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20th August, 2015

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Hugh Yarrow, co-fund manager of the Elite Rated Evenlode Income

Hugh Yarrow, co-fund manager of the Elite-Rated Evenlode Income Fund, spoke to us about the impact of the troubles in China and Greece on UK Investors, on the Evenlode Income portfolio, and his views on UK Equities going forward.

What is your view on global economic trouble spots China and Greece?

Stock markets fell in June as the Greek government and Eurozone leaders failed to agree on a new bailout package for Greece. Investor fears were compounded by developments in China. The Chinese stock market plunged in June and early July, popping an eye-watering bubble in which many Chinese individuals had piled their savings into the market. This has raised further concerns over the ongoing economic slowdown and, in particular, the Chinese government’s ability to manage it. The latest developments in China and the Eurozone represent the re-emergence of issues that have been bouncing around the global economy for more than five years. It looks like a last-minute, cobbled-together fudge has brought Greece back from the brink of a Eurozone exit, at least for now. But it also seems inevitable that structural questions regarding the region’s future will remain part of the financial market’s mood music for some time (as they have been for more than five years now).

Should UK investors be worried about China exposure?

I wrote in 2010, that China’s economic growth seems to embody at a country level what we are trying to avoid at the company level. As the years have gone on China’s growth story has needed more and more capital to generate each marginal unit of GDP growth, with a heavy skew toward infrastructure and property development. We are, as a result, very wary of any stock that looks particularly reliant on the continued buoyancy of this part of China’s economy. Today, with a bit of perspective, it is clear that the decade-long bull market in commodities (or ‘supercycle’, as it was known at the time) ended nearly four years ago, and China’s slowdown has played a significant role in this downcycle (just as its rapid growth did in the upcycle).

How are you positioning the portfolio?

Our view on the macro-economic environment is that uncertainty and complexity is the normal state of affairs. In this context, we try to keep things as simple as possible. We continue to focus the Evenlode fund on market-leading companies that sell repeat-purchase or mission-critical products and generate healthy levels of excess cash. This type of business tends to be good at coping with geopolitical and economic uncertainties, whilst continuing to deliver healthy dividend streams. We see significant valuation appeal in our key larger company holdings and have been adding to several over recent months (multinational companies were particularly hard hit during the sell-off in June, due to global worries and a strengthening pound).

What are some of the key trades within the portfolio?

In the smaller company arena we have also seen more value emerge, selectively. RWS Holdings and RPS Group, for instance, are two smaller positions we have added to Evenlode Income recently. These companies are both global market leaders in their respective fields of intellectual property services and environmental consultancy. Both are experiencing some short-term headwinds (not least the impact of a strong pound on their reported results) but are high quality, well-managed franchises offering significant valuation appeal.

What is your view on UK equity valuations?

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Much comment has been made regarding the sharp fall in bond yields and the impact this has had on equity valuations over the last two years. In a general sense I share this sentiment. Equity valuations are on aggregate higher than they were three or four years ago making the prospects for future returns less attractive than they were, and certain stocks in the UK market now trade on significantly lower yields than they did back then. But the above chart is a reminder that the really big move over the last few years has been in the bond market. To put it simply, quality equities with dividend growth potential are still available on attractive valuations and good starting yields. In an uncertain world with no shortage of day-to-day noise and cross-currents, I think this simple fact is reassuring for the long-term equity investor and worth remembering.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Hugh's views are his own and do not constitute financial advice


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