4 December 2025 (pre-recorded 3 December 2025)
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[INTRODUCTION]
Darius McDermott (DM): I’m Darius McDermott from FundCalibre. This is the Investing on the go podcast. I’m delighted to be joined by both Carl Stick and Alan Dobbie, co-managers of the Rathbone Income fund, to do a Budget reaction special. Gentleman, good morning and thank you for coming and talk to us.
Alan Dobbie (AD): Morning Darius, great to be here.
Carl Stick (CS): Good morning Darius.
[INTERVIEW]
DM: So let’s just dive straight in. What’s your sort of immediate reaction to the Budget? Anything that sort of stands out that you liked or that worried you from whichever perspective, whether it’s fiscal or just UK PLC?
AD: Yeah. Yeah, I guess there’s quite a bit in there. I mean, I think our first reaction when the headlines dropped last Wednesday was one of relief. We’ve had weeks, months of speculation and warning and kite flying about how bad things were gonna be. The market consensus was that there was a £20 to £30 billion fiscal hole that was gonna have to be filled here. So when we saw that headline come out albeit a little earlier than we expected that the Chancellor actually had £22 billion of headroom after our budget measures. There was definitely a sense of relief within our team and within markets. We felt that was a big enough number to keep the bond market happy. And that’s what we saw play out markets. We saw stocks and bonds both rallying a bit in the immediate hours after the Budget.
So, I mean, obviously the Chancellor had a few different objectives in terms of keeping her back, benchers on site, keeping the electorate on site. But, you know, when it comes to the markets in terms of reassuring the markets, I think it was a relative success. Obviously in the days since the Budget, we’ve now learned that maybe the Chancellor didn’t have as big a fiscal hole to try and escape from as many of us believed. It wasn’t such a big Houdini act as she was carrying out. She had £4 billion of headroom according to the OBR before she went on air on November the fourth to warn that, or to kind of secretly warners that perhaps income tax rates may have to rise. So I think, you know, given what we’ve learned since, it’s quite a tricky one for markets to digest positively, we can think whether the UK’s fiscal position was much stronger than any of us realised.
We weren’t in that fiscal doom loop that many people were worried about less charitably, we could say, well, you know, maybe if we had a clearer position, a clearer view of the true fiscal position, then maybe we could have avoided a few weeks and months of economic pain, the paralysis and the housing market businesses putting off investment decisions m and a decisions getting delayed.
We own Big Yellow in our fund, Blackstone potentially interested in bidding for that company. And they specifically cited kind of, you know, we need to wait and see what the Budget comes up with before we make a decision. So, you know, all that uncertainty was delaying decision making. So yeah, positives and negatives I think we could take from the budget.
CS: Yeah, I think we do have a degree of frustration around this as well. You know, we’re hoping this was gonna be a sort of cathartic you know, ripping the plaster off moment. But the whole sag with the Budget, you know, from the 4th of November through to this week, it’s just drugged on and it’s just frustrating because actually the UK economy, although it’s not strong, it’s not disastrous either.
And I think the government had an opportunity to satisfy a lot of questions and it was just a bit amateur, which is just annoying and frustrating. But actually the outcome’s not too bad for us.
DM: Well, I know we’re not here to listen to my opinion, but I’m gonna offer it anyway. It’s the second Budget where an unnecessary uncertain cloud was painted, and it’s the second Budget of sort of death by a thousand cuts of what they might or might not do. And then the sort of the final delivery, as you say, may have been not as bad as predicted.
Do you think, again, whether it’s from a fiscal point of view or when you’re talking to companies that it looks a little bit like a spent now tax later Budget, do you think that has any impact on companies or the economy?
CS: So much of what we do, we try to look at businesses over the longer term, and we know really well once this all sort of washes through, give it a couple of weeks, we’ve forgotten about this. So yeah, it is gonna have an impact. And we are very aware there are timing issues here especially with regards to the fact that some of the tax rises aren’t gonna all come in sort of towards the end of the government actually, which is yeah. Which is intriguing in terms of timing. But that’s their choice.
