rathbone income manager takes cautious stance choosing high quality companies with strong earnings potential
Carl Stick, manager of the Rathbone Income fund, has positioned his portfolio in anticipation of a recovery in 2003. The manager stresses he is only cautiously optimistic and so is not ignoring defensive stocks.
Stick, who in January gained his three-year track record on the fund, has achieved top-decile results over both one and three year time periods. Rathbone Income is ranked third out of 73 funds in the UK equity income sector over three years to 20 January and seventh out of 77 over one year.
Over three years, Rathbone Income gained 4.95% after charges, compared to the sector average loss of 22.6%.
Over one year it lost 17%, but this outperformed the average decline in the sector of 23.7%, according to figures provided by Standard & Poor's. Stick said he essentially looks for high quality companies that are growing their earnings. As a result there is a low level of turnover in the portfolio. There are currently around 63 holdings in the fund, which does not have any exposure to fixed interest.
The manager does not buy non-yielding companies but there is nothing set in stone in terms of minimum yield. The lowest yielding stock is Collins Stewart, the asset manager, on a prospective yield of 2.5%. The highest is UK Coal, yielding about 20%.
Stick's investment process is based on certain principals, the first of which is taking an economic view and determining the main themes governing the global and UK economy.
Second, taking into account these economic themes, he ascertains what sectors will benefit and which areas are undervalued. 'In essence this is a buy- and-hold fund. You make a firm decision after doing the work. There is probably about 33% turnover,' Stick said.
Two major themes currently dominate the portfolio. Although Stick does not assume consumer spending will crash, he does expect it to slow down in the next six to 12 months.
'Historically, when there has been a slowdown in consumer spending from very high levels, this has been balanced by an increase in capital expenditure. We are turning negative on the consumer and more positive on those areas that will benefit ' namely government expenditure and corporate investment,' Stick added.
Stick, therefore, has reduced exposure to retailers and leisure stocks while increasing exposure to construction and infrastructure, particularly those companies that will benefit from increased government expenditure. Examples of recent purchases include engineering and construction group Amec and Carillion.
The second theme centres on his belief there will be a pick-up of growth in the US and hence there is an emphasis on cyclical companies that are expected to benefit such as financial group Tompkins and electronic component distribution company Premier Farnell.
Meanwhile, he is not totally ignoring defensive companies.
'We don't want to get caught up in too defensive a frame of mind as we think that once the Middle East problem is resolved, we could see a recovery in the market and we want to ensure we are positioned to participate. But we are not ignoring them totally, for example I hold the tobacco company BAT,' he said.
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