7th May 2015
Carl Stick, manager of the Elite Rated Rathbone Income fund.
'Back to Basics', was a political campaign used by the then Prime Minister, John Major, back in 1993. As a coincidence, although for very different reasons, it was also a phrase used by Carl Stick, manager of Elite Rated Rathbone Income fund, when we met him today, 7th May 2015. Election day.
In a similar vein, Carl was using the phrase to describe how he and his team are dealing with the uncertainty in markets, by going back to traditional values.
“To say we are in a difficult market environment is an understatement,” he said. “It's anyone's guess what will happen in the next six months. So we have set ourselves certain rules to stick to and have really gone back to basics. Mitigating the downside, or 'winning without losing', has been our mantra since 2009 and it's even more front of mind today.”
“Clients in my fund want dividends that will grow each year, so it's my job to deliver this, whilst at the same time balancing risk across the portfolio. This is getting harder. More and more people have been pushed higher up the risk scale in the search for a decent income and markets have risen a lot. Good quality companies, which make up the core stocks in my portfolio, and are the ones I would love to hold forever, are much more expensive than they were in the past. So by owning them, I am taking on price risk. However, it's not just a case of selling something expensive and buying something cheaper, as the market could well stay expensive for a few years.”
“So, as a team we are sitting down regularly to review the portfolio. We are asking ourselves: if I were starting afresh today, would I hold this stock? We are making sure that the businesses we are investing in are best placed to maintain and grow their dividends, as it could be the defining factor in the next couple of years.”
“We are constantly looking at our process and evolving it to make it better. A new discipline we have introduced in the past few months is a 'suspect screen'. We now sit down formally and review data, which highlights company downgrades and expectations. In itself, this screen does not highlight a stock to be sold, but if a business appears on it for three months on the trot, one of the team has to go and do some more detailed analysis and report back.”
“We believe this discipline is very important, particularly so at the moment. We need to be pragmatic. Selling a stock is always a more woolly decision than when you buy one – I don't mind admitting that. It's easy to fall in love with a company. In the current market, however, we don't want inertia and complacency to sneak into the portfolio.”
So how is the fund currently positioned?
“The FTSE All-Share yield, which is around 3.6%, is currently being skewed by the mega caps, which have yields of 5%+. This means that if a manager wants to maintain a yield that is higher than the market, they need to own some of these stocks. The trouble is, in my view, all the mega caps are businesses with blemishes, and it's rather like picking your poison. So it's crucial to analyse the business risk very carefully.”
“One of my biggest holdings is Rio Tinto, but this is more a contrarian/value investment and isn't a holding I believe I'll have for long. Usually I look for stocks that I will hold for a number of years, but occasionally a shorter-term opportunity like this presents itself. More generally, I'm underweight oils, utilities, telecoms and banks, and overweight mining companies, pharmaceuticals and 'other' financials.”
“When it comes to the banks, Barclays has started to pay a dividend again and Lloyd's is expected to start again this year. However, the wider banking sector is fraught with difficulty, especially for managers with an investment style like mine, so I usually steer clear. They may, however, prove to be of greater interest when they return to the dividend roster, and when interest rates start to rise. This is very much a nascent idea though, and not a theme I currently have in the portfolio.”
“Within utilities, I own SSE, which has a good management team, running a good business, in what I look on as a poor quality industry. There is simply no incentive for utilities companies to try to win customers and do the right thing, when regulators and politicians can take it all away overnight. And why invest in power stations or make other big capital outlays when there is a regulatory review under way? They have no idea what the return on investment will be, so are not investing. It's the same for telecoms.”
“In contrast, a company like Restaurant group know they can spend £800,000 opening a new Frankie and Bennie's and get the money back in two years' time. It has been fashionable for companies to return money to shareholders in the form of dividends or share buy backs for a number of years now. If a business can't use capital sensibly, like the utilities, returning money to shareholders is fine. But not investing for the future is a bad thing. It's the reason we have maintained the exposure to mid-caps within the fund. Whilst on the expensive side, companies like Restaurant Group and Howden Joinery, have continued to invest in their businesses, as well as pay a dividend. They both have good balance sheets and a very clear roll-out strategy.”
So, while political uncertainty could weigh on markets for some weeks to come, we came away comforted that Carl and the team have their eye on the ball.
More information on this fund can be found on the FundCalibre fact sheet, which can be found here.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Carl's views are his own and do not constitute financial advice.