Threadneedle UK Equity Income: November 2020 fund update

Emma Wall | Wed 18 November 2020

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• Richard Colwell is an experienced equity income manager
• A blend of high-quality, dividend-paying companies and unloved companies with more growth potential
• Our analysis shows the manager has added value through stock selection

• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The fund aims to pay a high and growing income, as well as some long-term investment growth. Unlike some UK equity income fund managers, manager Richard Colwell doesn’t invest outside the UK. The fund would work well in an income focused portfolio, adding a UK allocation to a global portfolio, or alongside fixed income investments.

Manager

Richard Colwell has managed the Threadneedle UK Equity Income fund since September 2010, and also ran other UK equity portfolios prior to this. Colwell is supported by a large and experienced UK equities team, including nine sector specialists, some of whom also run portfolios. He can also leverage the expertise of eight responsible investment analysts.

As well as this fund, Colwell manages the Threadneedle UK Growth & Income Fund, the Threadneedle UK Equity Alpha Income Fund and the Threadneedle Monthly Extra Income Fund, and additionally holds the position of Head of UK Equities at Columbia Threadneedle. While we recognise that these additional responsibilities need to be properly managed, we are comfortable that Colwell dedicates sufficient time to the UK Equity Income fund.

Process

The manager looks to identify stocks he considers good quality – but which are currently undervalued by the market. He is careful to avoid value traps, but instead looks for good businesses with a catalyst for change which fall into three buckets; defensives which should perform well regardless of the economic backdrop, average risk which can be cyclical companies but which have little or no debt, and higher risk investments which could be highly leveraged or need some work to turn to profit.

Colwell likes to take the long-term view, recognising that some of his investments, particularly in the higher risk bucket, may take time to realise what he considers to be their true value, and aims to buy and hold investments for some time, meaning low portfolio turnover. Once invested, Colwell works with a company’s management with an aim to improve the fortunes of his holdings.

In recent months Colwell has used market weakness to purchase more shares in Imperial Brands and Pearson, and topped up investments in engineering solutions firm IMI and Tate & Lyle. He also took some profits from AstraZeneca.

Investors should be mindful that the top positions in the portfolio can be large, which can significantly impact the performance of the portfolio, adding risk. The fund can also carry some sizable sector bets, as the manager is not afraid to back his own conviction, but which can add volatility.

Culture

Columbia Threadneedle was formed in 2015 when US based Columbia Management Group was merged with UK asset manager Threadneedle Investments. There have been a number of high profile fund managers leave the firm since the merger, including a number from the European equities desk last year. However, the UK equities team is well-resourced and Colwell is incentivised to encourage a long-term commitment to the firm.

Columbia Threadneedle has bulked up resource on ESG (Environmental, Social and Governance) over the last four years, hiring Iain Richards as Head of Responsible Investment in April 2016. Roger Wilkinson, Head of Central Research in EMEA, is also responsible for oversight of all internal ESG analysts.

ESG analysis does not lead stock selection but it is a significant input to analysis. ESG reports from the dedicated team feed into stock reviews, and without deliberately looking to run an ESG portfolio Colwell has ended up with a fund that holds many stocks highly rated by independent ESG ratings agencies.

Cost

The ongoing charge for this fund is 0.82%, but HL clients benefit from a saving of 0.23%, resulting in a net ongoing charge of 0.59%. Part of this saving is provided through a 'loyalty bonus', which is tax-free in an ISA or SIPP. However, they may be subject to tax in a Fund & Share Account.

The HL platform fee of up to 0.45% per annum also applies.

Performance

Over the course of his career, Richard Colwell has comfortably outperformed the FTSE All Share, and though the last three years have been more challenging as value investing has been out of favour, he has kept up with the FTSE All Share benchmark. Our analysis suggests he's added value with his stock picking over the long term. Typically the fund has slightly lagged rising markets, but has not lost as much money in falling markets. This has played out recently through 2018 and in the market volatility earlier this year. Past performance is not a guide to future returns.

This year has been tough for UK equities, particularly those with a value bias thanks to the headwinds of coronavirus and continued Brexit uncertainty. Colwell shared that the balance of the portfolio moved through this year, as some of his stocks have seen big falls. Around 10 stocks saw falls of more than 60%, including ITV, Marks & Spencer and BT, but there were some winners which provided balance including Rentokil and Morrison’s.

Dividends have also suffered, with the portfolio suffering around a 30% fall in income, with holdings including Shell, BT, Morrisons and RSA all cutting or deferring pay-outs. However, some companies have already announced they will be reinstating their dividend, including BAE Systems, and Colwell is optimistic for the outlook. He expects an income and capital boost next year as companies return to paying dividends or pay out deferred dividends, which he predicts will leave the fund on a yield of around 4.2%. This should not be seen as a guide to future income. Remember charges can be taken from capital which increases the yield but reduces the potential for capital growth.

Past performance is not a guide to the future. Source: Lipper IM to 31/10/2020.

Find out more about Threadneedle UK Equity Income, including charges

Threadneedle UK Equity Income Key Investor Information