196. Consumer demand robust despite rising prices

Ben Peters, co-manager of TB Evenlode Global Income, discusses all things inflation: its impact on individuals, companies, sectors, and different geographies. He explains why demand has remained surprisingly robust, despite the continued rise in prices and why some companies are being slow to pass on their costs to their customers. He also discusses his team’s recent trip to the US and pent-up demand for human contact and tells us how the fund has 20% exposure to Asia but only a couple of holdings in Asian companies.

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TB Evenlode Global Income managers Ben Peters and Chris Elliott believe the market fundamentally underestimates the value of high-quality businesses because of its obsession with short-term events. The fund has four key objectives: grow the dividend on a consistent basis, compound returns at a high annual rate, outperform major global market indices over the long-term and generate returns with lower volatility and downside risk.

What’s covered in this episode:

  • How inflation is impacting companies in different sectors
  • Why companies are starting to have problems supplying goods
  • The impact of China’s lockdown on networking hardware and software company Cisco
  • Why demand is staying surprisingly robust in the face of rising prices
  • Why companies are being slower than usual to pass on costs to consumers
  • Firms that can thrive in any environment
  • Why meeting companies on the ground is so important for investors
  • How the fund has decent exposure to Asia – without owning many Asian’ companies

8 June 2022 (pre-recorded 6 June 2022)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.


Ryan Lightfoot-Aminoff (RLA): Hello, and welcome to the Investing on the go podcast brought to you by FundCalibre, I’m Ryan Lightfoot-Aminoff and today I have the pleasure of being joined by Ben Peters, the Elite Rated manager of the Evenlode Global Income fund. Ben, thank you very much for your time.

Ben Peters (BP): No trouble.


RLA: Now, inflation has been the buzzword of the year, it’s making headlines, at the moment, all across the world. We all know how it’s impacting us as individuals, but how is it impacting companies? You’ve got a couple of firms in there that have mentioned it in their financial results. So how is it impacting the portfolio as a whole?

BP: Yeah, I mean, it really is the sort of hot topic from a personal finance point of view, but also from a corporate finance point of view as well, and really inflation is impacting, it’s not just a couple of companies, it is impacting all companies in some way. And quite how it’s affecting companies is dependent on exactly the sector the company is in, exactly where it does business but it is quite generalised. So, you’re looking at raw material cost increases. Energy is a big, big topic of course, following Russia’s invasion of Ukraine. Wage inflation as well is coming through and other things like transportation. So, it’s a pretty broad based. There, there are some sectors and some companies that have been more affected than others. So, the consumer goods sector is one that has felt more immediately the impact of inflation because it’s sort of affected their basic input costs pretty much across the board, but it’s by no means just consumer goods companies. So, electronic equipment makers, medical devices companies, you name it, and companies are feeling the effects of inflation right now.

RLA: Thank you. And you’ve seen this you said across different sectors, but are you seeing it as a problem all around the world or are there some areas, some geographies that are facing purer inflation problems?

BP: Yeah, it is pretty broad based around the world. And I think that whilst it has been impacting input costs and so therefore has been affecting the margins of some businesses, we’ve also started to see it affecting companies’ abilities to supply goods and get them out of the door. So, for example Cisco, the networking hardware and software company, they said that they were having difficulty getting power supply units. And this was as a result of the recent lockdown in China. And what that meant was that they couldn’t fulfill customer orders. So, they were very much seeing good demand for those products but their ability to finish them and get them out of the warehouse and to customers was limited. So, we are seeing it across the world, but it’s also, it’s not just inflation. There are some issues with supply chains, which are a bit deeper than that. 

RLA: And what impact do you think this is going to have on demand? Like, do you think that companies can be resilient in the face of these rising prices and will it be different for both consumer-facing businesses and business-facing businesses?

BP: Yeah, it’s a great question. And so far, the picture has been one of very strong demand actually. So, to take the Cisco example again, you know, they’ve got a record order book, so the issue really isn’t in them having demand for their goods and for their services, more the issue has been in finishing their products. Now, I should say this hasn’t been a disaster for that company or indeed any other company that we’ve been looking at, but certainly it’s the story and something they’re having to manage very, very closely at the moment. I think that’s broadly true in the consumer-facing world as well. So far, I think demand has been robust and I think perhaps surprisingly robust in the face of increasing prices.