I think we certainly think about how this impacts the landscape of our investors. And I’m not sure how much it does. I mean, I think the biggest issue we are facing is this argument around how good a place is the UK in which to do business and how good a market is the UK in terms of stock market in which to invest.
And we’ve seen a flow of money leaving the UK investing elsewhere over many, many years, and there’s nothing in this budget that’s gonna sort of change people’s mind if they’ve made that decision. The irony is we’ve also laterally seen a lot of money from overseas coming into the UK market as a massive diversification. So I’m not sure that the budget actually changes that.
I think if you are an overseas investor and you’re looking for value the UK market continues to look very attractive. I don’t think the Budget changes that. And from an equity point of view, you know, valuation, there’s an irony that it’s a relatively low beta market. It’s viewed as a a safe port in the storm. And I say, again, I don’t think the budget necessarily changes that. It may make people question that a little bit, but I don’t think it changes that we’ve got global companies. It’s a good source of income.
I think despite the noise, I think the reaction of the bond markets and the calmness around the budget, you know, exhibited by bond markets, I think that actually it still supports our market and it still supports the valuation argument as well. So I think you, yeah, a lot of noise. And yes, I take your comments with regard to timing, but I think we sort of sooner or later we forget about this and then we move on and how much has really changed.
DM: Yeah. So I wonder if UK equities are still really good value and I’m sure you’ll have an opinion on that. And you talked about some overseas money coming back into the market. I’m sure part of that is because obviously the very strong performance of particularly UK large-cap equities and also sort of dividend slightly the value or devalue oriented strategies. Have they had their run? Have people missed out or are we still cheap, especially I’m guessing relative to anything that looks like US.
AD: Yeah, well, as UK managers, it’s love to lovely to be asked that question. You know, to be in the circumstance where the FTSE all share has had such a good run, it’s up over 20% this year. But as you, as you alluded to, the valuation still remains very attractive. Trades on under 13 times forward earnings that compares to about 23 times for the S&P 500. Even if you adjust for the different sector mix between the two markets, you know, still the UK still looks very cheap. As we have been constantly reminded over recent years. The evaluation is only one part of the story. We need to look at other things as well.
And I think something that is sometimes a bit overlooked is the diversification benefit that the UK market can offer. Because of its high weightings and sectors like consumer staples and healthcare, it has this very defensive value oriented tilt, which makes a pretty useful hedge against the more gross the US market or the more cyclical European market.
We’ve seen the benefits of this play out just over recent years. If you think back to 2022 when we had this you know, the start of this inflationary period, interest rates starting to rise, we had every asset class, every geography was getting hit by this. I seem to remember actually, I think the NASDAQ was down about 25% sterling terms that year. But against that backdrop, the UK managed to, eek out a very, very small positive return. Again, this year we had the tariff tantrum earlier in the spring. The UK held up relatively well, not because we were getting a kind of more favourable treatment from Donald Trump, but because the UK is one of the lowest beta developed markets, you know, when investors are worried about global downturn, the UK tends to provide relative stability.
And I think, just comments on overseas markets, Carl alluded to earlier as well. I think the timing of the budget was unfortunate because we were starting to get overseas investors coming back into the UK earlier this year. I think they were put off a bit over the summer. We are hopeful that, you know, okay, there’s, we can point out the pluses and minuses from the budget, but hopefully it should prove to be the clearing event. We thought because there are still great attractions to the market is still a very international market, 75% of revenues coming from overseas. So it’s a a great way for for international investors to access global growth in a relatively cheap way.
And even the domestic part of the market, we think FTSE 250 is pretty attractive at the moment. Yes, there’s challenges in the economy, but you know, mid-caps are trading at discount to large-caps. That’s a relatively rare occurrence. We think parts of the budget were pretty disinflationary, so there shouldn’t be anything to stop the Bank of England keep cutting from here. So that could be a powerful tailwind for that part of the market as well.
