Why RSMR Rate this Fund

• This fund has built a strong track record whilst following the same philosophy and process of the highly successful UK Income fund which launched in 2009.

• Disciplined investment framework focused on a proprietary Cash Flow Returns on Investment (‘CFROI’) system.

• Provides access to a dynamic team who have demonstrated outperformance over the long term.

Fund Process

The investment process begins by filtering down the investment universe to fit the preferred criteria of the managers. Ideas may be generated through screening, market research or reading, but the company must pass through a quantitative and qualitative checklist before further work is conducted. The quantitative factors that the team assess are profitability, capital intensity and leverage.

The team are seeking companies with a high profitability (relative to capital employed) which is the most important indicator for quality. They prefer ‘asset light’ companies with low capital intensity which leads to higher free cash flows and an ability to self-fund future growth. The qualitative assessment of a company focuses on identifying companies with strong intangible assets (brands, R&D, distribution network etc.), pricing power and those with hard to replicate business models. From a dividend perspective, the managers are predominantly seeking companies which have the potential to sustainably grow their dividends over time.

The team have a coverage list of around c130 companies for this fund and a financial model is built for every idea considered for inclusion in the investable universe using a proprietary Cash Flow Return (CFROI) system known as ‘EDDIE’, which is a similar system to commercially available CFROI systems such as HOLT and QUEST. It allows the team to analyse the historic fundamental performance of the business, as well as estimating each stock’s future free cash flow stream. The system is used to generate a forward cash return measure and DCF valuation for a company. Other fundamental research is also conducted on these companies including competitive analysis, and meetings with company management. Decisions to add or reject candidates from the investable universe are made at a weekly investment meeting. When the team make a decision to invest in a company, they will size the position according to their confidence in the investment idea, dividend considerations and the degree of idiosyncratic risk inherent in the business model.

There is a risk management framework in place whereby each stock is rated on a scoring system of various metrics and from this each business is assigned a maximum position that will not be exceeded, to reflect the risks perceived. These scores are updated and re-visited regularly, and decisions may be made in the event of sudden change in scoring.

Evaluation

The managers will always have a bias towards sectors which meet their desired criteria. This includes sectors such as IT (asset light & cash generative), Health Care (strong pricing power & high intangibles) and Consumer Staples (Brand Power and economic moat). They avoid sectors that are asset intensive and highly leveraged such as Energy, Financials, or Real Estate. They also avoid sectors which are highly regulated with low pricing power such as Utilities and Telecoms.

Application

This fund is suitable as a high-quality core holding in a portfolio although a focus towards dividend growth rather than headline yield means that the income generation will not be as high as other funds in the sector.

Our Opinion

This fund has demonstrated excellent performance since launch in 2017, outperforming the peer group average since inception and attracting large inflows. Evenlode, which began as a small boutique in Oxfordshire, has built out its investment team over the years and has a strong culture resulting in consistent and attractive investment returns.