Best In ClassFeb 6 2018

Best in Class: Evenlode Income

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Best in Class: Evenlode Income

His CV can make pretty scary reading when you find yourself sitting next to him making small talk: he's a Bachelor of Science (Hons) in astrophysics, a Master of Science in theoretical physics and has a Doctorate of Philosophy in nano electronics. Thank goodness we have funds in common.

In short, he's very good company and, having talked about his new venture – the Evenlode Global Income fund that launched last November – we got talking about the original UK version, Evenlode Income.

Mr Peters has run this fund since October 2009 with lead manager (and brother-in-law), Hugh Yarrow and together they also run the boutique fund management business, which now has 11 employees. 

Mr Peters and Mr Yarrow try not to worry too much about individual world or market events, focusing instead on a small group of high quality companies that should be able to withstand pretty much any macroeconomic environment.

So it is more coincidence – and good judgement in terms of looking for better value companies – that saw the fund positioned almost perfectly on the day of the EU referendum. 

In the run-up to the Brexit vote, the managers saw better value in the UK's larger companies and positioned the fund accordingly, leading to considerable outperformance.

With just 40 high conviction stocks in the portfolio, the fund has an average turnover of just 17 per cent per annum, which keeps the transaction costs nice and low at just 90p for every £1,000 invested (there is clear pricing on the website).

It also means that when it comes to active management, sometimes the managers' active decision is to do, well, nothing.

Their definition of high quality is a company with sustainable growth and limited need for capital reinvestment.

They share three characteristics: asset-light business models (intangibles are key), high barriers to entry and customer purchase decisions which are not based on price alone. This means that the fund has a bias away from capital-intensive industries and, as such, is underweight in oil and gas, and utilities.

The managers also tend to be underweight financials due to their inherent complexity and cyclicality.

In the run-up to the Brexit vote, the managers saw better value in the UK's larger companies and positioned the fund accordingly, leading to considerable outperformance in the aftermath of the referendum when sterling sank.

In the intervening 18 months, little changed until very recently when they added a couple more domestically-focused names showing value: Howdens Joinery and MoneySuperMarket.

One possible flaw is less about the fund itself and more about the sector: having been removed from the IA UK Equity Income sector a couple of years ago for failing to meet the yield requirement, Mr Peters and Mr Yarrow have decided to leave the fund in the IA UK All Companies sector.

So the fund is not constrained by an income target, believing that it is difficult to apply their investment strategy in this environment if they have to focus too much on obtaining a higher yield – it is currently 3.3 per cent, compared to the FTSE All Share yield of 3.59 per cent, but has been consistently growing.

They still very much consider the fund to be an equity income fund – as do I – but could this mean the fund gets 'lost' in an already overpopulated peer group?

There is certainly that risk, especially at times of cyclical or momentum markets, when it could get pushed down the performance rankings. 

For now it is more than holding its own, however. It has outperformed both the IA UK All Companies and IA UK Equity Income sector averages in all but one calendar year since its launch, leading to a cumulative outperformance of around 65 per cent over both.

With their well-defined process and sensible approach to both managing a fund and business, I see no reason why this should not continue.

Darius McDermott is managing director at FundCalibre

Note: all performance data is according to FE Analytics, 1 October 2009 to 1 February 2018, total returns in sterling.