Carl Stick, manager of the £500 million Rathbone Income fund, has been buying more stable, defensive companies due to concerns about the prospects for a string of international markets.
Pharmaceutical giant GlaxoSmithKline, Imperial Tobacco and British American Tobacco have been among those on his buy list. ‘We have bought defensive FTSE 100 names as they are paying a 5-5.5% dividend yield,’ he said.
‘These are very well run businesses that are adept at allocating capital sensibly,’ he said. ‘They have strong balance sheets, healthy levels of dividend yield and reflect the more defensive tone we’re trying to adopt in the portfolio.’
Rathbone Income fund, which is celebrating its 40th anniversary, aims for an above average and sustainable income but without neglecting either capital security or growth. It does this by buying shares with an above average yield.
Since 2006, the fund has returned 16%, double the FTSE 350 higher yield index's 8%, but slightly behind the IMA UK Equity Income sector average of 17%.
Against the tide
Stick has a contrarian approach which means the fund is not influenced by benchmark considerations or short-term trends. He also prefers to run a concentrated portfolio and currently holds 40 stocks, although it can go as high as 50.
‘If we’re not following the crowd or the benchmark there will be times when we don’t do as well as the market and other times when we perform particularly well,’ he said. ‘Therefore, I don’t want people to be surprised by what the fund does.’
This philosophy of only investing in companies in which he has a high conviction means fresh investment ideas are compared against those already owned. If they are not better then there is no requirement to add them to the portfolio.
Risk management is another key part of the process. ‘Our definition of risk is losing a large proportion of capital due to fundamental issues in a business or its shares being valued too highly by the market,’ he said. This has been a particularly important area of focus since 2008 when the fund’s performance suffered due to a combination of the valuations of certain stocks becoming too stretched and a general failure to recognise the business and financial risks that were entering the system.
‘We tend to look at everything on a two to three-year view and there are currently five principle risks that concern us.’
These concerns are: the state of finances in the US – federal, state and personal; the UK economy, housing market and levels of unemployment; sovereign indebtedness in Europe; the prospect of monetary policy being tightened in China; and the recent uprisings in Tunisia and Egypt.
Separately, Stick has been taking profits from names such as Anglo Pacific and Cineworld, which have performed well, and recycled this money into areas that he believes offer more value – even if they are currently disliked.
‘It can be a dangerous thing to cut the winners because we are running the risk that the shares will go higher after we sell them,’ he said. ‘That’s what happened with Fenner, a producer of heavyweight belting. It is a tremendous business but the valuation was based on the ongoing strength of the wider global economy and we’re not sure that will necessarily happen.
‘Even though its shares went substantially higher after we sold, when we made the decision to sell we were doing it for the right reasons as far as our investment process was concerned.’
He also cites examples of where a decision to exit has been vindicated.
‘We’d been involved with Wincanton [a logistics company] for a long time which made it difficult to sell but did so because of issues such as the amount of leverage on the balance sheet and weakness in the general economy,’ he said. ‘It subsequently had a profit warning and the shares fell 40%.’
Spread of holdings
Just over half his holdings come from the FTSE 100, with 26.58% from the FTSE 250 and 13.75% in FTSE SmallCap.
Looking ahead, Stick insists that he is far more focused on longer-term performance than on trying to enjoy shorter-term gains. The goal, he maintains, is to have an income-oriented portfolio that can generate capital growth over 10-20 years.
‘People shouldn’t be worried about whether our position is the best place to be over the next two or three weeks, they should be worried about how we’re positioned versus what we’re trying to achieve over the next five to 10 years,’ he said.