CT UK Equity Income: November 2023 fund update

• Lead manager Jeremy Smith took over from longstanding previous manager Richard Colwell in 2022 and is supported by Jonathan Barber
• The fund aims to provide an income as well as deliver some long-term investment growth
• Smith has made a good start in his first year as lead manager of the fund
• This fund does not feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

CT UK Equity Income aims to provide an 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, and we expect this to remain the case. The fund could work well in an income focused portfolio, adding a UK allocation to a global portfolio, or alongside fixed income investments.

Manager

The lead manager of the CT UK Equity Income fund is Jeremy Smith, who also serves as Co-Head of UK Equities. Smith joined the company in 2015 and has over 20 years of investment experience across various asset managers including Neptune and Schroders.  

While Smith has experience managing funds investing in UK larger companies, these have mainly been focused on growth rather than income. Smith also manages other UK focused strategies and is supported by deputy fund manager Jonathan Barber who has 32 years investment experience.

Last year, following the announcement that previous manager Richard Colwell would retire, we removed the fund from the Wealth Shortlist. Smith worked with previous manager Richard Colwell and continues to run the fund using a similar investment style and approach.

Process

The manager looks to identify companies he considers good quality with strong balance sheets, 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.

Meeting company management is an important part of the process. Smith seeks to fully understand each business he invests in, and meeting management is an important part of this process. Situations where a company's profitability has fallen below its historical average, but the core franchise remains attractive are of particular interest to Smith.

In recent months, Smith has invested in transport operator FirstGroup, feeling that there are opportunities for the business to grow revenues and reduce cost. He’s also added to investments in energy business SSE and commercial property development company Land Securities. Melrose Industries was sold from the fund after Smith felt that recent internal restructuring benefits and the recovery in aerospace demand were fully captured by the share price.

Culture

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

In 2021, 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

Columbia Threadneedle believes well-managed companies that look to the future are better positioned to navigate the risks and challenges inherent to 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 'environmental, social, and governance' (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 Research 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, it 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

Over the relatively short period since Smith became lead manager of the fund in November 2022, he’s got off to a good start and performed well.  

The fund has delivered returns of 2.08%* over this period, ahead of the 0.97% return from the FTSE All Share index, and the IA UK Equity Income peer group average return of -1.18%. Past performance is not a guide to the future.

Our analysis suggests that the fund’s investment in energy business Centrica, and retailer Marks & Spencer Group have been among the largest contributors to performance over the period. On the other hand, the fund’s positions in pest control company Rentokil and industrial and electrical product distributor RS Group has hurt performance.

At the time of writing, the fund yields 3.78%. 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 31/10/2023.