CT UK Equity Income: December 2024 fund update

• Lead manager Jeremy Smith took over from longstanding previous manager Richard Colwell in 2022

• The fund aims to provide an income as well as deliver some long-term investment growth

• Smith has made a good start to life as lead manager of the fund, outperforming the FTSE All Share index. Past performance isn’t a guide to the future.

• 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. 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 Head of UK Equities. Smith joined the company in 2015 and has over 30 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 deputy manager Dominic Younger. Younger has 11 years’ experience in the industry and has been in the team for the last eight years.

When previous lead manager Richard Colwell retired in 2022, we removed the fund from the Wealth Shortlist. Smith worked with previous manager Richard Colwell and runs 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, the manager has topped up the fund’s investment in pest control business, Rentokil. Smith thinks that concerns about slowing sales in North America and some operational issues linked to an acquisition are overblown and sees a high quality business there in a strong position.

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 in business. In recent years the firm has 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 Threadneedle 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. However, this fund is not managed to a responsible mandate.

The firm’s Active Ownership team coordinates voting and engagement activity. Engagement generally focuses on the current and emerging ESG issues that the team thinks will have the greatest impact on long term investment returns, the economy, the environment, and society.

The team also undertakes event-driven engagement in response to unscheduled or controversial events. All engagement is tracked in a company-wide database and accessible to all research analysts and portfolio managers. Engagement progress and voting activity is reported to investors in a quarterly and an annual Stewardship report. The firm also produces frequent thought leadership and insight articles.

Cost

The ongoing charge for this fund is 0.79%, but HL clients benefit from a saving of 0.01%, resulting in a net ongoing charge of 0.78%. 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, except in the Junior ISA, where no platform charge applies.

Performance

Since Jeremy Smith became lead manager of the fund in November 2022 he has done a good job for investors, although this is still a relatively short time period. The fund has delivered returns of 25.81% over this period, ahead of the FTSE All Share’s 20.36% return, and the 19.08% return for the IA UK Equity Income sector average. Past performance is not a guide to the future.

Over the last year, the fund has delivered a return of 18.50%, performing better than the FTSE All Share’s 15.75% return, and the 15.58% return from the IA UK Equity Income peer group average.

Our analysis suggests that the fund’s investments in the industrials sector, as well as its underweight allocation to energy companies have been contributors to performance compared to the index. The fund’s underweight allocation to the financials sector, on the other hand, has proved a headwind to performance.

At the time of writing, the fund yields 3.59%. 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.