Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Richard Colwell. He is Manager of the Threadneedle UK Equity Income Fund. Hello.
Richard Colwell: Hello there.
Black: So, we're talking themes for UK investors for the year ahead. We've got three themes to look at. And the first one is value as an investment style, which you're a big fan of.
Colwell: Yes. Well, I think over recent years the narrative has been very much are you a roundhead, are you a cavalier, are you a value investor, or are you a growth manager. And I think it should always be more nuanced. I don't think any self-proclaiming growth manager would own up to overpaying for that growth. And likewise, if you're – you know, you should all be looking for value and buying stocks cheaply. And so, I don't think it's a mechanical process, albeit you want to start as a contrarian from the point of view of stocks that are disliked, distrusted by the markets that are trading on low cash flows and profits. And in the fog of uncertainty you're trying to figure out if they've got the wherewithal, the levers to pull to go back to close to the glory days, don't need to get back to the glory days given distressed valuations. So, I think markets have got too extreme and written off value investing, which I think is very foolhardy.
Black: And our second theme and this will be a big one for anyone in an equity income fund, dividends, which was challenging in 2020.
Colwell: What we've seen this year is a more extreme version of what we always get. And so, after the financial crisis a decade ago, we saw dividends fall a third over a few years. This time round they're probably going to fall, say, 40-odd-percent, just concentrated in the one year and very much all delivered in a couple of months on the onset of COVID, but that does in no way negates from that long-term truism that dividends are here to stay and is a key component of the UK market. And from this base and the valuation the U.K. is on, we've already despite that cuts have got an attractive starting yield in a world of negative rates. And we're going to see dividends grow 10%, 15% next year and build from there. And that's a good starting point.
Black: Okay. And our final theme, and – I mean, people would wish it wasn't, but we're not out of the woods yet, so I think Covid is still going to play a role in the stock market in the year ahead, isn't it?
Colwell: Yes, it's going to be stop-start uncertainty and unfortunately, there's lots of businesses that won't make it to the other side of the shore. But therefore, for the survivors, the winners, it's a great opportunity. So, notwithstanding any pent-up demands there is an opportunity next cycle to enjoy higher profit margins. In terms of there might be opportunities for more pricing power because capacity has come out of your industry and obviously leisure and retailer are most disrupted parts from COVID and we're already seeing big amounts of capacity come out of those industries. So, if you're a winner and a survivor, then you can prosper, I think, and the prognosis is not reliant on a buoyant economy. It's just that you've got a stronger market position. So, I think that's something to look forward to.
Black: Richard, thank you so much for your time. For Morningstar, I'm Holly Black.