DM: So let’s dig a little deeper because we sort of touched the sort of the bigger picture stuff. Whereabouts in the UK market are you still finding opportunities as we sit here post budget
AD: Back in 2021, we had 13% of our fund invested in FTSE 250. Today, it’s almost a quarter. We’ve been adding to that recently. We’ve got a big watch list of mid-cap stocks. As I said, they should benefit if inflation and interest rates keep trending lower. I would highlight that, you know, we’re not macro investors, we’re very much stock pickers, but we do think it’s important to be aware of the economic backdrop.
We do always want to be trying to invest with the wind at our back rather than kind of into headwinds. From a sector point of view, if we think about which area should gain the most from falling inflation and bond yields to real groups that we’re interested in here.
First the direct beneficiaries of lower interest rates, you know, house builders, retailers, et cetera. And the other ones are the bond proxies. You know, those stocks that everybody’s very keen on in the previous decade that kinda lower for longer decade. Long duration stocks, steady cash flows stretching out as far as the eye can see, the kind of utilities REITs, those kind of areas. So those are the two groups, the direct beneficiaries that in indirect beneficiaries, the bond proxies on the direct beneficiaries. House builders, obviously the housing market’s been in hibernation for months. It’s been held back by high mortgage rates, not helped by, you know, the fears we were mentioning earlier on all the uncertainty over the summer would stamp duty change, council tax change, the mansion tax, et cetera. So decisions were being put off now that we have more clarity on the tax side and we believe that mortgage rates will keep coming down, we would hope to see demand recover.
It would’ve been nice to see something in the budget to help stimulate demand some kind of rebranding version of help to buy would’ve been great. I don’t think there were huge expectations of that, but we think that would’ve been helpful because actually we’re reasonably positive in some of the supply side measures that the government’s put in place in terms of the planning and infrastructure bill, more planning officers, these kind of things. There’s a lot of work still to do, and I’m not suggesting we’re gonna get to the the one and a half million new homes this parliament, the government has been talking about, but we can certainly improve on the very low levels of house building that we’re doing at the moment.
CS: I mean, I think despite the very strong UK market, I think people just forget about how strong the UK market has been as a market is still relatively cheap and the gyrations that have actually afforded us opportunities of more high growth, high quality businesses that have actually been derated. So I think the one which we’ve actually added to quite significantly over the last month is the media business Rex, where we’ve seen this is a darling of the market. I mean a lot of, you know, we’ve owned for some time, but we did actually take profits a little while back based upon valuation. We still argue the biggest determinant of the future returns you’re gonna get at the price you pay for a stock. So if something’s expensive, you should be taking profit over the summer.
The shares have de-rated because people have been questioning quite correctly as we have the impact of artificial intelligence on their model. But we think the shares are come back so far now that risk is being priced in. So we’ve been able to quite significantly add to that position. So it’s not just buying defensive stocks and it’s not just buying UK domestic stocks that look cheap, it’s also buying high quality global growth businesses that have been caught up in some of the volatility at prices that we think are, you know, very attractive versus long-term history.
So there are lots of shots we can play and that’s despite the movement in the market, there’s a lot of opportunities in lots of different areas. So of course we are not unbiased observers here, Darius. We are excited about our market and we should be.
DM: Maybe just a little bit on the mid-cap part of the market. So I think reasonably well understood large-cap, mostly overseas, often mature businesses, good dividends with some dividend growth. And more recently, and I used recently share buybacks a what’s the dividend, I would say culture, maybe it’s a bit highbrow in the mid-caps and are mid-cap companies as keen to buy their shares back as maybe some of the large-caps are? And you can speak generically, it doesn’t have to be on a stock basis.
