Rathbone Income
Rathbone Income remains a strong choice for investors seeking steady income on top of capital growth.
Stick’s strategy has led to strong returns over the past five years versus its average Morningstar UK Mid Cap equity peer, but if we narrow down the category to those focused on providing income for investors, we find this fund has performed well against its peers. Stick has outpaced his closest income-focused mid-cap rival by an annualised 11 basis points since the beginning of his tenure in January 2000 to the 15 November 2008 and this has been achieved with an average level of volatility.
The fund’s trailing 12-month yield is slightly higher than the average fund in the IMA Equity Income sector, but like most equity-income managers, Stick’s search for yielding stocks could be more difficult going forward. Since the credit crunch started to grip the markets, the banks’ ability to pay dividends has become questionable which removes a key dividend-paying sector from his universe. Stick raised the fund’s exposure to industrial materials slightly in 2007 in his search for yield but exposure has since been cut back as a result of rising valuations. Tobacco stocks, also popular with income managers, are also off-limits because valuations have been pushed up as investors go defensive. The underweight positions in overvalued sectors with yield such as metals and mining, tobacco and energy have hurt the fund’s income but has helped preserve capital as those particular sectors have been hit badly in 2008 so far. Nevertheless, Stick has used his experience further down the market-cap ladder to ferret out stocks with rising yields. For example Northgate, the commercial vehicle rental business, has been steadily growing its dividends above the rate of inflation for almost a decade.
We are pleased Stick shows complete conviction in his strategy, even during a tumultuous year and the fund’s turnover has remained low at 35% for the year to 30 September 2008. This highlights Stick’s long-term disciplined approach, despite being forced to trade more than usual given the turbulence in the markets.
The value bias inherent in income strategies has been out of favour with the markets - the Morningstar UK Large Cap Value equity category lags its growth counterpart for the five-year period to the end of August 2008 - but this fund has still performed remarkably well, which is a testament to Stick’s skill. Moreover we have seen that in recent months the Morningstar value categories have been outperforming the growth categories.
The past few months are too short a period to make a strong case for value stocks just yet. However, we believe this fund is well positioned to benefit when the market recovers.
