Richard Colwell has told investors not to get used to the lower volatility profile of his Threadneedle UK Equity Income fund, saying he wants a portfolio that looks “more like the Peak District than Norfolk”.
An article published earlier this year on FE Trustnet showed that Threadneedle UK Equity Income is the only top-quartile fund in the IA UK Equity Income sector that has made a positive return in at least nine of the past 10 full calendar years.
Another study showed it had outperformed its peer group composite in seven of the past 10 calendar years, a record bettered by only one fund in its sector.
However, Colwell (pictured) warned investors in his fund not to take this consistency for granted.
“The pushback, the advertising health warning, would be that we do not position it as some sort of low-volatility fund that will religiously outperform each year. That's just not going to happen,” he said.
“The first five to seven years of this cycle, we were very pleased to have been on the front foot and managed to outperform our peer group each year, but that was unusual.
“It's been a bit more rock and roll in the last three years and I don't think that's because I've lost form or anything like that – it's been more about the quality of the market and the breadth getting narrower, you've obviously had oil and mining lead the way in the index over the last three and a half, four years, which is not an area I'm particularly exposed to.”
Colwell said that there is nothing wrong with volatility and diverging performance, describing the focus on Sharpe ratios in the current cycle as “a bit of a fad”. The manager also pointed out that most studies on the subject will show that the best-performing fund managers over the long term will typically underperform one year in three.
And, he added that with “the elastic becoming quite stretched”, the true test will come as the current cycle ends, saying that being an active manager who is not over-indexed in crowded positions should be beneficial.
“Performance will be more lumpy really, just as it was at the turnings of the last two cycles. You know, I underperformed in 1998 to 1999 and then did very well in 2000 to 2001,” the manager continued.
“Likewise, I underperformed in 2007 but did well in 2008, relative to a horrible market. So I'm pleased that we've delivered a rolling three- and five-year track record over the last 10, 15 years that's attractive and adds up to something that clients can make use of, but this is not a fund that is designed to religiously outperform each year.
Performance of manager vs peer group composite over 15yrs
Source: FE Analytics
“Because if you're aiming for that, you'll end up with a portfolio that looks like Norfolk. I want a portfolio that looks a bit like the Peak District.”
Colwell’s divergence from the benchmark in future is likely to be exacerbated by his preference for value investing. The manager added that building up positions too early is an occupational hazard and that he has plenty of “war stories” where he was up to five years premature in some cases.
However, he said that while it can be lonely when you are in this position, it is important to stick to your guns.
“The mistake investors continually make through cycles is, you know, there's a tendency to want to be in the crowd and airbrush your portfolio to perfection and get rid of all the problem stocks.
“I've got plenty of problem stocks, some of which really do frustrate me, but to sell now, it would be a bit like selling in Q1 2009 or what have you: you might feel good for a few weeks, but you might regret that.
“Because when there is a rotation in markets, it's as much about the quant funds and the hedge funds having to buy back their consensual shorts.
“You don't need these problem stocks to go materially better. It's sort of that second derivative of less negative stuff happening to them, a degree of stabilisation.
“The sort of madding crowds that have been attacking them every day, they keep self-fulfilling as it were, but that can reverse quite quickly.”
Conversely, he said his relative performance has been hurt by taking some profits too early in growth stocks that have done well such as Compass, Relx and Rentokil, even though they remain core holdings across most of his strategies.
Performance of equities over 5yrs
Source: FE Analytics
However, the manager said he remembers feeling the same thing in 2004 to 2005 after selling US housing stocks and UK banks, which continued to do well for the next few years.
And he has a prime example more recently that sums up the importance of a strong sell discipline.
“We sold out of Kier last summer, which had been a stock we had engaged on with management a lot.
“We had had concerns about the cash flows for a long time. So although it seemed like not a great sale, after channel-checking of suppliers saying they're not paying regularly, and competitors saying they are pricing irrationally, that obviously turned out to be a good sale, because it went into a cash crunch spiral,” he finished.
Data from FE Analytics shows Threadneedle UK Equity Income has made 209.21 per cent over the past decade compared with gains of 172.19 per cent from the FTSE All Share and 164.69 per cent from the IA UK Equity Income sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The £4bn fund has ongoing charges of 0.83 per cent and is yielding 4.3 per cent.