Investors need reminding of the reasons why UK equity income is an attractive part of the market, Rathbone Income manager Carl Stick says, after several years of the sector being unloved.
Over the past 12 months, Rathbone Income has made a 10.1% total return while the IA Equity Income sector is up 8.5%, which is ahead of most peer groups by a significant margin. The average IA Global fund, for example, has made just 1.8%.
Yet money continues to trickle out of the sector – in February, IA UK Equity Income funds suffered the sixth highest level of outflows in the industry after more than £200m was pulled out of the sector.
Below, Stick explains why he is on a mission to highlight the attractiveness of UK equity income to investors, as well as how he prepared the portfolio for the onset of higher inflation and the importance of avoiding the worst of market falls.
What’s your investment process?
The philosophy of the fund hasn't changed in the last 20 years. We are very focused on generation of income so we’re trying to provide a pay rise every year.
That's the basic premise and we're trying to invest in businesses that are going to grow their dividends by a real amount every year.
We are one of the best funds in the sector over the past 20 years and that’s been achieved not by being the best fund when the markets go up, but by statistically doing better when the market goes down. By not losing as much, we tend to win in the longer term.
Total return of fund vs sector and index over 20yrs
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Source: FE Analytics
What sets you apart from your peer group?
We have seen three big market crashes and market cycles, whereas a lot of people in the market these days have actually just experienced the last 10 years, and I think that experience is a major point for us.
I also think there's a humility around what we do and a vision that we can't be everything to everybody. We have a very specific role to certain people - that's what we do and we stick to it.
If you're looking to try and get a good total return and relatively low volatility you might want to look at us, but if you're looking to compete against global growth funds that shot the lights out over the last 10 years, you don't want to be looking at us. That clarity of vision is important.
What alterations have you made to the portfolio?
Back in 2020, investors were totally discounting any idea of inflation coming through into the system and strategists who were starting to suggest that were being dismissed and laughed at.
We sat down as a team and thought that the market was just totally disregarding that risk so we started to allocate a bit more money to the mining sector, to the oil sector and into banks.
We put 3% of the fund straight into BHP, which at that time was quite a punchy thing to do - we were buying oil stocks when people just weren't interested in oil. We had somebody write us a letter saying I've sold the fund because I don't know why you're buying oil stocks.
Have you found it challenging to increase income at the rate of inflation?
No, to be honest, because we've had a big rebound from the lows of 2020. The exposure to miners and oil have had supernormal profits and are generating extraordinary dividend growth.
We want to make sure we have consistent dividend growth as well. In the same way that we want our returns to not be volatile, we don't want income to be volatile either.
What were your best and worst stocks last year?
The stocks that did best in terms of share price return were quite an interesting mix. Big Yellow, the self-storage company, was up 60% last year and Dechra Pharmaceuticals, which makes dog and cat medicine, was up 52%.
Our biggest contributors to performance though were obviously from big positions in the oil stocks like BP and Shell.
Financials like Lloyds, Aviva and NatWest all did very well and benefited from this rotation into value.
Unilever and Imperial Brands were a drag on performance. We got rid of them quite early in the year and I'm glad we did because to be honest with you, they've continued to perform badly.
Unilever was about 20 basis points and Imperial Brands was 10 basis points, roughly.
We had 35 of the stocks we owned produce negative performance but everything else was up so that showed it was a strong year.
Have the past few years been difficult to navigate?
I think the last three years have been very difficult because the sector has become very unloved and it's quite difficult running money in a sector where people aren't bothered anymore.
We've been making a concerted effort just to remind people that the UK is worth investing in, income sectors are worth investing in and the fund is worth investing in.
We've got to explain to people why what we do is important and we haven't had to do that as much in the previous 20 years.
Have you seen an improvement in interest?
Yes, we have this year. You look at flows in the market over the past three years and the fund has diminished in size, but that's not because of any massive redemptions: the redemption has been going on exactly the same level - it's been a lack of interest in buying the fund.
That interest has started to come back this year and we’re starting to get net inflows.
The market is changing so you need to have a Plan B. That doesn't mean to say you should throw away Plan A but we're just saying that UK income or the UK market in general is an option people should be thinking about. That's something that’s been proven correct over the last year.
What do you like to do outside of stock picking?
I’m doing a masters in modern history at the moment. At school, I was always fascinated with history but I had to give it up at 13 to do another language and I always hankered about going back and doing it. Now that I’m in my 50s, I thought: ‘now I’m going to do that.’