FUND COMMENTARY - SEPTEMBER 2021 THREADNEEDLE UK EQUITY ALPHA INCOME FUND

FUND COMMENTARY – SEPTEMBER 2021
                          THREADNEEDLE UK EQUITY ALPHA INCOME
                          FUND

                          Summary
                           UK equities declined modestly in September amid a global sell-off.
                           Gross of fees, the fund trailed its peer group and the FTSE All-Share over the
                            month. However, the fund remained ahead of the index over the year to date1.
                           The underweight in energy detracted in September, as did the holding in
                            Restaurant Group.
                           Positive contributors included AstraZeneca and Electrocomponents.
Richard Colwell
Lead Manager
                          Market Background
                          UK equities retraced some of their gains from earlier in the year amid a global
                          sell-off owing to heightened indications that key central banks could be preparing
                          to rein in their stimulus measures. Higher bond yields and rising energy costs
                          were further headwinds for equities, as were fears of financial contagion should
                          Chinese property firm Evergrande default on its debt.
                          The FTSE All-Share was down 1.0% over September, but held up much better
                          than global stocks, helped by a weaker pound and, towards the end of the month,
                          by a rotation to value. Sterling was impacted by concerns that the UK’s economic
                          recovery could be hurt by supply-chain issues and tax rises. Fuel shortages in
                          particular garnered much attention; these were partly attributed to a lack of
                          suitably qualified drivers to deliver fuel to petrol stations. There is also a shortage
Jeremy Smith
Deputy Manager
                          of labour in other, mainly low-paid industries. On the tax front, the government
                          unexpectedly announced that the levy on dividend income will rise by 1.25% from
                          April, as will national insurance rates for employers and employees.
                          In terms of economic data, the purchasing managers’ index for manufacturing
                          eased further in September revealing that activity expanded at the slowest pace
                          since February. Meanwhile, retail sales volumes declined in August too, though
                          remained above pre-pandemic levels. Once again, spending on goods may have
                          been reduced as leisure and service industries returned to more normal
                          operations, giving consumers alternative ways to spend their money. Other data
                          showed that UK consumer price inflation jumped to 3.2% in August, according to
                          the Office for National Statistics. The Bank of England projected that inflation
                          could exceed 4% during the winter. At the meeting in September, two members
                          of the Monetary Policy Committee voted to end stimulus right away and market
                          expectations for an interest-rate hike moved forward to early 2022.
                          At a sector level, materials and real estate fared worst in the FTSE All-Share. The
                          materials sector was impacted by lower metal prices amid concerns about
                          slowing demand from China. Real-estate stocks were hurt by growing
                          expectations of an interest rate hike in 2022 and fears that the end of the stamp-
                          duty holiday on 30 September would trigger a slowdown in the housing market.
                          On the other side, energy was the best performer, as oil prices surged. The only
                          other sector to post a positive return was healthcare, which was lifted by strong
                          performance from index heavyweight AstraZeneca. A general rotation towards
                          defensives and the weakness in the pound also helped.

FOR INVESTMENT PROFESSIONAL USE ONLY                   1                               Issued October 2021 | Valid to end January 2022

FUND COMMENTARY | SEPTEMBER 2021

Performance
Gross of fees, the fund declined 1.9%1 in September, underperforming the FTSE All-Share. The fund was
also behind its peer group, which lost 1.7%. However, the fund remained ahead of the index over the year to
date.
The fund’s underperformance relative to the peer group in September was due to unfavourable sector
positioning, particularly the underweight in energy.
Security selection was beneficial, led by the holding in AstraZeneca; the shares rallied after the pharma
major released encouraging trial results for a cancer treatment. Additionally, data showed that AstraZeneca’s
Covid-19 vaccine had performed well in US trials. The firm also reached a deal with VaxEquity to enhance its
development of RNA-based treatments; these can be used to address illnesses that cannot be reached
through traditional drug discovery processes. The company has a strong sales and earnings growth profile,
and we feel that the recent acquisition of Alexion Pharmaceuticals is likely to result in significant synergies.
Other notable contributors included Stagecoach and Electrocomponents. Shares of Stagecoach rallied as
the transport operator confirmed it was in talks to be acquired by National Express at a premium.
Electrocomponents reported encouraging trading earlier this year and was boosted by a broker upgrade
during September. Our investment thesis is underpinned by the firm’s highly competent management, strong
cash conversion and consistent market-share gains.
The zero weight in Anglo American proved beneficial in a difficult month for miners.
The holding in Restaurant Group detracted. The company upgraded its earnings forecast for this year but
expressed caution about the impact of higher food prices, supply-chain issues and hiring difficulties.
Nevertheless, we retain conviction in the stock. In our view, the company should be less disrupted by these
issues than many of its peers thanks to its cost-efficiencies. Meanwhile, Restaurant Group is less leveraged
than many of its rivals and we therefore believe it should be in a stronger position to benefit from the return
to normality.
The absence of Royal Dutch Shell and BP also hampered returns amid strength in energy stocks. Oil prices
rallied owing to a decline in US inventories and anticipation that surging gas prices may push other energy
commodities higher.

