Threadneedle UK Equity Income – why it pays to remain level-headed
Richard Wood | Wed 06 February 2019
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- Most UK equity income funds lost money last year
- This one held up much better than the broader UK stock market though
- Richard Colwell thinks there are good investment opportunities in UK shares
Our view
Richard Colwell thinks investing in less fashionable parts of the market will reward investors with higher long-term returns. The idea is he invests in companies at a great price when they're unloved, and makes a profit once they return to favour.
It's an approach that's achieved considerable success over the course of Colwell's career. He's used this process consistently throughout, and we like his ability to think with clarity and remain level-headed in different market conditions.
He currently manages the Threadneedle UK Equity Income Fund which is on the Wealth 50 list of our favourite funds.
We recently negotiated the fund’s charge down to 0.59% a year for HL clients. Our charge for holding funds, a maximum of 0.45% a year, also applies.
Performance
The fund lost 0.9% over the past year. But it held up much better than most other funds in the UK Equity Income sector and the UK stock market, which fell 3.8%. We think this leaves the fund in a stronger position when markets rise again.
Over the course of his fund management career since 2005, Colwell’s significantly outperformed the UK market. Our analysis shows he’s tended to lose less than the market during downturns, and capture most of the market gains when it rises. Past performance isn't a guide to future returns though and there are no guarantees he’ll do so in future.
The fund currently yields 3.9% which is variable and not guaranteed. Colwell invests in companies that already pay high dividends, but he also includes some that offer a lower income with the potential for this income to grow. The fund’s charges are taken from capital which increases yield but reduces the potential for capital growth.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
|
Jan 14 -
Jan 15 |
Jan 15 -
Jan 16 |
Jan 16 -
Jan 17 |
Jan 17 -
Jan 18 |
Jan 18 -
Jan 19 |
|
| Threadneedle UK Equity Income | 12.1% | -1.9% | 15.4% | 7.3% | -0.9% |
| FTSE All-Share | 7.1% | -4.6% | 20.1% | 11.3% | -3.8% |
Past performance is not a guide to the future. Source: Lipper IM to 31/01/2019
Being a contrarian
Colwell invests in a core of larger companies he thinks will pay fairly stable dividends. He also invests in some out-of-favour companies that could offer greater potential for growth.
AstraZeneca is an example. The pharmaceutical company was the biggest positive contributor to performance last year.
Investor sentiment towards the company was tepid towards the end of 2017. Patents on a number of its drugs were close to expiry, which makes them less profitable. Colwell felt investors were overlooking some potential blockbuster drugs coming to market. They’ve helped put the company on track to grow sales and its shares subsequently performed well.
Taking a contrarian view doesn’t work every time though. An investment in defence and security expert Cobham Plc weighed on the fund’s performance. A number of poor acquisitions didn't help and resulted in a new management team taking over. Colwell thought the business was back on track but there were further setbacks last year, like major customer Boeing making a claim for damages against Cobham.
Outlook
Investors have a lot to worry about at the moment, including the impact of rising interest rates and the potential for trade tariffs to stunt economic growth. Colwell isn't quite so worried and makes a strong case for UK shares.
Political uncertainty in the UK has put pressure on share prices and means they look good value compared with many overseas markets. This means that, in many cases, shares can be bought at a lower price than the future growth potential of a company suggests although there are no guarantees prices won’t fall further.
Weaker sterling could also increase the profits of companies that make most of their sales outside the UK. A lower pound makes UK exports cheaper for overseas buyers. Overseas businesses might also be more likely to take over UK companies at these more attractive prices. And takeovers often lead to a boost in a company's share price. Overall, Colwell continues to invest in companies he thinks can do well whatever's going on in the economy.