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Evenlode Investment View - October 2015

Sixth Anniversary

If there has been one overarching theme this year in global financial markets it has been volatility. The UK market has produced an unexciting return of just over +1% year-to-date, but this included a rally of more than +10% in the first few weeks of the year, followed by a drop of -14%, and a subsequent rally of more than +5%. Moves in individual stocks have in many cases been even more extreme. This all creates stress, noise and uncertainty.  For me, it is a reminder that equity investing is a discipline that is best pursued over the long-term with a balance required between detailed analytical work, long-term perspective and patience.

Companies have been updating on trading for the third quarter, and the resounding theme is a  macro-economic backcloth that is patchy and far from benign.  This month I will focus on three Evenlode holdings (Unilever, Pearson and RWS Holdings) which have seen share prices move by a particularly large amount in response to recent trading updates (positively for the first and last, negatively for Pearson).


We have been reassured by third quarter updates from many of the fund’s globally exposed consumer businesses (Unilever, Diageo, PZ Cussons, SABMiller, Reckitt) in recent weeks.

Unilever’s trading statement last week demonstrated that consumer demand for low ticket, repeat-purchase items such as soap, shampoo and ice cream remains resilient. Unilever also seems to be benefiting from its particularly strong competitive position in emerging markets and good execution. Underlying sales have grown nearly +4% year-to-date across Unilever’s markets with more than half of this growth driven by volumes. Conditions are very mixed in emerging markets, but sales in the region overall accelerated in the third quarter, and are now up nearly +7% year-to-date. As Unilever’s incoming finance director Graeme Pitkethly noted recently, the company is very used to operating in volatile conditions in these regions. Pitkethly himself ran Unilever’s Indonesian business for several years and had to deal with a huge number of uncertainties including currency volatility, natural disasters and political uncertainties. But Unilever’s Indonesian business has gone from strength to strength with double-digit hard currency sales growth since the mid-1990s (almost all organic and notwithstanding some periods of severe currency depreciation) and generating consistently healthy operating margins along the way. The strong grow stronger in tough times – particularly those like Unilever with the discipline to continue to invest in the future and build market share.

Unilever’s shift towards personal care and homecare also continues steadily, with these two sectors representing 57% of the company’s sales, and food now representing less than 23% of the overall company. The personal care category in particular has strong growth potential and generates more attractive margins and returns on capital than the group average. This transition bodes well for the future. On our estimates Unilever’s forward cash return remains attractive despite this month’s share price recovery of nearly +10%.


Less positive was this week’s update from global education company Pearson, with shares falling approximately -20% on reduced profit guidance for the year. Pearson has been a holding in Evenlode (in various weightings) since the launch of the fund. Over this period it has produced useful dividend growth (+7% a year) and a reasonable (though by no means stellar) total return of a little more than +7% per annum (including this week’s share price fall).  But to be frank Pearson has been a frustrating and disappointing investment over the last two years. The company is restructuring in order to accelerate its transition from physical textbook publisher to a provider of digital products and services. This strategy is sensible and we think the business will ultimately emerge in good shape. We are also encouraged by progress so far in terms of revenue per student as analogue products are replaced by digital offerings. But the journey is by no means over and not without execution risk. It has also occurred whilst the company is undergoing operational headwinds from various factors: policy changes in US schools, falling college enrolments in US colleges and a slowdown in emerging markets. We continue to value the company’s embedded relationship with customers, its asset-light business model and its market leading position in the global education sector. Following the recent share price fall, the stock offers a dividend yield of more than 5% and, based on our estimates, trades on one of the most attractive forward cash returns in the Evenlode investable universe.

RWS Holdings

Another significant mover in the portfolio this month has been smaller company RWS Holdings, which has risen approximately +20% following a positive trading statement. We added a position (it represents c1.7% of the fund) in RWS to Evenlode over the summer when sentiment was depressed due to a slowdown in trading and currency headwinds and the company offered a dividend yield of c4%. The company is a specialist in intellectual property support services, and the global market leader in patent translation. Its team of highly trained employees translate patents for many blue chip companies. As such, RWS provides a service that is essential for the smooth and efficient functioning of a company’s innovation efforts, but whose cost is very small relative to the total cost of overall expenditure on research and development. Once a pharmaceutical company, for instance, has spent millions of pounds developing a new drug, they don’t want to risk the whole project on a poorly translated patent. So they return again and again to RWS. This is a key characteristic we look for in business-to-business franchises. RWS is an asset-light, highly cash generative business with net cash on the balance sheet. We view long-term growth prospects for RWS as positive though as this year’s pattern of trading shows, growth won’t always be in a straight line.

Sixth Anniversary

The Evenlode fund had its sixth anniversary this month. Evenlode was born on 19th October 2009 as the global economy emerged from the ashes of the Great Financial Crisis of 2008 and 2009. At the time, Ben and I stated publicly that we saw Evenlode as a very long-term investment project (twenty years or more), and this aspiration remains unchanged. We also welcomed Chris Elliott to Evenlode earlier this year as an investment analyst and he has been a great addition to our team.

The track record so far is shown below against the fund’s benchmark, the UK Market and the IA UK Equity Income Sector:


Since launch, to date, the compound total return per annum, after fees has been +12.7% per annum for Evenlode compared to +7.8% p.a. for the UK Market and +9.8% p.a. for the IA UK Equity Income sector. The average annual dividend growth, from a starting yield of 4.3%, has been a little over +8% per annum (the yield on an initial investment in the fund would now be approximately 6.4%).

Operating in a market (and a sector of the market) which is very competitive, we think this is a reasonable result so far. It has been achieved by focusing only on quality (i.e. high return, asset-light) stocks, with a disciplined valuation and dividend filter. This approach has consistently proven to work long-term, but it also involves us doing things very differently to the UK market and running a relatively focused portfolio (currently 33 positions - and not always in stocks that are bathing in the glow of positive market sentiment). The fund’s performance will, therefore, fall in and out of fashion over shorter time periods as the market cycle waxes and wanes. This is something we are keen for our investors to understand.

Though we are pleased with the progress to date, we are acutely aware that what matters most for our investors is not the past but the future, and our efforts remain focused on retaining an attractive combination of quality, value and dividend yield within the portfolio to drive future returns and dividend growth. On this note we continue to assess an interesting pipeline of potential new candidates for the Evenlode portfolio.

Hugh Yarrow
Investment Director
October 2015

Please note, these views represent the personal opinions of Hugh Yarrow as at 22nd October 2015 and do not constitute investment advice.


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