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Stick of rock

Carl Stick tells Philip Scott how long-term thinking is the secret to the success of the 476m Rathbone income fund.

Carl Stick does not like using the phrase “taking bets” when it comes to describing how and where he invests money.

The Rathbone income fund manager likes to think he is not gambling on anything for the simple reason that he is always investing for the long term.

“We have always said we look at long-term earnings’ performance and earnings’ growth,” he says.

Such is Stick’s conviction on this issue that he notes the portfolio has taken hits in short-term performance but only because of his belief in the long-term game. “If we do the job right, we are in a stock for a long period of time. A lot of the fund’s holdings have been there for four to five years. Ideally, I would like to be able to buy a stock and forget about it for 10 years. I am far more interested in getting the long term right.”

This investment philosophy plays out in the Rathbone income fund’s per- formance figures. In the 12 months to April, the veh-icle, which holds around 80 stocks, has slightly underperformed against the UK equity income sector average, delivering a return of 11.7 per cent against an average of 12.6 per cent, ranking the fund 46th out of 80.

However, for Stick, who has managed the 476m fund since the start of 2000, the waiting game has paid off as the long-term data tells a different story. Over the past five years to April, the fund has massively outperformed its peer average, achieving 73.9 per cent against a sector mean of 25.2 per cent – placing the portfolio third in the category and over three years it is ranked ninth, with a return of 21.8 per cent against an average of 12.8 per cent.

This long-term philosophy does bring its own problems, however, particu- larly in identifying areas that will provide the long-term growth that he seeks. “The difficulty is, if we are still trying to find value – that is not so easy,” says Stick.

He highlights the pharmaceuticals sector as an example of the problems that can be encountered. “On the one hand, we can see why there are advantages. If the market is slightly jittery over the next month it does offer defensive growth, the likes of GlaxoSmithKline do produce quite a reasonable chunk of dividend. But the problem we have looking at things from a long-term point of view when seeking growth is finding where is it going to come from and we cannot see it there.”

Stick says the same issues are in oil and tobacco sectors but he likes utilities: “We do like utilities, we have always done. As an income fund, we have a high exposure to them. Again, they have had a tremendous run over the past few years and a lot of the big mainstream stocks performed well but I do not know if they will continue to do so because a lot of the other stocks have been consolidated out of the sector so there is less to go for.”

Then there is the problem there will always be some mainstream businesses which are going to continue to have problems. Stick cites Marks & Spencer as an example.

But from a more lateral perspective, he believes there are some consumer-orientated businesses that offer good long-term value. “I think the best retailer we can think of is House of Fraser,” says Stick. “But why get involved with a department store? This is a business where over the past three or four years the management has restructured it and for the first time in many years is actually in a position to determine its own destiny.

“It has always had a lot of debt and this stalled progress but it has now got to a stage where debt is being paid down. It does offer good opportunities but we are slightly flying against the face of a wind saying, do not get involved with retail.”

Stick recalls there was a similar problem with housebuilders last autumn, when no one liked them but over the next six months they were one of the best-performing sectors.

The two biggest sector allocations in the fund are financials and cyclical services with 20.43 per cent and 24.03 per cent respectively. Pointing to the former, Stick explains: “With banks, we have to have a reasonable exposure but we are underweight. There is margin compression and increasing competition in the market. Within that, there is about 12 per cent in banks and the rest is in specialist financials, where we are overweight. We are looking for companies, such as the mortgage bank specialist Paragon, which have an expertise which gives them the ability to defend margins.”

Ultimately what drives Stick – and he invests in his fund too – is the desire to find an opportunity and exploit it to its full potential.

“I know it is a basic and obvious thing to say but I am a firm believer in that when we buy a share in a business, we are actually buying a chunk of that business. And I have to be convinced that it is a decent firm in which to invest capital,” he says.

As a long-term strategist, Stick is reasonably happy with the way things are going, although he feels the Chancellor may have been a little bit too optimistic in his forecast for GDP growth in the current year. “We are looking at between 2.5 and 3 per cent. At least we are going to be an expanding economy. The issue is where the expansion is going to come from. The past four years have seen the consumer pushing the economy along by spending money but we are still going to see consumer expenditure – we do not think that is going to fall off a cliff,” he says.

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