Markets were quite calm at the start of February but ended up falling very significantly, as investors began to realise that coronavirus was spreading to countries outside Asia. Losses were all posted in climactic selling during the last week of the month, with falls ultimately very broad-based.
Evenlode Income fell -9.0% compared to a fall of -9.3% for the IA All Companies Sector and -8.9% for the FTSE All-Share index. The most negative contributors to return were Unilever, Reckitt, Relx and WPP. The first three holdings in this list are large positions in the fund (and economically resilient business models, so their appearance highlights the broad-based nature of the sell-off). During February Reckitt’s new management announced a plan to invest in the business to improve sales growth, and Relx released solid results. WPP also released results and issued guidance of flat growth and flat margins for 2020, excluding any impact from coronavirus. The only positive contributor to return was Spectris, thanks to results that demonstrated the company’s portfolio rationalisation is going well and cash generation remains healthy. EMIS (no news) and Microsoft (strong results) were the next best performers during the month.
Valuations have improved materially since the beginning of the year. We’ve made no major portfolio changes but have topped up several holdings in late February and early March. In particular, a theme has been holdings that offer attractive quality/valuation appeal and are also well placed to weather economic weakness, but whose share prices have fallen along with the market (Diageo, Relx, Glaxosmithkline, Bunzl, Reckitt Benckiser, Moneysupermarket, Intertek etc.).
On March 1st, the fund went ex a fourth quarter dividend of 2.41p (B Inc estimated). This brings the fund’s full year distribution to 7.45p, representing annual growth of +3.0%. Looking ahead, the provision of real dividend growth over time remains a key aim. The fund’s current dividend yield is 3.3% and, whilst cognisant of current uncertainties, we are encouraged by portfolio’s healthy and diversified free cash flow stream, from which this dividend is provided.