Following a difficult first six months of the year, July saw a strong recovery in global stock markets. Concerns over the global economic slowdown were mitigated by the continuation of reasonably steady operating results from the corporate sector, whilst signs of lessening input cost inflation also reduced expectations for future interest rate rises.

Evenlode Income rose +8.8% compared to a rise of +4.4% for the FTSE All-Share and +5.8% for the IA UK All Companies sector. Fund performance was helped by a reassuring results season: for companies releasing interim results during July, revenue growth averaged +16% for the January-June period, and profit growth averaged +14%. During such an extreme period for input cost inflation, we think these results are a good indicator of the financial resilience and pricing power enjoyed by the portfolio. The strongest contributors to performance were Diageo, RELX, Unilever, Bunzl and Reckitt; all were helped by solid operating results. The only negative contributor of note was Smith & Nephew, whose share price fell -9%. Smith & Nephew reiterated full year sales growth guidance, but lowered operating margin expectations from 18.5% to 17.5% due to input cost inflation and stepped-up investments.

In terms of portfolio changes a new holding in Haleon was created following its demerger from GSK. Haleon is the global market leader in consumer healthcare products with a portfolio of strong brands ranging from Sensodyne to Panadol. We also continued to build four new holdings that were introduced in June: Experian (credit checking and decision analytics), Games Workshop (fantasy miniatures for hobbyists), LVMH (global luxury goods) and Diploma (specialist industrial distribution). These companies all share several attractive characteristics: market-leading positions in their respective sectors, good growth potential over coming years, and cash generative economics. They also bring interesting diversification to the portfolio’s cash flow stream. On the sell-side, we reduced the fund’s holding in EMIS following the company’s recommended takeover offer in June. We also finished exiting WPP and AB Inbev to make way for other opportunities where we think the combination of quality, financial strength and forward return potential look more interesting.

Looking ahead, we continue to see a broad set of opportunities, both within the existing portfolio and on the portfolio’s watchlist. We look forward to updating you on fund progress and portfolio developments over the coming weeks and months.

Hugh Yarrow31 Jul 2022
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