Best in class: Threadneedle UK Equity Income
The threat of inflation and the undervalued nature of UK equities are two of the principal discussions we have as an investment team at the moment.
The former is the big question in markets. Valuations globally are pricing in zero inflation, while central banks have indicated they are keen to keep inflation at low levels.
However, those who are more cautious believe that although not rampant, inflation is already running through the likes of food, energy and service prices – and could be exacerbated by a marked increase in household spending post-lockdown. In short, an inflationary scenario might not be as far away as people think.
The second concern is the undervalued nature of UK equities - courtesy of the Brexit overhang and the market’s larger exposure to value sectors than other regions. The result has been a significant lag in performance compared to the likes of the US, which is being driven by a number of tech behemoths.
But what if both issues were to change? We always like to kill two birds with one stone and this week’s fund not only focuses on undervalued UK businesses but also offers a reasonable yield to counteract inflation.
The Threadneedle UK Equity Income fund has been managed by Richard Colwell since 2010. Richard runs a series of funds at the asset manager as well as being head of UK equities.
It is a contrarian fund that identifies undervalued stocks, looking at the general macroeconomic environment but also using stock selection. Richard avoids speculative companies, even when they are fashionable and have short-term momentum. Instead, he looks for unloved firms with the ability to sustainably grow their dividends.
Colwell believes in being patient and not over-trading. He has a ‘think active, act lazy’ philosophy, aiming to have conviction with all his investments, and he is not afraid to ignore whole parts of the market.
Columbia Threadneedle believes that idea generation and company research work best with more people. Significant in-house resources enable the UK equity income team to conduct its own proprietary research – meeting more than 800 companies a year.
The company also believes portfolio construction and risk control work best with fewer people, so its funds are run by portfolio managers with specific skills in each individual product type.
The team pays particular attention to the implications of change at the stock, industry, sector, regional and macroeconomic level, and has found that analysing these implications consistently highlights mispriced opportunities.
Understanding what a stock is worth and whether this is reflected in its share price is a key factor, as is quantifying the downside risk in order to provide a balanced view and be cognisant of the adverse impact, should an investment case not materialise.