AD: I suppose it is actually more on a stock by stock basis. There are some mid-cap companies we speak to who are all over the kind of buyback trade. And actually even within the large-caps, it’s quite different. There’s some large-cap companies that we speak to who I can think of one in particular who talks about the buyback as something they do to mop up any excess free cash flow that they have. Whereas I can think of a mid-cap company who do a very detailed calculation about the returns that they can get on every bit of capital allocation, whether it’s reinvesting back into their own business, doing M&A, paying down debt, acquiring a competitor, or buying their own shares. They’ll actually say there’s one, I won’t name the company, but they said we think we can get theoretical return on buying back our own shares of 20%.
So that is the kind of internal hurdle rate that divisional managers have to go to the CFO and say, well this new project expanding into a new geography, new product line. If it doesn’t return more than 20%, then the CFO will say, I can get a very low risk buying back my own stock. So it is very stock specific. One question we quite often get actually about buybacks is, well, your income manager, surely when companies decide to buy back stock rather than paying dividends, then you are gonna be against that.
But actually if you look over the medium term, if you are buying backs stock, if you are reducing your share count, then dividend per share should go it. So it is actually, and you know, we are very interested in dividend growth as you know, we’ve got a great track record of dividend growths in our fund. So that’s something we’re interested. It’s dividend per share, not kind of divid absolute dividends and pounds and PE.
CS: And I think, I mean just on your point, I mean there a couple of points to make. It’s funny, we talk about mid-caps mid 250, but I think we know really well that within the UK market, the top 16 businesses are the ones that are really powered ahead. So you could look at the UK market and almost like say mid-caps of everything below the top 16. I know we divide them as arbitrary. If you look at a business like a Legal and General, it’s £13 billion. That’s a tiny US business. I mean these businesses are small versus over the Atlantics. That’s the first point.
I think the second point, and which we’ve always stood by is that when we look at any business, it doesn’t matter what market cap, what industry it’s in, we look at the cash profits that they generate and you know, how they pay back the tax man, how they pay back the people from whom they borrowed, how they invest in the business for maintenance, how they invest for growth.
And at the end of that you’ve got cash and then they make a decision. Do they pay it back to us as in dividend? Do they buy back shares, but based upon the principles that a just explained or do they keep it within the business, you know, that’s the basic analysis of a business is what we do. It doesn’t matter what market cap, it could be a hundred million, it could be a hundred billion.
The third thing, which again we haven’t thought thought of that much in the last week, but I think is gonna be relevant is obviously the changes in the budget around income on dividends or tax on dividends. Make it pardon? Yeah. Whether or not that changes company behaviour because obviously we are looking at it in terms of allocation of capital, but if companies are thinking about shareholder returns, does it actually sort of you know, they think we’re gonna get our shareholders are gonna get less bank for their buck if we pay back dividends. Does it change behaviour on the margin around share purchases? I don’t know the answer to that, but it’s definitely something which we’re gonna think about.
DM: Yeah, I’m sure that’s one maybe for the year ahead and how companies actually do actually react to those changes. So one to look out for maybe just a bit more basic, I mean, one of the tax treatments apart from the dividends which we touched on was sort of salary sacrifice. Is that something you hear of a lot in companies? Is that something which is really sort of quite a common incentive or way of you know, not paying national insurance on pension contributions or whatever it might be? Is it a major thing or is this just another headline and then with that being reduced, does that make ISAs more popular potentially?
CS: Well I think certainly obviously the incentive to actually keep your investments within a tax wrap and a tax efficient wrap is even more relevant now. So certainly in terms of the ISA allocation to equities, the changes there, and obviously we would argue for the compounding benefits of income funds within an ISA, again, of course we’re gonna do that. And I think we have you know, we’ve long advocated the important role that income funds can have to pension provision. It’s not the solution, but it should be part of a solution.
