Rathbones’ Stick says ‘trash dash’ hit returns

Rathbones’ risk-averse veteran Carl Stick suffered his worst relative year since the financial crisis in 2013 as his mid-cap picks failed to perform.

Mr Stick, who was hit hard by the crisis in 2008 and developed a new focus on risk as a result, has been trimming his expensive defensive and mid-cap positions following a disappointing 2013.

The Rathbone Income fund has slipped into the third quartile for performance in the IMA UK Equity Income sector in the past year, according to FE Analytics, having been first or second quartile since the crisis.

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Mr Stick said the reason for the fund’s underperformance during 2013 was a hangover from its success in previous years.

He claimed his “small and mid-cap names performed so well in 2012 that there was a bit of treading water in 2013.”

It was a similar story with stocks such as Diageo and Unilever that were grouped under the label of ‘quality’, which had done so well in 2012 as investors fled to them for protection from economic uncertainty.

As the global economic picture improved in 2013, investors began to abandon quality defensive stocks, which caused them to underperform.

Mr Stick admitted that he faced a dilemma around what to do with his traditional income stocks because they had been driven to share price highs by the market and so now looked expensive.

He said: “We still hold them but there is more price risk there because they are more expensive.”

The manager said he had been trimming defensive holdings recently due to price worries and continuing a process he began in 2013 of “rummaging in the ugly drawer”, looking for companies he sees as being riskier to own, but which are available at attractive prices.

One of these “ugly” companies is Barclays, which Mr Stick first started buying in 2013, but has already been adding to at the start of 2014.

The consensus view among market commentators is to be bullish about developed market equities, but Mr Stick warned that this consensus is based on predictions for earnings growth that may not materialise.

He said: “People are now relying on earnings to come through and that is where I see the risk. Maybe the re-rating might not be justified.”

“I have got a feeling it might not be, especially if you look at the evidence of the final quarter in the [US] when there were more earnings downgrades than there have been for some time.”