In the lead-up to the 2008 financial crisis, Carl Stick’s Rathbone Income fund was a favourite among private investors and advisers alike. The manager’s record was excellent in the early and mid-2000s, with his overweight in dividend-paying small and mid cap stocks particularly effective at delivering strong performance from both an income and total return perspective.
FE data shows Stick’s fund was a top-decile performer in its UK Equity Income sector between his appointment as lead manager in January 2000 and the beginning of 2008, with returns of exactly 141 per cent. This compares with a figure of 62.17 per cent from the IMA UK Equity Income sector average and 29.1 per cent from the FTSE All Share.
Such strong performance saw assets grow to more than £1bn, and Stick was among the most highly rated managers in the sector.
Just a matter of months later, Stick’s fund was reeling from some hefty redemptions as a result of significant underperformance in the aftermath of the Lehmans crash.
Performance of fund vs sector and index Jan 2000 - Jan 2009
Source: FE Analytics
Many of Stick’s biggest holdings were heavily indebted in the lead-up to the 2008/2009 sell-off and were hit particularly hard during the crisis. The fund’s large size and poor market liquidity did not help matters, and Rathbone Income ended the year down 34.49 per cent. This compares with losses of 29.93 per cent from the All Share and 28.54 per cent from the UK Equity Income sector average.
The year 2008 is the only real blemish on Stick’s record: his fund outperformed its peer group in the up years of 2009 and 2010 and lost less in the falling market of 2011. However, redemptions nonetheless followed, sending assets under management (AUM) to a low of £425m in October 2010, according to data from FE Analytics.
"It wasn’t just about the losses; I think a lot of investors wanted out of an equity fund with small and mid caps in it, which were seen as more vulnerable than large caps," said Tim Cockerill, investment director at Rowan Dartington.
Year-on-year performance of fund, sector and index 2006-2013
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) | 2007 (%) | 2006 (%) |
|---|---|---|---|---|---|---|---|---|
| Rathbone Income | 19.57 | 14.94 | -0.15 | 18.71 | 23.48 | -34.49 | -2.8 | 21.24 |
| IMA UK Equity Income | 18.04 | 14.01 | -2.9 | 14.58 | 22.88 | -28.54 | -1.21 | 18.19 |
| FTSE All Share | 15.84 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 | 5.32 | 16.75 |
Source: FE Analytics
"There was a flight to quality after the crisis and a lot of people changed their funds. I think you’ll find a lot of investors went into [Neil Woodford’s] Invesco Perpetual Income fund and others of that ilk."
However, Cockerill thinks investors would be wrong to dismiss Rathbone Income, which he says has proved since the financial crisis that strong performance in the early and mid-2000s was no fluke.
He believes the lessons Stick has learnt from the crisis have made him a better investor, which is why he holds the fund throughout his model portfolios.
"I think it’s a very good fund and use it a lot," he said. "I’ve known Carl a long, long time – before 2008 – and think he’s a very good investor."
"He looks at stocks that other equity income managers don’t look at in the small and mid cap range."
"There’s no doubt he got caught out in 2008 as many people did, but unlike the others he took a long hard look at his process as a result. This, I think, was a good thing. A lot of managers have a process and see it as the right way, and stick with it no matter what happens. However, I think Carl realised he needed to make some changes."
"He had a lot of stocks with a lot of debt going on their balance sheets – not a great crime by any stretch of the imagination. He now realises that it’s better to be a bit more cautious and do things differently, with more of a focus on capital preservation."
Stick refers to this process as "winning without losing".
Cockerill thinks Stick has perhaps been too hard on himself, given that many fund managers have underperformed their peer group and benchmark by a far greater distance than Rathbone Income. His long-term record is stellar by anyone’s standards; our data shows the fund has returned 270.78 per cent since he took over, beating the IMA UK Equity Income sector average by more than 100 percentage points.
Performance of fund vs sector and index since Sep 1998
Source: FE Analytics
However, in speaking to Stick it is clear he is a manager who asks a lot from himself.
"We spent a lot of time thinking about our process," said Stick in an exclusive interview with FE Trustnet. "It was only one year of underperformance and we did very well before and after that, but we went away from the period having learnt a lot of lessons."
"When everything goes well, people assume that it’s because of the decisions they're making, and when things go wrong people assume it’s someone else’s fault. We realised we needed to take stock and look at the process."
"The focus now is not to lose money. The industry is often focused on who can achieve the most, but I think the key to being successful over the long-term is trying to make the fewest mistakes."
Avoiding permanent capital loss, according to Stick, is the number-one priority.
"There are three principles to managing risk," he explained. "The first is business risk, which determines whether a business model is breaking or perhaps never worked in the first place."
"The second is financial risk, which looks at the balance sheets. If a company requires a lot of debt to generate equity, you have to ask what happens if that debt is taken away."
"The third is price risk, which is all about paying the wrong price for a stock, even if it’s a very good business."
"We lost our discipline a bit in the lead-up to 2008, but now if a price is too high or a company is too leveraged, we won’t own it. It’s as simple as that. We had a lot of businesses that were highly geared and others which had business models which couldn't survive the impact of a crisis. We should have done better to predict how a crisis would affect our stocks."
On the issue of price, he explains that he has recently been selling down his holding of Restaurant Group – one of his favourite companies – because the price had gone too high. Our data shows that the stock is up more than 350 per cent in the last five years.
"When markets go higher and valuations also go higher, this is when investors can get sucked in," he said. "You’ve got to resist temptation and remind yourself – 'I will only pay this price for this growth rate, and nothing more.'"
He believes the market has gone to elevated levels in the last year or so and will therefore recycle a lot of his profits into cheaper options. He has bought both Rio Tinto and Barclays recently, for example.
"These two are OK businesses, but they’re at very good prices," he explained.
Stick believes there are plenty of reasons to be optimistic about equity markets at the moment, but says that his cautious nature encourages him to look at the numerous risks out there.
"No-one can be 100 per cent sure what the markets will do. Due to my philosophy, I am more in the cautious camp," he explained.
"My concern is that if the bears are right, the effects are essentially unknown. Most nations are still sitting on a huge amount of debt. There is a quantum of debt in the US, UK and Europe are heavily indebted, and in China we’re seeing government and now corporate debt going higher."
"When rates normalise and go higher and make the cost of debt higher, I don’t think anyone can understand the true consequences. The same goes with the unwinding of quantitative easing."
"It’s for that reason that preserving capital is the priority."
His fund is currently sitting on 8 per cent cash which is above average, and Stick explains he will only put that money to work if he finds businesses at the right price.
There's no doubt that Stick's change in process has benefited the fund post-2008. Not only has Rathbone Income performed strongly, posting top-quartile returns of more than 50 per cent over the last three years; the fund has also been significantly less volatile than both its sector and benchmark, losing less in the down year of 2011, for example.
This comes despite the fact that it has more than 50 per cent of its assets in small and mid caps, which tend to be viewed as high-risk compared with large caps. Stick explains that he holds small and mid caps because they enable him to add value over the long-term.
Rathbone Income requires a minimum investment of £1,000, has ongoing charges of 1.56 per cent and is currently yielding 3.57 per cent. The fund has recently been upgraded to a five crown-rating, as a result of Stick’s strong performance post-financial crisis, and it is also a new entrant into the FE Select 100.
The fund's assets have grown to £590m over the last three years or so, but this is a result of strong capital performance rather than investor inflows. Cockerill believes all this could change if Stick continues to run his fund with the same attention to detail.
