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Two UK funds to play both sides of the interest rate-rise debate

18 September 2014

Rowan Dartington’s Tim Cockerill picks one fund that is well-placed for rising interest rates, and another that is more cautiously positioned for a more bleak economic outlook.

By Jenna Voigt,

Editor, FE Investazine

While it’s clear – at least to the vast majority – that interest rates will only go up from here, exactly when this happens and by what margin is still hotly debated.

ALT_TAG Rowan Dartington’s Tim Cockerill predicts that rates will finally rise at the end of the year.

While it could cause some volatility in the short-term, he thinks investors should see it as a good thing.

“There will likely be modest rate rises which is a positive signal because its telling us the economy is doing fine,” he said.

Though the UK economy has certainly picked up, Cockerill admits that the UK may not be healing as quickly as everyone hopes.

Real wage growth has still yet to come through, which Leigh Himsworth recently highlighted as a reason not to raise rates.

With a great deal of uncertainty still surrounding the topic, Cockerill tips two funds that sit on opposite sides of the interest rate debate – Threadneedle UK Extended Alpha and Woodford Equity Income.


Threadneedle UK Extended Alpha

While Cockerill says it’s difficult to find funds that are positioned to directly benefit from an interest rate rise, he thinks the Threadneedle UK Extended Alpha fund, run by Chris Kinder, is better placed than most.

The fund is fully invested with exposure to cyclical areas of the market, and therefore should benefit if the UK economy continues to improve.

Kinder is backing consumer products, services and financial stocks nearly equally in his high-conviction fund – with roughly 18 per cent invested in each sector. Among his top holdings are Rio Tinto, HSBC and Unilever.

However, the fund has the ability to ‘short’, which would allow the manager to benefit from falling share prices if an interest rate is badly received by the market.

“The manager runs a small short book so if you are convinced the share price will fall, you can take a short position and generate cash and put it to work,” Cockerill said.

He likens the portfolio to a 1/30/30 fund where a manager is able to take a 30 per cent short book, add it to their long book and gear up by 30 per cent.

“Threadneedle UK Extended Alpha can do that but much more subtlety,” he said. “The long book will benefit [when the interest rate rise calms down] and equities will carry on, but stocks could also be adversely impacted and this fund has the ability to go short and hopefully benefit from that.”

Threadneedle UK Extended Alpha has a 2.7 per cent yield and has been a top-quartile performer in the IMA UK All Companies sector since Kinder took over the portfolio in December 2010.

Over that period the fund has made 61.02 per cent while the FTSE All Share has gained 41.26 per cent.


Performance of fund, sector and index since 2010

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Source: FE Analytics

The four-crown rated fund has ongoing charges of 0.88 per cent.


Woodford Equity Income

If interest rates don’t rise as quickly as everyone expects, that’s the signal the economy isn’t in great shape, says Cockerill.

He says if the economy isn’t picking up as much steam as experts think, investors will want to be in more robust, reliable stocks – the bread and butter of star equity income manager Neil Woodford.

As Cockerill highlights, Woodford’s portfolio is positioned for a “lacklustre economy” and he holds some of the UK’s largest and most reliable dividend payers as a result.

In a recent FE Trustnet article, the manager warned the UK was set for “extraordinary economic and political uncertainty” – a view that would suggest interest rates are farther off than everyone thinks.

“If interest rate rises are further out, that’s a signal the economy’s not as good as people think. It makes the yield from equity income that much more attractive,” Cockerill said.

While the Woodford Equity Income fund has only been running for a few months, the manager has a long track record of outperformance on his Invesco Perpetual Income and High Income portfolios.

From 1989 until he stopped running the portfolio in March this year, Woodford returned an impressive 1,709.

39 per cent in the Invesco Perpetual High Income fund – more than double the returns of the FTSE All Share and IMA UK All Companies sector.

Performance of fund, sector and index since 1989


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Source: FE Analytics

Woodford started running the fund in 1988, but our data for the sector only goes back to 1989.

The manager uses the same investment philosophy in the Woodford Equity Income fund, which has returned 4.10 per cent since launch in June this year.

The FTSE All Share and IMA UK Equity Income sector have lost 0.46 per cent and 0.83 per cent, respectively. Among his top holdings are staple, blue-chip income payers like AstraZeneca, GlaxoSmithKline and British American Tobacco.


Woodford has taken a strong view on pharmaceutical companies and is also backing Swiss giant Roche in his top-10.

Woodford Equity Income has ongoing charges of 0.75 per cent.

Cockerill says FE Alpha Manager Mark Barnett, who took over the Invesco funds following Woodford’s departure earlier this year, is also a good bet; however, he prefers his Invesco Perpetual UK Strategic Income fund, which has more flexibility.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.