Fund in focus: Threadneedle UK Equity Income

Posted by Liz Rees in Fund and industry updates category on 12 Mar 20

The proposition

Threadneedle UK Equity Income fund aims to provide a yield above that of the FTSE All-Share Index, over rolling 3-year periods, after charges. The yield is currently 4.5%. It also offers the prospect, albeit no guarantee of capital growth over the long term.

At least 90% of its holdings are listed on the London Stock Exchange and, typically, at least 70% of the portfolio is invested in FTSE 100 shares.

Investment philosophy & process

The manager, Richard Colwell, seeks sustainable investment themes as a source of ideas, before carrying out rigorous fundamental analysis and valuation assessments on individual companies. He aims to spot hidden gems - unloved companies with medium to long term potential – and uses short term volatility to build positions. 

Colwell’s flexible style allows him to tilt the fund towards value or growth opportunities as market conditions evolve. His focus is on large companies but the fund is not constrained and can invest anywhere.

The high-conviction stock picking approach produces a concentrated portfolio of 45-60 holdings. This shows the manager is not afraid to back his best ideas and he will take individual holdings up to the maximum 10% of the portfolio that is permitted.

Current positioning

The fund currently has high exposure to industrials, consumer services and healthcare sectors compared to its benchmark. Conversely, it is underweight in financials and the oil & gas sector.

The largest holdings at the end of January 2020 were AstraZeneca and Glaxo SmithKline, which represented 9% and 6.5% of the portfolio respectively. Colwell believes AstraZeneca has a particularly promising portfolio of recently launched drugs.

An example of a turnaround is Marks and Spencer. Colwell appreciates this will require patience but has been encouraged by action taken to improve clothing sales, whilst food has made solid progress in a tough environment. He thinks the deal with Ocado, to enter the fast-growing online grocery market, offers growth potential.

Performance & Costs

Since Colwell was appointed manager on the fund, on 1 September 2010, it has returned 9.4% annualised compared with 7.3% annualised for the IA UK Equity Income sector*. Over 5 years to 29 February 2020 the annualised return is 3.9% against 2.7% for the IA peer group*.

The Ongoing Charges Figure (OCF) is 0.82% which we consider is competitive compared to its peers.

Current outlook

The manager believes the Conservative majority in Parliament, and increased clarity over Brexit, should underpin a return to favour for the UK stock market, although this may be delayed until the coronavirus is contained.  

Colwell notes the extreme divergence between growth and value stocks which he calls the ‘deeply hated and the highly rated’. However, he distinguishes between cheapness and value will only consider companies that have strong and resilient balance sheets.

Colwell considers it is not only domestically-focused companies that have been hurt by negative sentiment. Many UK businesses with overseas exposure are also trading at attractive valuations compared to their international peers. Colwell therefore anticipates a broader reappraisal and rerating of UK-listed companies.

Furthermore, he expects mergers & acquisitions to remain at high levels, encouraged by the persistent weakness of sterling relative to the dollar. Private equity and US predators have shown willingness to ignore the geopolitical noise and focus on valuations.

Our view

We believe this fund is worthy of consideration as a core holding for investors looking for income. We like the preference for resilient companies that Colwell believes can prosper even in a low growth environment.    

As a patient investor, he tries to look through short-term volatility and market noise, instead concentrating on company fundamentals. This philosophy has served investors well, although the high conviction approach means returns may diverge considerably from the benchmark.

*Total return local currency, 31st January 2020