Threadneedle UK Equity Income is the only fund in the IA UK Equity Income sector that has made a positive return in nine of the past 10 calendar years while delivering top-quartile performance over this time.
Of the 56 funds with a track record of this length, 17 funds have made a positive return in nine of the past 10 calendar years. However, just nine of these are second-quartile performers or higher over this period, with Threadneedle UK Equity Income the only fund in the top 25 per cent of its peers in terms of total returns.
1st & 2nd quartile funds with fewest number of negative years
Source: FE Analytics
Manager Richard Colwell (pictured) joined Threadneedle UK Equity Income in September 2010. He became lead manager, and head of UK equities at Columbia Threadneedle, after the retirement of Leigh Harrison in mid-2016
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This UK equities team employs a valuation-based investment process with the aim of exploiting short-term moves in markets to construct portfolios that will generate above-average returns over the long term.
However, Square Mile Investment Consulting & Research pointed out that while Columbia Threadneedle believes that stock research can be successfully performed through a collegiate team-based approach, portfolio construction and risk assessment are best handled by an individual – in this case Colwell.
“The investment approach has been structured to determine three things,” said Square Mile. “What is the business model and can the business continue to grow? Does the business have sufficient financial strength and can it successfully convert earnings streams into cash flows? And finally, does the firm have good management in place who can allocate capital efficiently?”
Although the team takes long-term views, it does not attempt to make forecasts on the broader economy.
Its members employ scenario analysis to consider how a business is likely to perform in different circumstances and to determine how sensitive the cashflow is to various economic factors.
Square Mile added that Threadneedle UK Equity Income's portfolio is constructed with an above-average yield and, as a result, may hold positions in less fashionable parts of the market where higher dividend yields are available.
“The manager believes that he needs to focus on risks affecting the underlying businesses rather than those associated with diverging from the benchmark,” it said.
“The final portfolio of around 45 to 60 stocks is invested in firms that can succeed in a low-growth environment and have complementary risk characteristics. This is a fund that focuses on larger companies and it typically has a FTSE 100 exposure of at least 70 per cent.”
FE Invest is also a fan of Threadneedle UK Equity Income, including it on the Approved Funds List. It said that Colwell’s approach to equity income investing is unusual and likes the way this differentiates the fund from its peers.
“His focus on medium- to long-term dividend growth in areas overlooked by the market has paid off, generating the required level of income along with some capital growth,” said FE Invest.
“However, investors must be aware that the contrarian style of investing often involves buying more of poorly performing companies, providing the manager’s investment case still holds.
“Therefore, some of the fund’s holdings may often be experiencing uncomfortably negative news flows. It is these short-term bouts of market overreaction that provide the buying opportunity sought by the manager.”
Threadneedle UK Equity Income made 161.96 per cent over the 10-year period, compared with gains of 138.35 per cent from its FTSE All Share benchmark and 131.73 per cent from its sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £4.2bn fund has ongoing charges of 0.83 per cent.
It is yielding 4.2 per cent. Someone who invested a £10,000 lump sum into the fund at the start of the period in question would have made £6,394.63 in income alone over this time.
Colwell also manages one of the second-quartile funds that made a positive return in nine of the past 10 years: Threadneedle UK Equity Alpha Income.
This is effectively a more concentrated version of Threadneedle UK Equity Income – whereas UK Equity Income has 71.51 per cent of its assets invested in its top-20 holdings, Alpha Income has 84.10 per cent. However, while it is a 'best ideas' version of Colwell’s other fund, it has only made 149.58 per cent over the 10-year period in question and has slightly higher ongoing charges, at 0.88 per cent.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
It does have a slightly higher yield though, at 4.5 per cent.
The other second-quartile IA UK Equity Income funds that have made a positive return in nine of the past 10 calendar years are Threadneedle UK Monthly Income, Aviva Investors UK Equity Income, Premier Income, Premier Monthly Income, Schroder UK Alpha Income, Artemis Income, Franklin UK Equity Income and Trojan Income.