I’m a fund supervisor: Evenlode’s Ben Peters is betting on a cosmetics big

Each month, we put a senior fund manager to task with our I’m a fund manager series to find out how they manage their own money.

We want to know where they’d invest for the next year – and next 10 years – and what pitfalls to avoid. We also quiz them about Nvidia, gold, and bitcoin and their biggest investing mistake. 

This month we spoke to Ben Peters, lead portfolio manager on the Evenlode Global Income strategy team. 

Ben and his team invest in the shares of companies with market-leading positions, cash generative economics and attractive long-term growth potential. 

The fund will always be at least 80 per cent invested in the shares of high-quality UK-based companies, but with revenues coming from a range of countries. 

The fund currently has 37 holdings and has a valuation of £2,363 million. It offers a historic yield of 2.3 per cent. Its largest holding is in L’Oréal but it also has sizeable holdings in Unilever, Reckitt and Nestlé.

Since the fund launched in 2017 it has returned 71.7 per cent in total to investors. During that same time the MSCI World Index has returned 144.5 per cent.

If you could invest in only one company for the next 10 years, what would it be? 

I’ll go for the cosmetics giant L’Oréal. It is by far the market leader in the attractive and growing beauty category. 

The company has a fantastic record of developing brands that it often buys in, and its scale gives it significant research and development and, importantly, marketing clout.

What about the next 12 months? 

We normally think about investing over much longer timescales, but a company that is seeing a near term recovery from a weaker period is French IT consultancy Capgemini. 

Last year its corporate clients really reined in spending on IT, which perhaps runs counter to the artificial intelligence boom narrative. 

That is now reversing as business confidence returns and revenue growth is coming back, but the company’s stock still trades at a depressed level.

Which sector most excites you? 

Information services has really fallen out of favour with the market recently and therefore offers a lot of value for some really great companies. 

These are businesses that sell information, software and analytics packages to corporate clients in different professions like lawyers (RELX’s LexisNexis), accountants (Wolters’ CCH), and financial institutions (London Stock Exchange). 

There are worries that artificial intelligence will fundamentally disrupt some of these businesses. 

Our view is that they will be able to apply these new tools to their deep data assets. Indeed, they are already doing so, accelerating revenue growth.

What sector would you avoid and why? 

We don’t invest in the banking sector as banks do not have the financial characteristics we look for. 

That’s not to say that you can’t make money investing in banks, in fact they have been fantastic performers in recent years as we’ve moved away from the very low interest rates of the 2010s. 

Their valuations did look very cheap, but now are more fully valued.

You have a significant holding in Unilever. Why? 

Unilever has undergone a transformation that has taken quite a long time, including simplifying its corporate structure and disposing of lower growth divisions. 

It now has a portfolio of consumer goods in growing areas like beauty and personal care. 

We think the company can push on with creating value for shareholders as well as the customers that enjoy its products every day.

And what about RELX? 

RELX’s divisions service professional clients with data, software and analysis that helps them improve efficiency and reduce risk. 

It is applying new generative artificial intelligence tools to some of its products like those helping scientists to stay on top of a vast number of research publications, or lawyers with case law. 

But it has been using AI for many years already, for example in its risk division that helps financial institutions with things like fraud detection. 

The stock has been derated in the market, making it attractively valued.

Are we in an AI bubble? 

The capital spending behind artificial intelligence is real, but the real question is whether consumers and businesses will be willing to pay enough for the new services to justify the trillions of dollars of spending commitments. This remains to be seen. 

As with any nascent technology there will undoubtedly be companies that do not make it through the investment boom. 

There will be future giants that are not born yet. Meanwhile there are plenty of companies to invest in that will thrive without the new AI tools.

So no imminent market crash in your view?

The level of the stock market is high on the whole, and history suggests that when such conditions reverse it can be quite dramatic, but history also suggests that high market levels can go on for a surprisingly long time. 

At Evenlode we don’t predict market movements given such uncertainties, and remain focused on looking for good companies trading at attractive valuations. 

There are, perhaps surprisingly, a lot of these available at the moment for the investors who are willing to be selective and patient.

Do you expect the magnificent 7 to still be dominating in 10 years’ time? 

In the sense that they will be important companies in 10 years’ time, yes. Companies like Microsoft will very much be delivering computing services to customers a decade from now, and Nvidia is likely to be a leading chip designer.  

They are also likely to be a large part of the equity market. 

However, with current valuations reasonably high for some of the Magnificent 7, and valuations elsewhere in the market more reasonable, their relative market value may well come down over time. 

Is there a company you believe has the potential to offer ‘Nvidia level’ returns?

The current excitement around artificial intelligence means that deeply lossmaking AI-first companies are having enormous valuations put on them. 

Whilst there are likely to be some huge AI businesses, many will not make it through their ‘cash burn’ phase and will destroy value. 

It is probably better to look at service providers like Microsoft in that sphere, or at information services companies that might apply these new tools to their existing products and trade quite cheaply in the market right now.

Do you think investors should be wary of passive investing at the moment? 

As an active investor it might surprise you to hear that I don’t have anything against investing passively, as long as investors understand the risks they are taking. 

Right now, stock market valuations levels are high, so investing in an index involves taking on that valuation risk. 

I personally would choose an active manager that has a sensible process that considers valuation and that they apply consistently – there are many out there and not just in our style.

Why should investors choose your fund over a passive index fund? 

At Evenlode we manage both the qualities of the businesses in the portfolio, and the valuations at which we choose to hold them. 

We think owning good businesses is a good long-term strategy but managing valuation risk is equally important generally. 

Right now, it is, I think, very important to be aware of stock market valuations. 

Whilst many are worried about the overall market level, I do not worry about that for the fund, which sets it up well for the future.

Gold is not in your portfolio. Why not?

Gold is being seen as a hedge against the debasement of currencies, particularly the US dollar, or in other words as an asset that guards against inflation. 

At Evenlode, we do not invest in commodities so don’t have a particular view on the direction of the gold price, but I would say that whilst the price could rise further it has already moved a long way and there is no ‘natural’ price for it. 

History has shown that high quality equities can also act as a hedge against inflation, with companies being real assets that generate cash flow that flows to investors. 

Many such companies are trading at attractive valuations in the market, and that’s where we focus our attention.

Do you personally invest at all in crypto?

I don’t – I think the shares of companies are far more interesting. Companies generate value by delivering things that society wants and needs, and investors get the cash flow that results. 

The shares of great businesses have been shown to be great assets to hold through good economic times and bad.

What’s your greatest ever investment? 

Investing in Microsoft in the early 2010s when it was considered the dinosaur of the computing industry. Look at it now. 

We did not predict the rise of cloud computing and AI, but did think it was well-resourced, generated buckets of cash, and held important and growing market positions. 

We are not complacent about the ongoing need for technology businesses to re-invent themselves, however.

And what’s your greatest ever investing mistake? 

There have been a few. One lesson I’ve learned is that too much debt can make a good business bad. 

Brewer AB InBev fell into that category after it acquired SAB Miller with what was the world’s largest debt issuance at the time. That should have been a signal to sell.

Which company would you advise an income seeking investor to put £100,000 in right now?

A business that balances an attractive yield today with potential for growth is Dutch business-to-business data and software company Wolters Kluwer. 

It is a steady growth business that serves a range of professionals like accountants, tax experts, corporate finance departments and doctors. 

It generates a lot of cash, so its 2.8 per cent yield has scope to grow over the years as well as providing some income in the shorter term.