of our clients, we do not use the market to measure risk; volatility stems from business fundamentals, not the other way around. 

Our Team Approach

The Evenlode investment team has grown to five. In addition to myself and Hugh, we have been joined over the last few years by Chris Elliott, Steph Pestell and Sawan Kumar, who have developed not only their own analytical skills but also the tools that we use as a team to analyse potential investments and reassess existing holdings. Their input has enabled us to carry out the high-quality, in-depth research that we demand before investing in any business, and has accelerated the build-out of our global investable universe.   

The increase in investment-focussed personnel has been accompanied by the addition of a capable operations team, including our equity dealer Callum McPherson. The team look after all matters from accounting to compliance, to providing a comfortable place for us to work (investors are welcome to visit us at our converted barns in Oxfordshire). They enable the investment team to focus on the long term fundamental picture for the portfolios we manage and those businesses that might be included in the future. 

The investment team has developed an approach that ensures all analytical output is fed into the decision making process, and is collaborative in nature. I believe it is vital that all members of the team actively contribute to the decisions that are made: does a business fit the Evenlode mould? If so should we invest in it at the current time, or are there more attractive opportunities available? Our team, like the portfolios we manage, will always be focused, but nonetheless we should avoid groupthink and facilitate an open exchange of ideas and views. No one person has a monopoly on good ideas (or, indeed, bad ones!).

Whilst we believe in a team approach, we allocate a lead manager who is ultimately responsible for decision making on portfolios, and for managing the week-to-week and month-to-month shape of a fund. For Evenlode Income, Hugh has been the lead manager since launch, and I have been the co-manager since 2012. We will continue to manage Evenlode Income in this way.

For the Evenlode Global Income fund I will be the lead manager, and Chris Elliott will be the co-manager. It will be Chris’s role to suggest and challenge portfolio decisions, and to deputise in my absence. I am very excited to be taking on the role of lead manager, putting my experience of the last eight years into practice with the whole world of listed businesses to examine and to invest in on behalf of our clients. 

Global Income in Practice

In order to focus our efforts, we have been actively managing a Global Income portfolio during the course of 2017 alongside the Evenlode Income fund. That means that all new opportunities have been fully assessed as part of the ongoing investment process, and the portfolio has been ‘nudged’ in accordance with our routine of weekly investment meetings. We have engaged with management teams all over the world. 

The precise shape of the portfolio at launch will of course depend on the opportunity set at that time, but as we change things slowly at Evenlode we have a reasonable idea of what it will look like. These businesses will deliver the attractive yield and prospect of real dividend growth that our approach aims to capture.

Some of our key favoured sectors are present, with consumer goods making up 34% of the portfolio, including PepsiCo, Diageo, Nestle and P&G. Healthcare technology is around 19% in weight, with a spread of pharmaceuticals, medical devices and diagnostic testing in what is a truly multinational and diversified sector. Other technologies also make up a significant portion, be it enterprise software from Microsoft, network infrastructure and security from Cisco, or services from Accenture and IBM. Elsewhere business-to-business media makes its presence felt, through Thomson Reuters, Wolters Kluwer and WPP, and a diverse range of other niche players in their respective sectors make up the balance. Whether it’s Euronext in financial exchanges or Kone in the world of industrials, these businesses are some of the best at what they do.

Clients First

We are looking forward to managing the Evenlode Global Income fund for you, the savers, and your representatives. We always keep in mind that it is your capital that we invest, and that without our clients, we do not have a business. If you like the sound of our approach, then we would be delighted to have you on board. We aim to give you all of the information you need in order to make a decision whether to invest alongside us, so if you would like any further details then please do contact Spring Capital if you’re an institutional investor or adviser. If you’re an individual then please get in touch with us direct – details are below.

Ben Peters, Fund Manager, September 2017

Please get in touch if you’d like to discuss long term investment opportunities with us

For institutional investors, please contact Spring Capital: [email protected], 020 3195 0076.

For individual investors, please contact us at [email protected], 01608 695 200.

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