And I think that there are a lot of different reasons for that. I think coming out of the pandemic, people had lots of savings which has enabled them to weather price increases overall so far. Clearly everything has a limit and whether that is the case into the future, we will have to wait and see. But companies are being reasonably cautious about putting prices through to end customers. They’re not just taking all of their input cost inflation and saying, right, here you are customer, here’s all that inflation in one go. They’re being very measured about taking it stepwise and making sure that the market, the customer, can weather those price rises. And I think, we’re talking about companies that have dealt with inflation in the past, they do know how to deal with inflation. And I think in this bout it’s been more acute than anything we’ve seen for quite a long time. So, the usual dynamics that companies use to pass on price increases to consumers, they will take a little bit longer to pass through this time. But they’re already started on that journey.

RLA: And now turning to your portfolio and the fund you run, a global equity income portfolio, how can this help with investors to combat inflation, perhaps for those who are retired as well and like that income stream coming in?

LI: Yeah, well, something that is good about the types of companies that we look for, so companies that generate a lot of cash, they can use their cash to reinvest in their business. But also, some of it goes on to pay dividends to the shareholders, which ultimately are our unit holders in the Evenlode Global Income fund. Something we like about those companies is their ability to keep on investing whilst also paying that dividend. So, when we analyse a company, we are looking for companies that will be able to invest through thick and thin. And clearly recent years have thrown up a number of different challenges. Currently there’s inflation, there was lockdown. And if you go back a little bit further, there was the great financial crisis.

And these companies have been able to continuously invest in their goods and services, whether that’s a consumer-facing company like a Nestle, whether it’s a Cisco that I’ve already mentioned, Hexagon in the world of information technology, as well. They can all use some of their cash flow to invest and continue investing through these more volatile times, but also pay a growing dividend. And that’s quite good from an inflation protection point of view. There’s no perfect hedge for inflation, but as far as financial instruments go, these are not too bad. Something that we have been seeing with companies is that they are using some of their cash flow to invest in things like inventory, which means that they are more resilient to some of these difficulties that are going on in the global supply chain and global economy. So that does stand them really in good stead to continue paying dividends into the future.

RLA: Interesting. Thank you. Recently some of your team went to the US to meet some of the companies out there. What exactly did they discover on the ground, meeting the companies?

BP: Yeah. Well, it’s been great to be able to get out and do on the ground research. I didn’t join the trip this time, it was my colleagues. But I think it’s a little early to draw conclusions. They only got back last week, and they did a lot of meetings, so have to let them digest everything they found. I think they did 38 meetings in total. So yeah, there’s a lot of information there, but I think that the first observation that I have from this side of the pond at least, is that they had those meetings and they were meeting very senior members of management teams who were very keen, I think, to talk to investors and talk about what those businesses are doing.

And I don’t know whether that was a sort of pent-up demand for human interaction. But also, I think that the people are really keen to now get out, tell their story to investors. And we’ve been able to go in and find out in a little bit more detail about what these companies are up to. And certainly, something that’s very nice about going to a different country to see companies in their home environment, is you get a sense of the culture in that business. I know some of my team have come back and they’ve been talking about the campuses that they’ve visited. And I think it’s really hard to get that sense of a company when you are talking to them on Zoom and Teams which has been a good way of keeping in touch through the pandemic. But I think now, going out and talking to people where they are, I can see a lot more of that happening. But yeah, we’ll wait to draw our conclusions and perhaps update you in the next podcast.

RLA: Yeah. We look forward to hearing about that. And now, sort of turning our attention to other parts of the portfolio. You only hold a couple of holdings in Asia. It’s a very, very big region globally, but not much exposure for yourselves. Why is that?

BP: Well, if you look at the underlying revenues of the Evenlode Global Income portfolio, actually around 20% of the revenues come from the Asia Pacific region. So, we’re certainly not averse to businesses that do business in that geography. The reason we don’t have so many businesses that are listed there is because we can access the long term attractive economic dynamics of those geographies through developed market listed companies. And that comes with a couple of benefits. One is that you overall get more robust governance within those structures and that’s not to take anything away from what’s happening in, in the companies in emerging economies and in Asia Pacific particularly, but we get sort of what we think is the gold standard of governance. And then also there’s a valuation argument. So, we do see good value in the businesses within the portfolio. Those businesses do business in the Asia Pacific region, as well as lots of other geographies around the world. And we get the kind of the gold standard corporate governance to boot. So, nothing against businesses in that region. But we happen, we happen to access it through developed market-listed businesses predominantly at the current time.

RLA: Sounds very sensible. Well, that’s the end of my questions Ben, so thank you very much for your time today.

BP: My pleasure. Thank you very much.

Please remember, we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at the time of listening. Elite Ratings are based on FundCalibre’s research methodology and are the opinion of FundCalibre’s research team only.

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