Threadneedle UK Equity Income - research update

Richard Troue | Thu 07 December 2017

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• Richard Colwell has seen Brexit-related uncertainty as a buying opportunity
• Avoiding mining companies and banks has held back performance
• The fund contains a blend of high-quality dividend payers and unloved, contrarian opportunities

Our View

Richard Colwell has gone through a tough patch of performance over the past year or so. From time to time this is inevitable for any fund manager. We view Richard Colwell as experienced and capable, with the ability to bounce back and deliver good long-term returns for investors.

More broadly, sentiment has been negative towards the U.K. stock market recently and we believe it could be overdone. Of course, there are risks on the horizon, Brexit chief among them, but the UK is home to lots of international businesses that can thrive regardless of the outcome. Similarly, many domestically-focused businesses will find a way to cope.

For patient investors this fund offers a yield of 3.9% (variable and not a reliable indicator of future income), plus the potential for capital growth in the long run. It remains on the Wealth 150+ list of our favourite funds.

Manager's outlook

Stock markets across the world have undoubtedly benefited from quantitative easing and low interest rates, and the UK is no exception. Starved of yield from traditional sources, such as cash and bonds, investors have increasingly taken on the higher risks associated with an investment in the stock market, for the potential of higher long-term rewards.

Richard Colwell acknowledges that stock market levels are high. However, Brexit-induced uncertainty and negative sentiment towards the U.K. means companies here look attractively-valued compared with European and US counterparts. In this environment he is confident he can find opportunities to add to existing investments at attractive prices and generate good long-term returns.

Fund positioning

The fund's positioning has not changed dramatically in recent months. Richard Colwell has used share price weakness to top up out of favour companies that he still believes will perform well over the long term. These include Cobham, AstraZeneca, Johnson Matthey, and Imperial Tobacco.

In the case of Imperial Tobacco, for example, he felt investors overreacted to the US Food and Drug Administration agency's statement on reducing nicotine levels. The company has previously shown an ability to adapt to such measures in Europe and, in any case, no imminent changes are expected in the US.

Performance

The fund's performance modestly lagged peers in the IA UK Equity Income Sector and the broad U.K. stock market (FTSE All Share Index) over the past year.

Relatively high exposure to healthcare companies detracted from performance as this sector struggled at times and remains out of favour today. Richard Colwell continues to hold companies such as AstraZeneca and GlaxoSmithKline as part of his approach is to buy unloved, but fundamentally sound companies with good yields.

One of the biggest detractors from performance has been stocks and sectors the manager doesn't own. Mining and resources companies, for example, have generally performed well, but with no exposure to the likes of Glencore, Rio Tinto and BHP Billiton, the fund didn’t benefit. Richard Colwell continues to view them as poor-quality business, exposed to any slowdown in the Chinese economy, and he is happy not to own them.

Similarly, avoiding banks, including HSBC, has been painful, but Richard Colwell simply believes he can find better long-term opportunities among higher-quality, less risky businesses elsewhere.

Richard Colwell has managed this fund since September 2015. Over this time the fund has grown by 26.9% compared with 23.8% for the IA UK Equity Income Sector and 31.0% for the FTSE All Share Index*. Prior to this he managed the Threadneedle Growth & Income Fund from March 2010, delivering good performance overall. Please remember past performance is not a guide to the future.

Richard Colwell’s experience and longer-term track record gives us the confidence he can deliver good performance for investors over the long term. Please remember investments can fall as well as rise.

Past performance is not a guide to the future. Source: Lipper IM *to 31/11/2017

Please note charges can be taken from capital which can increase the yield but reduces the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/ key investor information document in addition to the information above.