After a positive start to the year, global stock markets fell back in the second half of January and have continued to weaken since the month end, with levels of volatility also picking up. The mood wasn’t helped by unilateralist sound bites from the US government, which led to a weakening dollar. Worries have also developed regarding rising interest rates, particularly in the US, and the potential headwind this may create for both the valuation environment and economic growth.

Evenlode returned -1.4% compared to -1.9% for the UK market and -0.8% for the IA UK All Companies sector. The most negative contributors to return were Diageo, Sage Group and EMIS. Diageo and Sage shares fell back despite updates that we considered to be reassuring, with both companies remaining highly cash generative. EMIS shares weakened after management identified some customer services issues with its EMIS Web product - disappointing news in the context of EMIS’s normal reputation for product quality. The company’s competitive position, revenue recurrence and financial strength are reassuring factors for the longer term.

The most positive contributors were UBM, Pagegroup and Smiths Group. UBM’s share price benefited from the announcement of a recommended merger with fellow Evenlode holding Informa. We have analysed the potential transaction in detail: although it will involve some incremental debt, the combined entity will be highly cash generative, plans to de-leverage quickly and looks attractive in terms of both its valuation and competitive position. Pagegroup benefited from a very strong trading update, whilst Smiths Group shares were helped by an update on US tax changes which led analysts to increase forecasts for the company’s earnings and free cash flow.

Many companies in the portfolio have released results in the last few weeks, and we remain reassured by the aggregate portfolio’s characteristics, particularly in terms of balance sheet strength and free cash flow growth. We will continue to manage both valuation and fundamental risk carefully as 2018 develops.

Hugh Yarrow 31 Jan 2018
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