After a strong recovery in April and May from the lows of March, stock markets had a quieter June. The Evenlode Income fund fell -0.7% compared to a rise of +0.5% IA UK All Companies Sector and +1.5% for the FTSE All-Share. Investors are still chewing over several uncertain factors: the degree to which the global economy may recover as lockdowns ease; the possible side-effects of the huge fiscal and monetary crisis-response; the possibility that some regions may need to re-apply lockdown measures, and the progress being made on vaccines and anti-viral treatments.
The fund’s most negative contributors were Diageo and Smith & Nephew. Though both companies have been significantly impacted by lockdown restrictions we continue to like their competitive positions, long-term growth prospects and cash generative business models. Since the month end, Smith & Nephew released a reassuring trading update, noting that elective surgery volumes have been recovering over the last few weeks in most regions.
The fund’s most positive performers were Bunzl and Smiths Group. Bunzl now expects organic revenue to grow at +6% for the first half of 2020, accompanied by an increase in operating margin. Given Bunzl’s exposure to lockdown-impacted sectors such as retail and leisure, this performance has been more resilient than expected. The company has been helped by its repeat-purchase business model and strong growth in its grocery, healthcare, cleaning and hygiene businesses. Smiths Group has also proved resilient through lockdown, growing revenue by +1% over the last four months.
We made no significant changes to the portfolio but have at the margin continued to ‘nudge’ towards resilient companies for which valuations and dividends are attractive. There has been a trickle of news flow from companies over the last few weeks, but at a much lower level than the previous two months. In general, we continue to be impressed with the overall resilience of cash generation, and how Evenlode Income holdings are adapting to the ‘new normal’. There is a sense that (though the short-term impact of the crisis on financial results is clear) market-leading companies will emerge with their competitive positions intact and in many cases strengthened.