13 Questions for Evenlode’s Elliott and Knoedler

Which Sector Shows the Biggest Promise in 2024?

At Evenlode our portfolio is built bottom up, so our focus is on individual cash generative companies with pricing power. This means that we don’t participate in certain asset-intensive sectors, such as energy or mining. Our exposure to remaining sectors is entirely dictated by company level opportunities. That being said, the prospective moderation of input cost inflation looks positive for consumer staples and medical technology companies, who have just been through three very grueling years.

What's the Biggest Economic Risk Today?

We don’t take a house ‘macro’ view, so we don’t have a straightforward answer to this question! The nature of macroeconomic events is that they are often difficult to predict. Few people expected a global pandemic or the reemergence of war in Europe, yet both events have had material impacts on markets in the last few years. Similarly, movements in interest rates and inflation are uncertain in timing, scale and even direction. Instead of trying to guess at these events, we seek to insulate the portfolio from a wide range of economic scenarios. Cash generative companies with low levels of leverage are well placed to reinvest and grow in most macro environments.

Describe Your Investment Strategy

We buy and hold companies with resilient pricing power based on a hard-to-duplicate competitive advantage, typically a brand, a switching cost, or a network effect, and seek to pay sensible prices for them. We believe that these companies are best placed to compound cash flows over time and generate higher returns to shareholders.

Which Investor(s) Do You Admire?

Stan Druckenmiller for his dispassionate willingness to change his mind when the facts change.

Name Your Favourite 'Forever Stock'

Our process is set up to avoid managers falling in love with ‘forever stocks’ – as the old saying goes, the stock doesn’t know you own it. Our valuation system assumes all competitive advantages decay with time. Phil Fisher said the right time to sell a quality compounder was ‘almost never’ – he did not say ‘never’. The largest position in our portfolio is Mastercard, the card payments network, and we have held the position since the fund was founded. However, even with a persistent network effect, this company has a “right price” for sale.

What Would You Never Invest In? 

Any company which lacks pricing power. Those businesses that produce commoditised products, such as a barrel of oil, have their prices determined by the market. This lack of control increases their cyclicality and places a constraint on reinvestment levels.

Growth or Value?

This question poses a false dichotomy. Any professional fund manager should seek to participate in ‘value’ as our job is to buy stocks which we think are intrinsically worth more than their market price. We think that it is hard for a stock to provide long term ‘value’ unless it is capable of growing revenue at least at the same pace as the wider economy; absent real sales growth, we can’t see sustainable value creation as the levers of margin improvement, improved asset efficiency, and share repurchase via leveraging all have limited runways.

House or Pension?

Pension. We prefer pensions of financial assets, and preferably equities, to houses, which are illiquid, undiversifiable, and largely depend on pure pricing to drive returns for their owners (as opposed to volume growth – it’s very hard to turn a three bed into a nine bed without risking prosecution for being a slum landlord – or mix growth through innovation – there is very little innovation in housing).

Crypto: Brilliant or Bad?

Bad. BIS research suggests that a majority (on their crude estimates, 75-80%) of retail investors have lost money on crypto. ‘Whales’ appear to have harvested substantial value from information asymmetries. In contrast, equities offer highly regulated disclosure and increasingly modest prices to participate; not to mention ownership stakes in often highly attractive real economic entities buttressed by robust legal structures. Crypto is a market with asymmetrical information and the asset lacks value in the absence of liquidity.

What Can be Done to Improve Diversity in Fund Management?

Fund management has been formalised as an industry which paradoxically has arguably reduced diversity in all forms. More mid-career hires and a different, less IBD-influenced work culture would be good steps. It’s also important that firms are willing to take calculated risks when hiring as opposed to sticking to ‘name brand’ CVs and backgrounds.

Have You Ever Engaged With a Company and Been Particularly Proud (or Disappointed) in the Outcome?

We independently vote all of our proxies as an important duty to clients and frequently engage on topics such as remuneration, climate reporting and governance. We believe that this can add significant value to investors over time. As a direct result of engagement with Nestle, we have been invited to the chairman’s round table and had significant input into their ongoing improvements. This helps us better understand the company from an investment standpoint and allows us to discuss potential risks directly.

What's The Best Bit of Advice You’ve Ever Been Given?

You aren’t learning anything when you’re talking.

What Would You Be if You Weren’t a Fund Manager?

James Knoedler: I have absolutely no idea. I thought I was going to be an academic, which I certainly would not want to be now.

Chris Elliott: I worked as a software engineer prior to entering finance. I still code occasionally (though very badly!) and am fascinated by both the new AI libraries being released and the potential for quantum computing. I would probably want to work in technology or run my own software business.