Carl Stick is running a cash weighting of just under 12% in his Rathbone Income fund, which he says is the highest level for almost 10 years.
The weighting has been built up through profittaking in several of his core holdings as he says they now look too expensive. For example, he has reduced his position in Diageo by 40%, cutting it from a 5.5% weighting to 3.5% over the past few months and has trimmed 15% from his other top holdings.
“The market is too expensive,” says Stick. “By running cash at our current level the fund has the firepower to take advantage of a market correction.”
He adds: “We don’t know when the correction will be, so this is not a market timing argument. If the market does go higher there will be plenty of investments that will give you access to it, but equity income funds should not be such funds. My job is to preserve capital.”
Stick says his core stocks have risen 20-30% in value in the past year, meaning it is harder to find value now than it was 12 months ago. “We still think they are great businesses, but having risen so much they are no longer great investments,” he says.
“We have a shopping list of stocks we will buy when they hit certain levels, but we cannot predict how the stockmarket will go. Markets oscillate and managers cannot always be the right side of the game. Our investment approach is our competitive advantage and we will stick to what we do.”
The manager’s long-term value investment approach has seen performance bounce, with the fund now ranked first quartile in the IMA UK Equity Income sector over both one and three years, according to Morningstar.
Following this improvement in performance, the fund was recently moved out of Principal’s Black List of underperforming funds, on to its Grey List.
Over five years it remains fourth quartile, but Stick is confident investors in the fund understand the reasons behind this.
He says: “There will be times when we do perform badly compared with the market, but people have to understand why this is the case. Year-to-date, the fund is up about 6%, which isn’t bad for a high-cash, defensive, income fund.”