Safety first on the long climb back

Carl Stick had a traumatic time in 2008 as his Rathbone Income fund lost 34 per cent of its value. He learned a crucial lesson: to analyse stocks for their downside as well as their upside

Patrick Collinson 2012 byline 160

Carl Stick is back – although £800m lighter. The star income manager at Rathbone who fell to earth during the financial crisis has clawed his way back up the performance league. But he has a long way to go before his fund recovers the assets it lost. At its peak, Rathbone Income enjoyed assets under management of £1.3bn, but today it’s just shy of £500m.

2008 was hell for Stick. The fund lost 34 per cent in value, and as he is the first to point out, a fall that size means you have to achieve a rise of 50 per cent to make up the loss. He confesess the fund got “too big too quickly and lost its discipline”. He adds that “a lot of the hot money that had come in left pretty quickly” but hopes that the investors who held on now feel vindicated.

Rathbone Income is now top decile over three years, ranked fifth out of 94 funds in the IMA UK Equity Income sector, with a gain of 40 per cent. He has outperformed his peers in each of 2009, 2010 and 2011, and is ahead in 2012. It was just the 2008 numbers – after a not too great 2007 – that floored him.

What went wrong? Stick admits that his portfolio was fine until the stresses of 2008 revealed that a lot of the businesses he was in were running models close to breaking point. It has taught him a crucial lesson in fund management – to analyse stocks for their downside as much as their upside.

“My starting point now is to look at a company and ask what is it about this business model that can break? Next, I look to see how the business is being financed. Can it keep itself going irrespective of market volatility, or does it need leverage to obtain its returns?” He ruefully admits that too many of the stocks in his portfolio were too expensive and highly geared as they went into the credit crunch.

“I now take a very much more risk-based approach. I focus on what’s going to do well over the next five or 10 years, not over the next six months.”

But the new approach comes with a cost. This is a fund that is likely to do well in risk-off environments, but will fall behind when risk is back on the table. In the more risk-on environment of recent weeks, it has done less well, although it’s still a respectable second quartile performer over one year.

What hasn’t changed is Stick’s interest in mid caps. Currently, the fund is only 43 per cent invested in large caps. “The thing about small and mid caps is, yes, there is a liquidity risk but we can at least understand the fundamental risks in the business. Can investors honestly say they understand what’s going on in a Barclays, Rio Tinto or the Pru?”


But he’s more cautious about how he approaches mid caps. “You have to be careful you don’t get too close to them and that you don’t get blinded by the story.”

FTSE 250 stock Restaurant Group is one of his biggest holdings, at 3.5 per cent of the portfolio, and its share price graph bears an uncanny resemblance to Stick’s own trajectory; a huge run up between 2003 and 2008 (from 50p to 350p) followed by a nastly collapse in 2008 (to just over 100p) but an impressive recovery (now back at its 350p peak).

Just outside the FTSE 250 is Headlam, another one of Stick’s favourite holdings. Headlam supplies and markets carpets and vinyls, billing itself as Europe’s leading floor covering distributor, though fortunately very much more northern Europe than southern. It remains a long way off its pre-crisis peak of 600p but Stick is hopeful it will recover. “We still find great value in that business,” he says.

“Things are looking expensive, and I sense that the market is too optimistic”

But he worries about the wider market. “Things are looking expensive, and I get the sense that the market is too optimistic. People are buying equities because they are the cheapest of what is an expensive bunch of other assets. I don’t feel that the economic stresses around the world are being adequately reflected in equity valuations. Relatively stocks look cheap, but in absolute terms I’m not so sure.”

Closer to home, he says that while quantitative easing and Funding for Lending are helping the banks, “it’s jolly well clear that the banks are not transmitting that money to the wider economy.”

Given these concerns, it’s perhaps surprising that Rathbone Income has exposure to the UK consumer thorugh Next, William Hill and Cineworld. But he’s comforted by the employment figures, which are consistently stronger than the macroeconomic picture would suggest.

Over the longer term, he feels that pharmaceuticals represent perhaps best value, and Glaxo is his single largest holding at 5.1 per cent of the fund. He also likes more defensive plays such as tobacco (BAT and Imperial) as well as Diageo.

The yield on the fund is currently 4.2 per cent. “I think that’s pretty safe. If it isn’t safe, I’m not doing my job properly,” he says.

Was he doing his job properly before the crash of 2008? “In a sense, 2008 had to happen. The fund had performed well, but there were stresses there we hadn’t focused on. I’m sorry we lost that money, but you learn by experience. I’m still the third best income manager since I started running the fund in 2000.”


Patrick Collinson is the Guardian’s personal finance editor.