Activity
We topped up some holdings during September, notably Hiscox and Hays.
Following the pandemic-related interruption, Hiscox appears to be enjoying a recovery, with gross premiums
up over the first half of 2021. The business has a strong capital position as well as opportunities to expand
its retail presence and generate higher margins in big-ticket lines.
Shares of Hays have lagged those of UK peers by around 30% over the year to date. As a result of
management’s confidence in the recovery, the business has increased investment this year, which will lead
to higher medium-term earnings. However, this has prevented Hays from issuing a short-term earnings
upgrade, unlike its peers.

Outlook
Despite the rally this year, UK equities remain cheap; this is a reflection of global asset allocators’
underweight to the market due to the previous uncertainty around Brexit and Covid. But the outlook is now
more positive as vaccines are rolled out, and the UK market offers global exposure alongside attractive
governance factors. UK-listed global firms are trading at material price-to-earnings discounts relative to
overseas rivals. As such, mergers and acquisitions have taken off and we expect this trend to continue.

1
  Past performance does not predict future returns. Please refer to the KIID document found on our website for further
information on the fund performance.

FOR INVESTMENT PROFESSIONAL USE ONLY                         2                                Issued October 2021 | Valid to end January 2022

FUND COMMENTARY | SEPTEMBER 2021

Meanwhile, valuations within the market remain polarised. While some of the more distressed areas have
rallied significantly since November, we still feel there is a long way to go. The proliferation of quantitative-
and ETF-driven trading and factor-based investing is throwing up some interesting themes, and many
companies do not fit the narrow growth/value definition. We feel there are many favourable opportunities in
stocks which are neither Covid winners nor clear reopening beneficiaries and believe it is important to
maintain optionality within the portfolio.
Conditions have stabilised following the swift and sharp contraction in dividend payments last year, with
many companies resuming dividends and more likely to follow. Looking ahead, we expect more prudent
policies and better cover. For now, however, balance sheets and liquidity are paramount.
As patient, conviction investors, we will continue to avoid whipsaw momentum trades and concentrate on
company fundamentals to target strong, risk-adjusted returns.

Key Risks
The value of investments can fall as well as rise and investors might not get back the sum originally invested.
Where investments are in assets that are denominated in multiple currencies, or currencies other than your
own, changes in exchange rates may affect the value of the investments.
The fund has a concentrated portfolio (holds a limited number of investments and/or has a restricted
investment universe) and if one or more of these investments declines or is otherwise affected, it may have a
pronounced effect on the fund’s value.
The investment policy of the fund allows it to invest in derivatives for the purposes of reducing risk or
minimising the cost of transactions.
All the risks currently identified as being applicable to the fund are set out in the “Risk Factors” section of the
Prospectus. Please read the Key Investor Information Document and the Fund Prospectus if considering
investing.

FOR INVESTMENT PROFESSIONAL USE ONLY                      3                              Issued October 2021 | Valid to end January 2022

FUND COMMENTARY | SEPTEMBER 2021

Important information
For Professional and/or Qualified Investors only (not to be used with or passed on to retail clients)
Your capital is at risk.
Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and
may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested.
Threadneedle Specialist Investment Funds ICVC (“TSIF”) is an open-ended investment company structured as an umbrella company, incorporated in
England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a UK UCIT scheme.
TSIF is registered for public offer only in the UK. Shares in the Funds may not be offered to the public in any other country and this document must not be
issued, circulated or distributed other than in circumstances which do not constitute an offer to the public and are in accordance with applicable local
legislation.
Shares in the Funds may not be offered, sold or delivered directly or indirectly in the United States or to or for the account or benefit of any “U.S. Person”,
as defined in Regulation S under the 1933 Act.
This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or
to provide investment advice or services.
Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual
or interim reports and the applicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in
any fund and specifically this Fund. The above documents are available in English, French, German, Portuguese, Italian, Spanish and Dutch (no Dutch
Prospectus) and can be obtained free of charge on request from Columbia Threadneedle Investments’ Client Services department P.O. Box 10033,
Chelmsford, Essex, CM99 2AL.
Please read the Prospectus before investing.

The mention of any specific shares or bonds should not be taken as a recommendation to deal.
This document is a marketing communication. The research and analysis included in this document have not been prepared in accordance with the legal
requirements designed to promote its independence and have been produced by Columbia Threadneedle Investments for its own investment management
activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of
publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to
be reliable but its accuracy or completeness cannot be guaranteed. All source information used in the preparation of this document is available on request.
This document should be read in conjunction with the appropriate fund factsheet for the same fund. The mention of any specific shares or bonds should not
be taken as a recommendation to deal.
Issued by Threadneedle Investment Services Limited. Registered in England and Wales, Registered No. 3701768, Cannon Place, 78 Cannon Street,
London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
Benchmark Index is the Lipper UK Equity Constituents. Performance attribution source FactSet, calculated using a daily time-weighted methodology based
on gross returns as at global close on the last working day of the month.                                                     columbiathreadneedle.com

FOR INVESTMENT PROFESSIONAL USE ONLY                                              4                                           Issued October 2021 | Valid to end January 2022