TM Redwheel UK 

Equity Income Fund (BG342C6) 124p

Assets: £501 million

Managed by the duo of Ian Lance and Nick Purves, the TM Redwheel UK Equity Income Fund (BG342C6) is the spiritual successor to the pair’s former five-star-rated income fund which they ran at Schroders (SDR) more than 15 years ago.

With a similar brief, to generate income and capital growth in excess of the FTSE All Share Total Return Index, the Redwheel fund has demonstrated its pedigree over one, three and five years, beating the benchmark by a considerable margin.

Year-to-date the fund has found the going somewhat harder, as have many buy-and-hold strategies, which makes this an opportune moment to add to or open new positions in our view.

VALUE ANGLE

Lance and Purves run a tight ship, so the fund typically holds between 25 and 45 stocks with an 80% weighting in UK equities, a 20% weighting in overseas stocks and a bias towards value.

The top 10 holdings, which at the end of March accounted for just over 49% of assets, are all familiar household names with broadcaster ITV (ITV) the only non-FTSE 100 stock.

The duo don’t try to reinvent the wheel when it comes to value investing, nor do they stray from their areas of core competence by chasing illiquid or risky stocks.

Instead, they undertake deep-dive fundamental research to find value ‘hiding in plain sight’ as they put it, and when they find businesses they like selling for far less than their intrinsic value they don’t hold back.

A case in point is electricals retailer Currys (CURY), where Redwheel was the largest shareholder with a 14.6% stake when it was approached last year by US takeover specialists Elliott Advisors.

Redwheel as an institution backed the company’s rejection of the 62p per share offer, a decision which was fully vindicated by the stock’s subsequent rally, with the shares now trading at 108p or almost 75% above the opportunistic bid price.

The fund also owned major stakes in Royal Mail-operator IDS and insurer Direct Line, both of which were acquired last year at a premium of more than 40% to the prevailing share price.

The managers are far from passive, however, and they take a proactive approach by encouraging investee companies to buy their own shares to create value when they are trading at a substantial discount to book value.

This strategy worked particularly well at Barclays (BARC) and NatWest (NWG), which reduced their share count by 9% and 5% respectively last year and saw their share prices rise by 83% and 72% as a result.

Yet rather than celebrate the fund’s success last year and risk ‘anchoring’ expectations based on current share prices, Lance argues valuations are a better guide to future returns.

Despite the strong performance of a number of holdings, the average PE (price to earnings) ratio across the portfolio at the start of 2025 was just nine times, which for many companies is still well below their historic average valuation.

STAYING THE COURSE

In the context of the increase in market volatility since the start of the year, investors have a natural tendency to protect themselves and ‘run for cover’, says Lance, but historically this has resulted in lower returns than sticking to your investment strategy.

‘In our view, it is especially true that at times like these that one needs to put emotion to one side, focus on the long term and stay true to one’s investment philosophy.

‘Our approach is and has always been, to think long term and buy what we believe to be fundamentally sound businesses at a significant discount to their true economic worth, on the basis that, eventually, this economic worth will be reflected in a higher share price.’

In line with the firm’s value approach, we believe the annual management charge of 0.65% is competitive, especially considering how well the fund has looked after investors relative to other income funds, the IA index and the FTSE All Share Total Return benchmark.

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