Fund manager profile: RLAM’s Cholwill on riding the underperforming commodities market

Royal London Asset Management’s Martin Cholwill is among the top fund managers in the UK equity income sector for total return as well as income over the past 10 years.

He ranks fifth out of 34 in terms of total return, with 108.2 per cent over a decade, and 10th for income generation, producing £4,270 over £10,000 invested, according to Hargreaves Lansdown.

Cholwill, who has been with Royal London Asset Management for 17 years, says he is very pleased with the numbers behind the £1.73bn fund.

He says: “It’s nice to have a long-term track record. I think any manager in a way can be lucky over a one year period if you have the right tilts but it’s difficult to fluke it if you talk about 10 years.”

But while he has almost constantly been ahead of his peer group average through the years, in 2015 he lagged behind because of his high exposure to oil and mining stocks.

Cholwill says: “2015 was a frustrating year because you had a situation where oil and mining stocks did incredibly badly and I had some exposure to that while my competitors had none at all. So while I was 5 per cent ahead of the All Share index, I was actually behind the average fund in the sector.”

However, the fund manager says he made up the losses, pointing out 2016 was a “mirrored image” of 2015 since oil and mining stocks performed better amid rising commodity prices.
Cholwill says: “In 2016, I was 28th percentile in terms of peer ranking. The fund has always had a significant weighting to mid-caps, around 40 to 45 per cent. During 2016 I was lighter in oil and mining stocks compared to the index but the peer group did worse than me against the index.

“Oil and mining companies though are very low quality business models. You are just a price taker as a company because you can’t control the price of oil. The companies you want to invest in are low cost producers. It means you are profitable at a much lower commodity price than a lot of your competitors.”

As such, the fund only holds Rio Tinto, which Cholwill says is “one of the lowest-cost producers in a number of the commodities that it mines”.

The UK Equity Income fund is a high conviction portfolio with a bias on quality companies, but it has not always looked the way it does now. Before Cholwill joined from Axa Investment Managers in 2005, bringing his investment process with him, the fund had gone from hand to hand and was bottom quartile in the sector.

Cholwill says: “When I arrived at Royal London it is fair to say the Equity Income fund had many managers. I reviewed the portfolio, and it took me six months to completely restructure it. There were a number of stocks that didn’t pay any dividend but also a number of high yielding bonds and convertibles, so I had a clear investment process in mind to change that.”

When taking the helm of the fund, Cholwill sold all the shares that “didn’t yield anything” and some of the bonds that were illiquid, including two of the convertibles which were sold back to the companies, taking significant profits.

The manager has since kept the focus on companies which can deliver sustainable dividends and that can grow their dividends in the long term.

He says: “The fund is ahead of the average of the equity income funds over the last 11 years and that is a testament to the process. I am a believer that if you can just be a bit ahead of the average every year and you don’t really have a bad year over the long term it really pays off.”

Financials make up 25 per cent of Cholwill’s fund, with HSBC making up around 4.2 per cent of the top holdings, followed by Aviva at 3 per cent. “HSBC was one of the only banks that didn’t cut their dividends,” says Cholwill. “I was sceptical when people predicted a major recession after Brexit because employment levels remained high and I didn’t think companies would have acted immediately by sacking lots of people, because politically that would have been a very insensitive thing to do.

“The UK economy is very dependent on consumers and the only change in that is if people were made unemployed.”

Playing the fallout of many domestic names after Brexit and their weaker share prices, Cholwill added exposure to home furnishings retailer Dunelm, which is currently yielding 4 per cent, as well as brewer Greene King, yielding 5 per cent. He also now holds retirement housebuilder McCarthy & Stone.

While the manager wants to continue investing in consumer names, he says it is going to be “a challenging backdrop” for UK consumer spending in 2017, given a lot of cost fees like apprenticeship levies and business rates as well as inflation.

After the Brexit vote, Cholwill only made tactical changes taking some profits from Water Stocks, which become “very profitable in that time”. He also took profits from Shell at the end of last year at above 212p.

“I tend to explore the very international side of the UK market. There are lots of opportunities in the mid cap space, although I consider myself size-agnostic philosophically,” Cholwill says.

The top 10 holdings only make up 35 per cent of the fund, which can vary from holding 40 to 60 names in total, suggesting a diversified source of income among the firms Cholwill holds.

He says: “UK dividend payers account for around 60 per cent of UK dividend income, and actually my income is much more diversified that that. Although I have BP and Shell, there are a lot of mega caps I am not invested in, and because I’ve got a lot of 2 per cent positions in various mid cap names, the income is far more diversified in my fund than the broader stockmarket.”

With the high number of firms cutting their dividends and the index changing its shape over the past 10 years, Cholwill says: “There’s nothing inherently safer or better than buying large companies.”

He says: “Things like Aviva and British American Tobacco are now 3 per cent in the fund while at the beginning of the year they were both 3.5 per cent, so I took profits in both. They had strong performance so I’ve used them as capital to fund other calls, such as increasing consumer names.

“BAT looked fully priced to me, trading at 17 times multiples. There are a lot of quoted companies which trade on significant lower multiples than that.”
The Royal London UK Equity Income fund returned 28.4 per cent over the past three years to date, versus the IA UK Equity Income sector, which returned 24.5 per cent, according to FE.


1983 – 1996
Fund manager on various UK equity mandates at Axa Investment Managers

1996 – 2005
Took over Axa IM’s UK Equity Income fund 2005 – present Fund manager at RLAM

The numbers

Assets in the RLAM UK Equity Income fund

Percentage of mid caps in the fund

40 to 60
Stocks held in the fund

Out of 34 UK Equity Income fund managers in terms of total return over a decade