Firing Line: Hugh Yarrow

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.” 

“At corporate level, the cost of borrowing is very low at the moment and there is a temptation for companies to borrow more money to juice up their earning growth. Borrowing money to buy back shares would help current earnings per share but it is a risk.”

What of impact of the continuous fallout of the EU referendum vote?

“We have not made a huge change to the portfolio. Most of the companies in the fund are listed in the UK but their overall revenue and the cash exposure of the underlying companies is global. The underlying cash flow of 20 per cent of companies in the portfolio is generated from the UK economy. We like global diversification because it reduces economic and political risk.”

The fund has come a long way since it was launched in 2009 by Mr Yarrow off the back of a seven-year stint at Rathbones Unit Trust Management, where he managed a number of equity income funds.

The portfolio, run from converted barn in Oxfordshire, is now worth more than £1bn, and £340m of that figure has been generated within a three-month period to 31 August 2016.

Its successes are unlikely to escape the attention the firm’s rivals. Mr Yarrow himself outperformed the peer group composite by 40 per cent at the time of writing.

What of the prospect of being poached by larger rivals? 

“We have had lots of calls over the years but you will never see a headline that reads Yarrow and Peters leave Wise Investment. It is an employee-owned company and Wise Investment was started by my father [Tony].

“We are a family. I work in the same office as my father and brother in law. Ben’s wife and my wife are sisters. We have a very nice and talented group of people who work well together.”

Myron Jobson is features writer at Financial Adviser

HUGH YARROW'S CAREER LADDER

2009, Lead portfolio manager, Evenlode

2002-2009, Investment manager, Rathbone Unit Trust Management

2002, Graduated from University of Edinburgh in with a first class degree in philosophy and mathematics