And as I said, look, we try and invest in businesses that are best able to grow their distribution. So not just pay out a dividend, but through their own organic growth or acquisitive growth and capital allocation to actually generate that earnings growth that comes through to dividend growth. You know, so that that combination of income and capital growth is gonna be relevant to any you know, sort of planning around pension and so on and so forth.
So I said I don’t wanna get into the minutia of that planning argument because it’s definitely not our area. But I think, again, our argument around the flexibility of income funds when it comes to pension planning still certainly stands.
DM: So I’ll ask one last question and I’m going ask it in a leading way. [CS: No.] And given that my audience, my audience are UK equity investors so people are looking at their portfolio. So when I started in this industry a couple of three decades ago, the vast majority of UK investors held UK assets first. They were incentivised from tax your overseas allowance and the UK was a very, very good place to invest in the naughties and actually outperformed the US then post GFC, we’ve seen this massive rise of tech and US equities.
Should UK investors revisit the UK should they be thinking, not necessarily even of selling us to buy UK, but allocating to the UK going forward in a bit more of a portfolio rebalance, I suppose, given the things we’ve talked about, diversification and valuation as well?
CS: Yes, yes.
DM: I know that I have a simple answer to a leading question.
CS: No, but I think that’s, obviously it’s not up to us to give investment advice, but I think yeah, you’re right. There’s been this multi-year, multi-decade shift and we know the reasons why. I think most of the people, you know, listen to this podcast. They’ve got UK assets, UK liabilities a lot of the, so much of this with the negative vibe has actually come out of the UK. We’ve talked ourselves into a very negative position. I don’t think anybody should be making a knee jerk reaction to the budget. I don’t think, as I say that it’s gonna necessarily change people’s negative view with regards to the UK market. But as I said, the UK market has been a great place in which to invest over the last five years. It’s almost like it’s the story that’s not being talked about. It’s been astonishing.
The UK performance this year we’re up 20% odd, 20% investing in this market that nobody wants to touch. Look at the press at the moment, again, this is press, this is noise, this isn’t fact. But there’s definitely greater jitters around valuations within the US. Think about their political environment, think about their tech environment. There’s a lot going on in the world and yet we seem to afford valuations to US businesses that are stratospheric compared to ours. They are different businesses, they are world transforming businesses, but you can create bubbles. Now, I’m not here to say there is a bubble in the US market, I’m biased, but I do think from a diversification point of view, UK investors with UK assets, UK liabilities, they should be thinking about the risk that that’s appropriate in their portfolios. And if you think about it in those terms, there is an argument unbiased as we are as UK managers.
There is an argument to be thinking about actually, is it appropriate to be reallocating some of those funds to the UK? Now it doesn’t take much because the amount of money that’s shifted across, you’ve only gotta have a little bit of money coming back into the UK and suddenly the UK’s outperformance in the last three years will continue into next year because it won’t take much money to start coming back when you aggregate that with the overseas money that is seeing the opportunity within the uk.
DM: Alan, any last thoughts from yourself?
AD: Just as Carl was talking there, I mean, I was encouraged just storying the FT a couple days ago about domestic pension funds allocating more X us so into the UK and other markets. That’s the bit that’s been missing. We actually, it was, you know, slightly ironic that we had international buyers coming back earlier this year to the UK market while domestic investors were still selling. So if we can get both of those things, it’d be nice to have both of those things going in the right direction at the same time. So I mean, I think there’s definitely reasons to be positive heading into the UK next year from a valuation perspective, a diversification perspective. We’ve got the budget out of the way so we can kind of move forward with clarity, I think.
DM: Alan, thank you very much, Carl. Thank you very much. It’s been a really interesting chat on the UK market post budget, so thank you for taking the time to talk to us.
CS: Thank you Darius.
AD: Thanks Darius.
DM: If you would like more information on the Rathbone Income fund, please do visit fundcalibre.com and if you’ve enjoyed this podcast or any of our other podcasts, please do like and subscribe to the Investing on the go podcast.
