The volatile nature of the global equity market this year has made the exercise of performance analysis more dynamic than usual, as the economic and political news has caused a whipsaw effect on market prices. The portfolio we manage having proven to be defensive when markets took a dive post-Liberation Day, since then it is clear certain sectors, and sub-sectors have driven the market’s recent rise, particularly AI-related information technology, banks, insurance companies, and European defence.
Durable growth, cash compounding businesses that trade at reasonable prices in the market have not generally been the fashion of recent months. Rather it has been growth themes (AI, defence) or ‘deep value’ (banks, tobacco) that have been “in”. This broad observation has its limits, but, at a high level, market moves have generally left some high-quality franchises trading at very attractive valuations. Put another way, the Evenlode Global Income portfolio is positioned between the growth and deep value trends that are en vogue.
Assessing what is “in” vs “out”
Style analysis is a way of comparing a portfolio to the market; it presents the qualities of a portfolio across a range of metrics that measure corporate valuation, growth profile, and ‘quality’ compared to other funds and to the broader market. While this has limitations and does not drive decision making, it is a helpful sense-check to give us comfort that a portfolio’s qualities are reflected from the top-down, having constructed it from the bottom-up.
Managing a portfolio that is differentiated to the market means that being out-of-fashion will happen. While this is a truism, it is important to assess whether the trends are long-lasting or indeed changing fast. This allows us to be comfortable that we are sticking to our investment principles. If the fundamental economics of a business, its growth prospects and valuation make sense, then we have good reason to believe our long-term goal of durable compounding of returns is intact regardless of the fashion of the market.
Is L’Oreal no longer stylish?
For a business that has its heart in making people feel more stylish, L’Oréal’s stock price has reflected it falling out of fashion in the market. This has followed revenue growth that has slowed from a high rate in the pandemic years to the low single digits in percentage terms. Purchases of little luxuries and a desire to look good on screen has given way to weaker consumer sentiment, particularly in China and North America where sales were flat year over year in the first quarter of 2025.
Despite the slowdown in sales, our assumption has never been that the higher growth rates were sustainable. The real things to like about the company stem from being by far the largest player in a consumer goods category that should exhibit steady growth through time. Being the market leader means that the company should capture a fair share of the global cosmetics market, and perhaps more, and has enviable financial characteristics. A high gross margin of 74% is testament to the value that consumers put on its products as well as the operational efficiencies that scale permits. Consistent cash generation and high returns on capital result, and the company’s strong balance sheet with limited debt reduces financial risk.
With a dividend yield of 1.9% there are higher yielding consumer goods franchises out there, however our discounted cash flow analysis shows the stock’s valuation to be on the cheap side of fair value – not the cheapest option out there. Given the company’s qualities and looking at history, valuation is the reason why the company was not such a large position when the stock price was higher. At this level, we’re more comfortable with a larger position.
Is credit en vogue?
Experian might be a less recognisable and glamorous consumer name, although individuals seeking a view on their creditworthiness will likely recognise the brand. The company’s consumer facing credit scoring business makes up about a quarter of revenues, with the rest of the business servicing companies who make loan decisions. Its data and analytical tools are sold to financial institutions largely in North America, and there is a healthy growth opportunity in its Latin American business, currently about a sixth of revenues.
Experian has, in contrast to L’Oréal, been more en vogue in the market over the last year – being involved in the world of data and analytics is probably helpful for market sentiment in the age of AI. But the performance is underpinned by
very solid revenue growth and a developing offering to customers through its Ascend lending decisions platform amongst other things. To date we have been content to hold the position at around the current 4.1% of the fund as the company’s valuation has moved from the cheap to the fair value zone. The company’s strong competitive position, customer offering and forecast growth in cash flows are, in risk terms, somewhat offset by some sensitivity to the economy and the large proportion of revenues derived from the US introducing geographic concentration.
Risk management is timeless
We welcome the market returns of course but are cautious of the overall market level. Experian is a good case study; a high-quality business, whose valuation factored in a good margin of safety, but now reflects more of a balanced prospect of risk and reward. L’Oréal is similar but trading a little cheaper in our estimation. This is acceptable in the context of a portfolio that is trading at better than fair value. The flip side is that capturing valuation opportunities – unless one is incredibly fortunate with timing – can lead to being out of step with the market’s returns. We are happy to go with the flow if valuations are reasonable, as with Experian, and build into positions, as with L’Oréal. Over the long run this valuation risk management is a critical part of an active investor’s role – even if that means being less fashionable.
By Ben Peters, Portfolio Manager of the Evenlode Global Income fund
