Launched in May 2011, the £84.1m Threadneedle US Equity Income fund aims to achieve a high level of income combined with the potential for long-term capital growth.
Managed since launch by Diane Sobin, with Nadia Grant joining as deputy in March, it has delivered consistently strong performance, outstripping its sector and index for the three years to August 6.
Ms Sobin notes the investment process is defined by two key features, the first of which is to combine both macro and micro factors to select securities using a bottom-up approach.
“The US equities team works closely with colleagues specialising in other regions and asset classes. This helps to generate a perspective advantage that is essential in today’s highly globalised world, where the breadth of investment coverage counts for as much as the depth of a team’s experience. A recent example was seen last year when Threadneedle’s European team started seeing signs of recovery in the eurozone. We were able to move quickly in increasing exposure to US companies with significant overseas revenues,” explains Ms Sobin.
She points out the analysis of macroeconomic factors is particularly important for US markets, given the large number of multinational firms in the investable universe. She notes: “US investors sometimes have an insular view of their own market and this presents an opportunity for managers with a more global perspective.”
The second part of the investment process focuses on applying upside and downside price targets to every stock researched, enabling the team to consider risks alongside reward and to develop a “fuller view of each stock opportunity”. She adds: “The fund applies an income filter after potential stock holdings have been identified as attractive on the basis of researching fundamentals. The fund seeks companies with strong dividend growth characteristics, solid balance sheets and the ability to generate strong cash flows.”
Though the process has remained consistent since launch, in the past year the team has strengthened its collaboration with Columbia Management, a sister company also owned by Ameriprise Financial. Ms Sobin notes the collaboration “has taken place predominantly in the areas of idea generation and research”. The fund sits towards the higher end of the risk spectrum with a risk/reward indicator level of six out of seven, according to its key investor information document, while ongoing charges are 0.71 per cent.
Since launch the fund has outperformed both the IMA North America sector and the S&P 500 index, according to FE Analytics, with a return of 51.13 per cent to August 6 2014. Its three-year return of 64.42 per cent is higher than the index return of 63.15 per cent and the sector average of 55.06 per cent. For the year to date to August 6, it has lagged the S&P 500 index figure of 3.07 per cent with a return of 1.75 per cent, although it is still outperforming the sector average of 1.53 per cent. But Ms Sobin notes: “The fund’s positioning has worked well so far in 2014, with activity taking place at the margin where the team’s research process suggested there was opportunity. A notable example is Microsoft, which the fund purchased at the beginning of June, and where the change of management has resulted in a pragmatic approach to cutting the firm’s cost base while improving the firm’s ability to compete in growing technologies such as cloud [computing]. The fund switched its holding out of Accenture, as both the risk/reward profile and the dividend yield of Microsoft were viewed more favourably.”
The fund also recorded strong performance from its overweight position in the energy sector, including The Williams Companies and Spectra Energy, which benefited from higher oil prices as geopolitical tensions increased in 2014. Looking ahead, the manager says: “Earnings season has gone well, with the majority of companies beating estimates for both sales and profits. Volatility has been low recently and talk of a correction by market participants has increased. This is a possibility as the Federal Reserve ends its bond-buying programme. However, we regard any significant weakness as a buying opportunity. The S&P 500’s P/E is roughly in line with its historic 50-year average, though this is higher when viewed on a cyclically adjusted basis.”
Expert view
Juliet Schooling Latter, Research director, Chelsea Financial Services
Verdict
This fund has done consistently well, keeping pace with a number of more growth-orientated funds in the sector. It’s reasonably diverse, with around 69 stocks and just 25 per cent of the fund in the top 10 holdings. The managers take reasonably high conviction bets on their stock choices. The US team has had a bit of a shake-up this year with the departure of the head of US equities, Cormac Weldon. It currently has an overweight to financials and energy stocks, with IT the biggest underweight.
