Slim pickings in the UK equity market have prompted a top-performing income manager to ramp up his exposure to overseas stocks.
Hugh Yarrow, manager of the £214m Evenlode Income fund, has a record 15 per cent in companies that are based outside the UK – not far from the 20 per cent permitted for funds in the IMA UK Equity Income sector.
Mr Yarrow’s fund has produced top-quartile returns in five-, three- and one-year periods, according to data from FE Analytics.
He said he viewed UK stock valuations as expensive and so had sought opportunities abroad.
Among the businesses he has targeted are technology giant Microsoft, consumer products company Procter & Gamble and American multinational medical devices, pharmaceutical and consumer-packaged goods manufacturer Johnson & Johnson.
“We are finding less value in smaller UK companies at the moment so we are using that money to supplement our overseas holdings,” Mr Yarrow said.
“If value came back into UK mid caps, [the overseas weight] would tick down a bit.”
The fund’s holdings in mid- and small-cap stocks have dropped quite drastically since its inception five years ago.
At launch, the fund held 50 per cent in large caps, but this surged to a high of 85 per cent this summer. It has dropped off slightly and is now at about 78 per cent.
Mr Yarrow is choosing to focus on four key sectors at present – consumer-branded goods, healthcare, media and software.
These sectors are made up of “large, stable and somewhat boring businesses”, he said.
The manager has chosen these sectors and stocks as he is positioning his fund defensively for the coming years.
He said: “The market is overvalued at the moment. The returns from the fund and the market are not likely to be as high as they have been in the past few years as the market is facing headwinds.”
This will make finding good investments difficult, he accepted, but he claimed the sell-off in September and October had thrown up a few opportunities.
Mr Yarrow and his co-manager, Ben Peter, took the opportunity to buy more Domino Printing Sciences, a developer of inkjet and laser-printing products.
The stock used to make up a significant part of their portfolio, but they started selling down as they found it was getting too expensive.
However, the company released a statement in the summer, which said it could struggle more than expected in 2015 while it invested more money in developing products.
The market reacted sharply to this statement, with the share price plunging from roughly 770p to about 610p.
Elsewhere, the managers have been selling off publishing and information company Reed Elsevier, which had been in their top-10 holdings.
They invested in the stock when it was “incredibly unfashionable” and have sat with it, but recently it has become a “stockmarket darling” and the pair have taken the opportunity to sell down the holding.
It made up 4.1 per cent of their portfolio at the end of October, but they have since reduced this to 3.7 per cent.
The managers have also taken profits from their holding in health, hygiene and personal care business Reckitt Benckiser.
The company used to make up 6.5 per cent of their portfolio but has since fallen to 4.5 per cent, and Mr Yarrow said he was considering selling more.
Chatfeild-Roberts backing sends Evenlode Income’s assets soaring
While the Evenlode Income fund may not be the most famous name in the UK equity income scene, its managers now have a backer the majority of investors know.
The fund, run by Hugh Yarrow and Ben Peter, was just £55m in size at the end of April in spite of its strong performance.
However, it now has assets of more than £200m.
This is in no small part thanks to backing from multi-manager John Chatfeild-Roberts, who runs Jupiter’s Merlin funds with his team. The Jupiter team adopted a position in Mr Yarrow’s fund in June and it now sits among high company.
When Mr Chatfeild-Roberts invested in Mr Yarrow’s fund, he also adopted a position in Neil Woodford’s CF Woodford Equity Income fund.
In spite of the latter investment, the multi-manager made what he called “significant investments” with Mr Woodford’s ex colleague, Mark Barnett, who heads Invesco Perpetual’s UK equities team.
“We believe that both Neil and Mark are very talented, long-term investors and [we] are excited about the potential returns they could generate for our portfolios and, as a result, our investors,” Mr Chatfeild-Roberts said at the time.
