Rathbone’s Stick to beat competition

Carl Stick, manager of the Rathbone Income fund, has seen an influx of cash that has increased its assets from 8.9m when he took over to 780m today. But he is still not content just to play it safe.

When Carl Stick first joined Rathbones he was looking after an 8.9m equity income fund. Today, still only a youthful 36, he is looking after 1bn of the 1.5bn that Rathbones now has in its unit trust arm.

It is quite a challenge for any manager to successfully handle such an influx of cash and, for the most part, Stick has done a good job.

The Income fund (780m in size) is up 37% over the past year, compared with the sector average of 28%. Over the three-year timeframe, the figures glow less brightly, up 96% compared with 81%, but over five years they shine again, with an 81% gain compared with 44% for the sector.

“When I first took over the Income fund, it was 8.9m in size and stayed like that for six months or so,” Stick says. “We had a bit of a celebration when it hit 10m.

“Basically, it was never really marketed. But once you’ve got the numbers, you’ve got a business.”

One challenge he has been fortunate not to have is redemptions, and what it is like when a big fund goes into reverse.

Has the investment process changed to accommodate the inflows? Stick insists it has not. “We developed a straightforward, commonsense way of running money with the process monitored by Julian Chillingworth, the chief investment officer,” he says. “I cut my teeth running a fund that was at the time 99% in-house money from our private client side. What I was looking for was UK equities offering a real and sustainable increase in dividends. At the time I was buying Lloyds, Bass, Scottish Power and so on. I still think of it as a private client fund, very much targeted at the individual. I think you can get too removed from the underlying client when you work for a big institution. The difference today is that I have a lot more support and back-up.”

But surely he must be tempted to play it safe? Why bother to take risks when you have pulled in so much new money on the back of past performance figures? Far easier to run it as a closet tracker and avoid disappointment.

“As we get bigger, there is going to be a gravitational pull towards being a tracker,” Stick says. “This does not mean you should play safe. You have just got to make sure you are doing things for the right reason.”

A superficial glance at the top four holdings in the fund might suggest a safety-first approach: BP, HSBC, RBS and Barclays. But in truth the portfolio is highly varied. There is a 4% limit on any individual stock, and Stick rarely reaches that level. It means, for example, that right now he is hugely underweight oils: 3.4% in BP, 2% in Shell.

He is confident enough to say that the holding in Shell is not there because he likes the company – he does not. But it is an insurance against oil continuing to rise.

“My gut feeling is that it is a bad company. But I wanted insurance against the oil price shooting up,” he says.

Insurance? Isn’t that the definition of the safety-first trap this fund could fall into? Stick keenly adds that Shell is the only stock in his portfolio that he holds despite his misgivings. Perhaps it is more of an acknowledgement that he knows he will not be right all the time. And even with the holding in Shell, he is 16% underweight the oil sector.

His approach to pharmaceuticals reveals how he has kept to his basic principles. Most other managers umm and ahh over whether to underweight or overweight Glaxo or AstraZeneca. Stick does not hold either, and never has. “I’ve always been asked why I don’t have Glaxo,” he says. “If I put 3% of the fund into it, no one would bat an eyelid. But I’ve been concerned for a long time about the drugs pipeline and patent expiry.” So what does he like? Eyelids might bat at the number of property shares in the fund. “A lot of them are invested in Europe, which gives us geographic and euro exposure,” Stick says. “I have had up to 9% of the Special Situations fund in these companies, which we now know very well.”

He is relatively relaxed about overall market valuations, but feels it is getting tougher to find yield. “It is harder to find good yielders at the moment,” he says.

But he does not buy the idea that the market is ripe for growth, not value stocks. He does not see the market in such binary terms, and believes that most of the time he is buying both. “In a raging bull market, perhaps this fund would not do so well, but that is about it,” he says.

His favourite stocks are an eclectic bunch. He finds Drax interesting. “It has become much more viable to use coal-fired stations again. The coal price is up, but not anything like the oil price,” he says.

It has gone from 780p to around 820p since he purchased, and he feels it has got a long way to go yet.

On the smaller side, he likes Titan Europe, an engineering group that makes the axle parts that go into super-giant Caterpillar mining and construction equipment.

Interestingly, with the Dow Jones now back at its 11,700 peak of five years ago, the two stocks that have risen most during that period are not oils but Boeing and Caterpillar. The latter is booming on the back of demand from Chinese construction and Canadian and Australian mining companies. Stocks like Titan Europe are a good way into that story, without having to pay top dollar.

He also likes Foseco, another British engineering success story: it makes the ceramic filters that in turn are put in moulds in foundries. It is very old economy, and doing rather well on the back of the Chinese industrial revolution.

It is a couple of years since I last met Stick, and I wondered whether I would find a more arrogant individual, basking in the success of his fund performance – but it is not the case. Back then he said he liked the boutiquey feel to Rathbones, that he would hate working in an institution, and thought the balance he had between being supervised and having personal control was about right. Today he is saying the same things. He may be the star manager, but his ego has not launched into space.

Now he is launching a high income fund, and there is no reason why it should not have the same degree of success as Income. “It has a young team, and we all feel we have a part in running the business. The challenges are still there,” he says.