Sometimes fund manager changes can trigger a reason to re-evaluate a portfolio, and that could be the take-home message from fund shops, who have dropped CT UK Equity Income from their best-buy lists over the past few months following the announcement of manager Richard Colwell’s retirement.
But finding an approach that has worked as well in the IA UK Equity Income sector is no mean feat. Indeed, the fund is currently a top-quartile performer over three, five and 10 years and has been a firm favourite with investors.
Trustnet sat down with the new man in charge of the fund, Columbia Threadneedle’s Jeremy Smith, to find out how it will differ under new management.
Here he explains why the fund has no exposure to oil, why ousting the management at Pearson has proven fruitful and why he is the “continuity” ticket when it comes to replacing the retiring Colwell.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
What is your process for picking stocks?
We are bottom-up, fundamental-driven stock selectors who take high-conviction positions to create a portfolio that is constructed irrespective of the benchmark.
We aim to deliver a premium yield to the market at a portfolio level and have long holding periods seeking to gain performance from compounding of advantaged companies.
We are looking for out of favour companies that historically have had good returns and have good core businesses in them, but something has gone wrong, whether it be perception, sentiment or even the fact that the cycle has gone on for longer than the market has patience for.
Best buy lists have dropped CT UK Equity Income due to the change in manager. Why should investors stick with you?
The fund has been constructed by a large team of people, all of whom are still in place and the technical input is continuing with the same personnel.
I have worked with Richard for 17 of the past 27 years. It is not as though I have come in from the outside and there is a style reset.
There will be no change to the process, style of philosophy and I have no intention to change the portfolio construction or the way that the fund is used by investors as part of a blended portfolio.
I am the continuity ticket. Yes there is a change at the top but there is no change of process, resources, intention to do anything different.
The fund will however evolve over time and it is an important period to be on the front foot as the market leadership changes from what has been an incredibly long period of narrow market leadership of US tech and quality-growth stocks to an environment where there is a real cost of money, inflation and higher nominal growth.
What has been your best stock pick this year?
Pearson has been the best performer over the past 12 months with a total return of 63% to 30 October. The company appointed a new chief executive, Andy Bird, in October 2020 who is redefining and clarifying Pearson’s purpose towards becoming a global learning growth company.
Over the past 12 months he has been able to demonstrate tangible progress on this strategy, returning the company to strong top line growth along with margin expansion. This progress has also caught the attention of private equity, as Pearson received takeover offers from Apollo in March this year, but these were turned down by the board.
And your worst?
M&S shares have performed the worst over the same period as investors have fretted over the UK consumer. M&S shares are down 42% and 38% relative to the FTSE All Share over the same period.
This is despite the retailer seizing the opportunity amid the pandemic to accelerate its plan to modernise its clothing business, reshape its store estate and broaden the appeal of its food business.
There is new executive leadership and strategic momentum must continue, but we continue to believe in this turnaround story.
CT UK Equity Income doesn’t own oil. Has that hampered you?
Relatively, the biggest negative for the portfolio has been energy as we don’t own any. It is rational in a period of rising inflation for investors to gravitate towards sectors that lend themselves to price rises as a risk control measure.
The markets have myopically focused upon oil, gas and mining, forgetting that there are lots of areas of the market where inflation comes through. When we started in the 1990s, some sectors such as supermarkets were also good ways to combat inflation.
Markets have added price inflation to the revenue line of these commodities companies and ignored the impact on cost, while in other parts of the economy investors have ignored the impact on the revenue line and just added it to the costs.
That is far too simple and binary. There has to be a relationship between the consumption of commodities and industrial output. We understand why energy prices have gone up due to the suppression of supply in Europe, but long term there needs to be demand.
So we are overweight industrials instead, as over the long term there is a direct link between global GDP and commodities. By investing in industrials you get the exposure to global GDP but can diversify the risk across different end markets.
Do you use environmental, social and governance principles?
We act as owners of businesses. The fund is a focused portfolio of high-conviction ideas, so we take large positions in companies and have always behaved responsibly.
We have always been big on the governance, which is critical to our investment process. When you own 15% of a company, you have an important part to play as a stakeholder in the running of the company.
We have replaced management at companies such as Imperial Brands Tate & Lyle, Pearson and Morrison’s. If the board deviates, we will roll our sleeves up and get involved.
But it is an Article 6 fund, which means we are not prohibited from owning anything and do not have any exclusions.
What do you do outside fund management?
My great passion has been horses ever since I was four years old and have been riding for 49 years. I have spent my whole life wanting that to be what I do, but it is hard to make your fortune with something that eats while you sleep – you’re basically just burning £5 notes.