December was another positive month for the UK stock market. At home, the election of a Conservative majority government reduced political uncertainty. Overseas, news that the US and China have negotiated the outlines of a trade deal was also welcomed.

The Evenlode Income fund rose +1.4% compared to +3.3% for the FTSE All-Share and +3.8% for the IA UK All Companies Sector. The fund’s underperformance was mainly due to the continued rotation within the UK market away from multinational companies and towards those with more exposure to the UK economy. This rotation started at the end of August and has occurred in tandem with a strong recovery in the pound.

In terms of individual holdings, the most positive contributors were Savills, Hays and Informa. Savills and Hays were helped by the UK election result (both companies have economically sensitive UK operations) whilst Informa continued to benefit from a reassuring November update. The only negative contributor of note was Unilever. Shares fell -5.0% after management announced that organic sales growth for 2019 will be slightly below the company’s +3-4% guidance range. Unilever is currently facing some challenges in certain markets and categories, but is taking steps to address them. For the patient shareholder, we think the combination of diversification, stability, cash generation and growth potential remains attractive. Following the recent share price fall, Unilever’s current dividend yield is approximately 3.4%.

The outlook for 2020 is, as normal, complex. Sentiment has improved materially towards the outlook for both the UK and global economy during 2019. However, UK political uncertainties remain, global geopolitical risk is elevated, global deflationary pressures persist, and valuations are not as attractive as they were a year ago. We continue to take a long-term view, and aim to retain a portfolio of resilient businesses that are capable of delivering an attractive and growing free cash flow and dividend stream over time. Recent market moves are allowing us to add to several holdings at more attractive valuations, and we remain open to evolving the portfolio as and when interesting opportunities present themselves.

Hugh Yarrow31 Dec 2019
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