CT UK Equity Income: November 2022 fund update

• Lead manager Richard Colwell will retire at the end of November 2022 and Jeremy Smith will become lead manager
• The manager looks to blend higher quality, dividend-paying companies and unloved companies with more growth potential
• Over Colwell’s tenure, the fund has performed well, delivering better returns than its peer group average
• The fund was removed from our Wealth Shortlist in September 2022

How it fits in a portfolio

CT UK Equity Income aims to pay a high and growing income, as well as deliver some long-term investment growth. UK equity income fund managers have the flexibility to invest up to 20% in overseas companies but this fund has generally not invested outside of the UK and Ireland. The fund would work well in an income focused portfolio, adding a UK allocation to a global portfolio, or alongside fixed income investments.

Manager

Experienced lead manager Richard Colwell has managed the fund since September 2010, and is supported by deputy manager Jonathan Barber.

At the end of November 2022 Richard Colwell, the fund's lead manager, will step down as manager of the CT UK Equity Income fund and retire from Columbia Threadneedle (CT). For this reason, we removed the fund from the Wealth Shortlist in September 2022.

Jeremy Smith will take over as lead manager of the fund. He’s currently Head of UK Equity Research and a fund manager at CT. Jonathan Barber will remain as deputy manager. While Smith has experience managing funds investing in UK larger companies, these have mainly been focused on capital growth rather than income. The new managers will continue to run the fund using the same investment style and approach. However, we are mindful they are untested on this fund over a prolonged period in the same way as Colwell.

Process

The manager looks to identify companies he considers good quality – but which are currently undervalued by the market. He is careful to avoid value traps, but instead looks for good businesses with a catalyst for change which fall into three buckets: defensives which should perform well regardless of the economic backdrop, average risk which can be cyclical companies but which have little or no debt, and higher risk investments which could have lots of debt or need some work to turn to profit. Not every company bought needs to pay a dividend at the time of purchase.

Colwell likes to take a long-term view, recognising that some companies, particularly in the higher risk bucket, may take time to realise what he considers to be their true value, and aims to buy and hold investments for some time, meaning low portfolio turnover. Situations where a company's profitability has fallen below its historical average, but the core franchise remains attractive are of interest to Colwell.

Once invested, Colwell engages with a company's management with an aim to improve the fortunes of his holdings. Recently he’s been trimming the fund’s position in Pharmaceutical company AstraZeneca after a decent year. Colwell feels that the UK market is home to many world-leading businesses with favourable prospects and thinks the sell-off this year has offered up some attractive opportunities.

Culture

CT was formed in 2015 when US based Columbia Management Group was merged with UK asset manager Threadneedle Investments. Richard Colwell will be the latest of a number of high profile fund managers to leave the firm since the merger, including a number from the European equities desk.

Last year, CT bought BMO’s European, Middle East and African fund management business to expand its capabilities and funds under management. We typically treat corporate changes with caution, given the potential to cause disruption to existing teams. We're also mindful that there have been some significant departures from the company in recent times. We will continue to monitor the situation closely and update investors with our views.

ESG Integration

Environmental, Social and Governance analysis (ESG) doesn’t lead stock selection but it’s a significant input to analysis. CT believes well-managed companies that look to the future are better positioned to navigate the risks and challenges inherent in business. In recent years they’ve developed several proprietary tools, including a company rating system that combines an assessment of how well a company manages its “financial stewardship” with a view of how well it manages its ESG risks. Both aspects are combined into a single, forward-looking rating from ‘one’ to ‘five’. Our meetings with CT fund managers suggest the ESG tools are relatively well-used by the investment teams, and managers are generally aligned with the view that an understanding of ESG factors is essential if you want to get a full view of a company’s risk/reward profile.

The firm’s Responsible Investment team carries out analysis on mega trends, carbon, climate change, and many other areas, and research is available for all CT fund managers to access. They are also accessible to fund managers for advice on ESG-related topics and coordinate the firm’s voting and engagement activity. Engagement progress and voting activity is reported in a quarterly Responsible Investment report. The firm also writes frequent thought leadership and insight articles.

Cost

The ongoing charge for this fund is 0.82%, but HL clients benefit from a saving of 0.23%, resulting in a net ongoing charge of 0.59%. Part of this saving is provided through a 'loyalty bonus', which is tax-free in an ISA or SIPP. However, they may be subject to tax in a Fund and Share Account. The HL platform fee of up to 0.45% per annum also applies.

Performance

Since becoming manager of the fund at the beginning of September 2010, Colwell has delivered returns of 151.15%* vs 117.07% for the IA UK Equity Income peer group average. Our analysis suggests he's added value with his stock picking over the long term. Typically, compared to peers the fund has performed similarly to the index in rising markets and hasn't lost as much money in falling markets. Past performance isn't a guide to the future.

Over the last 12 months, the fund has delivered a return of -3.17%, slightly lagging behind the FTSE All Share index return of -2.78% but performing better than the IA UK Equity Income peer group average return of -5.97%. Our analysis suggests that Pharmaceutical company AstraZeneca, education company Pearson and tobacco company Imperial Brands have been among the fund’s stronger investments over the year.

At the time of writing, the fund yields 3.80%. Yields are variable and are not a reliable indicator of future income. Remember charges can be taken from capital which increases the yield but reduces the potential for capital growth.

Past performance is not a guide to the future. Source: Lipper IM to 31/10/2022.

Find out more about the CT UK Equity Income fund, including charges

CT UK Equity Income Key investor information