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Cap in hand

Carl Stick does not follow the herd and his Rathbone income fund has mixed large and small company exposure successfully

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After a poor year in 2008, when he basically made the wrong calls, Rathbones income fund manager Car Stick rebounded strongly in 2009 with a solid year in performance terms.

I have thought in the past that too much pressure was placed on Carl as he seemed to be the only prominent manager at Rathbones, so when he had a poor year so did the business. That is probably unfair as they do have other quality managers such as James Thomson who manages the global opportunities fund. However, equity income provides the core of Rathbone’s unit trust range (as it does for many groups), so it is very important to Rathbones for this fund to perform.

Carl has been characterised as a somewhat racy manager prone to investing in smaller companies. Four or five years ago, this was probably fair comment as over half the fund was in mid and small-cap names.

However, 60 per cent of the fund is now in FTSE 100 companies as this is where he has seen the most value in recent times, although looking ahead, he does think large-cap exposure will probably fall. He is now finding value elsewhere and, in my view, the team do tend to have a bias towards smaller companies, believing this is where most pricing anomalies occur due to lack of research.

Rathbone’s investment process involves looking for consistent longterm returns, sustainable pricing power and companies able to generate satisfactory returns without the need to borrow.

Company funding (that is, the level of debt) now seems to be a central pillar of the investment process, perhaps an example of how fund management has changed since the credit crunch.

Larger-cap research is partially conducted in-house but they also rely on selected industry specialists. In contrast, small-cap research is almost exclusively done in-house. These contrasting styles demonstrate where Carl Stick’s sympathies lie – towards small-cap companies.

Fund managers can and do become stuck in their ways and sometimes you feel they are entrenched into their positions and cannot get out gracefully. However, Carl has become more pragmatic in recent times and shown willingness to switch the portfolio between large and small caps, which I think should benefit investors over the longer term.

Carl Stick views dividends as an important barometer of a company’s health as well as being important for the fund’s yield. He also believes dividends demonstrate that a company can generate its own cash and grow organically.

While his research is generally bottom-up, Rathbones do also have a sectorial overview.

As an example, they are currently underweight banks but this is mainly due to the measly dividends available at present.

Another example is a large underweight in pharmaceuticals, based on fundamental industry concerns but they do like GlaxoSmithKline for stock-specific reasons.

The media sector is a current favourite as Stick believes there is good value and companies such as Pearson exhibit good overseas earnings’ potential. In utilities, Stick believes some companies are well run but others are over-indebted and to be avoided.

Last year was a difficult one for many equity income funds, with income payments being cut by many managers. This fund was no different and the dividend was 13 per cent down last year compared to the previous year. Carl Stick thinks 2010 will see a modest increase and his top 20 holdings will see a 5 per cent to 10 per cent increase in payouts. There has been a surge in investor interest in emerging markets recently but investors should not write off the UK.

Equity income has been a mainstay of the UK market for 30 years or more and I see no reason for this to change. Despite Carl’s difficult year in 2008, he has rebounded admirably.

If you are looking for a manager who does not follow the herd and who includes some more exciting small-cap companies in the portfolio, the Rathbone income fund could be one to look out for.

Ben Yearsley is investment manager at Hargreaves Lansdown

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