Equity Income  

Firing Line: Hugh Yarrow

Firing Line: Hugh Yarrow
 Mr Yarrow previously managed a number of equity income funds for Rathbones Unit Trust Management

Fund manager Hugh Yarrow of Evenlode is one half of a dynamic duo that has made substantial ripples in the investment world with the impressive performance of the firm’s sole fund.

Evenlode Income, which is co-managed by his brother-in-law Ben Peters, ranked within the top quartile of the IA UK Equity Income sector in terms of performance in most time periods up to five years and boast a historic yield of 3.7 per cent (as at 31 May this year).

The investment vehicle moved to the IA UK All Companies sector in June this year after it was ejected from the IA UK Equity Income sector for missing the minimum target of 110 per cent of index yield over a rolling three-year period required to sit in the sector.

All the same, the portfolio trumped the UK All Companies index, returning more than 110 per cent over a five-year period to 16 September 2016 – around 40 per cent ahead of the sector average, according to FE Analytics data.

Mr Yarrow stressed the change has had no bearing on how the portfolio is run and criticised the sector’s “arbitrary” parameters. 

Evenlode’s investment team combs through a universe of 83 companies they consider ripe for investment or could be so in the future.

At present, the fund consists of 40 holdings and stock turnover averages to less than 20 per cent.

The fund adopts a long approach to investment, focusing on a concentrated portfolio of companies with free cash flow, low debt, high return on equity, a substantial kitty for reinvestment, and, crucially, the capacity to provide long-term dividend growth. 

Financial software company Fidessa, which provides software and services such as trading systems to banks, is one such company, according to Mr Yarrow. “85 per cent of their revenue comes from software subscriptions and they have an amazing 99 per cent renewal rate,” he said.

The fund is unlikely to venture into certain sectors because they are unlikely to meet its criteria. These include oil, mining, utilities, telecoms and insurance which Mr Yarrow argues tend to be too capital intensive and generate minimal returns on those assets. 

At first glance, the fund may appear to be skewed to large caps but Mr Yarrow insists this is not the case, adding the weighting allocated to such business has fluctuated over the years. 

Allocation to large caps peaked at 85 per cent in 2014, but is now below 65 per cent, he said. At the time of launch, half of the fund was in large companies and the rest were in small and mid-cap firms. 

The fund, now in its seventh year, faces significant headwinds to generate decent dividends in the current low-yield, high-volatility environment.

Mr Yarrow admits that company valuations are not as attractive, so finding that balance between quality and value is no easy feat. 

He said: “Most financial assets are placed to deliver low returns because of low interest rates and a low level of inflation. Returns have not been that attractive but it is important to manage investors’ expectation from that. We aim to deliver a fair return without exposing our investors to too much risk.”